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Disasters Costing $100 Billion Begin to Lift Insurance Rates

Joplin Tornado
Shandie Spencer, right, hugs a volunteer while recovering items from the basement of her destroyed home, where she was trapped after riding out a massive tornado that passed through Joplin, Missouri, on May 26, 2011. Photographer: Mario Tama/Getty Images

Natural disasters costing insurers almost $100 billion are beginning to lift some commercial insurance rates after a seven-year decline.

The reversal may benefit underwriters such as Chubb Corp. and brokers like Aon Corp.

Insurers hurt in the past 16 months by earthquakes in Japan, New Zealand and Chile and tornadoes in the U.S. are charging more for property coverage. Companies are seeking to strengthen finances after the recession drained value from investment portfolios and limited demand from business clients.

“The market is turning,” said Chris Johnson, senior vice president of commercial insurer FM Global. “If you look at reserves, if you look at every indicator for the industry, we have no slack left,” he said in an interview. “The only way to start turning the corner is for rates to rise.”

Travelers Cos. and Warren, New Jersey-based Chubb, which repurchased shares in the past three years rather than writing more coverage, are among insurers that may benefit from higher prices, said Cliff Gallant, an analyst at KBW Inc. Brokers like Chicago-based Aon and Marsh & McLennan Cos., which collect commissions on policies sold, may also gain.

Among the signs of sporadic rate increases: Prices for property coverage for businesses rose 0.2 percent in catastrophe-prone areas since mid-April, according to a report from Marsh’s flagship unit last week. The cost for general liability fell at a slower rate so far this quarter than a year earlier.

Renewal Rates

Insurers have increasingly been able to charge more to existing clients, even if they’ve had to cut rates to win new customers. Renewal rates for New York-based Travelers’s business customers, excluding the largest accounts, rose for the first time since 2007 in the three months ended March 31. CNA Financial Corp., a subsidiary of Loews Corp., increased commercial rates the last six quarters for renewals.

Allianz SE, Europe’s biggest insurer, may benefit from higher prices for insurance renewals, Oliver Baete, chief financial officer of the Munich-based firm, said in a statement last month.

Investors have anticipated a rise in rates. Travelers climbed 8.9 percent this year through yesterday, beating the 1.7 percent gain of the Standard & Poor’s 500 Index. Chubb advanced 7.8 percent and Chicago-based CNA jumped 8.1 percent. Aon surged 9.9 percent and New York-based Marsh & McLennan increased 9.4 percent. Allianz gained about 3.3 percent.

Reinsurance Rates

Some U.S. property-catastrophe reinsurance rates rose 5 percent to 10 percent on June 1, partly spurred by almost $100 billion in global losses since February 2010, according to a report from Marsh & McLennan’s reinsurance brokerage on markets including Florida. Reinsurers like No. 1 Munich Re and Swiss Reinsurance Co. provide coverage to primary carriers, protecting against the largest risks including natural disasters.

Rising rates from reinsurers often lead to higher insurance prices. Reinsurance rates for Japan earthquake protection climbed 20 percent to 60 percent after the March 11 disaster, Matthias Weber, Swiss Re’s head of property and specialty, said at a June 7 Bloomberg Link conference in New York. The cost of reinsurance for flooding and wind damage climbed as much as 10 percent in Japan, he said.

Swiss Re climbed 2.9 percent this year through yesterday. Munich Re fell about 9.3 percent.

American International Group Inc., the largest U.S. commercial insurer, is becoming more selective about risks it will take, said Peter Hancock, who was picked in March to run the property-casualty business. AIG said in February it would take a charge of more than $4 billion to build reserves after underestimating the cost of claims. AIG dropped 43 percent this year in New York trading.


“We’re coming out of this phase of insureds going into the market thinking they’re going to get a rate decrease,” said Lou Iglesias, head of commercial casualty at Chartis, in a conference last week sponsored by Advisen Ltd.

U.S. commercial rates have dropped 23 percent since the peak in late 2003, according to Advisen’s ADVx index. The last sustained climb in rates was in a period through the end of 2003 as insurers paid more than $22 billion related to the Sept. 11, 2001, terrorist attacks. Prices often climb after extraordinary claims.

Some of the increases in 2005 after Hurricane Katrina, the costliest U.S. natural disaster, reversed the next year as new private-equity-backed firms competed for business. Berkshire Hathaway Inc. added sales after Katrina then “sharply reduced” its appetite for covering storm damage, Chairman Warren Buffett said in 2007. The firm instead invested in takeovers, striking deals to buy a railroad and lubricants maker.

Berkshire Hathaway

“Premium rates have not been attractive enough to warrant increasing volume,” Omaha, Nebraska-based Berkshire said in a quarterly filing with regulators in May.

Kevin Whitehead, a New York-based senior vice president of excess casualty for Zurich Financial Services AG, said that a broader rebound in prices for primary coverage is likely, even if it’s difficult to predict when rates will rise industrywide.

“We’ve seen seven years of declining rate, and at some point the pendulum is going to have to start swinging the other way,” Whitehead said.

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