Guarding Against Complacency

Ratings agency Fitch has warned the industry and its policyholders against complacency, after two consecutive years in which high levels of hurricane activity were predicted and insured losses were minimal. Fitch says this situation has negative implications for insurer solvency and profits because it fosters complacency on the part of both policyholders and insurers. It also provides political ammunition to those who would weaken long-term industry solvency for near-term insurance price reductions, according to Fitch. The words of wisdom came as Fitch released the third installment of its annual hurricane season desk reference guide. The guide includes the most recent forecasts for the upcoming hurricane season from leading forecasters as well as an analysis of the top 10 insurers by market share for each of the 18 coastal U.S. states. Check out further I.I.I. Fact Book info on high risk markets.

2 thoughts on “Guarding Against Complacency”

  1. I saw the Fitch report re complacency. As an independent property auditor who looks at a lot of commercial property files I don’t have the same concerns as Fitch. Granted, prices have fallen and some terms have weakened but wind deductibles seem to be holding. These deductibles are still substantially higher than pre-Katrina and serve to insulate the industry. But, as we head into the July 1 renewals it will be interesting to see if the market gives back some of this protection in the form of lower deductibles or maximum deductibles. Also on the radar-substantially higher construction costs from higher fuel prices and oil-based building materials. These factors are difficult to model. I believe that it will be an interesting year…

  2. The price of a barrel of oil has doubled since March 2007 and it now stands at approximately $130 per barrel. It is a significant component of a building materials manufacturer’s and dealer’s COGS in terms of manufacturing a product, being a raw material of many products and cost to transport product (currently done largely by truck).

    Building materials manufacturers and dealers will pass these costs onto consumers in the form of higher product prices. This will amplify the “demand surge” inflation for building materials that occurs following a natural disaster.

    Many of the wind deductibles we see in the marketplace today were established in the months following hurricane Katrina when the (nominal) price per barrel was approximately $51.

    Therefore, in this period of high headline inflation (e.g. food and fuel), one could argue that those deductibles (many developed as a percentage of the building value) may not properly account for this high velocity increase in building materials costs.

    In other words, the current deductibles may get eroded quicker than anticipated.

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