WIN Magazine - Summer 2014 - (Page 14)

FEATURE THE RISING IMPORTANCE OF PROPERTY CATASTROPHE RISK IN THE "NEW NORMAL" OF THE NONADMITTED MARKET BY DR. GEORGE ZANJANI: AAMGA PROFESSOR OF RISK MANAGEMENT & INSURANCE, GEORGIA STATE UNIVERSITY L AST SUMMER, I wrote a piece speculating on whether the nonadmitted market had reached a "new normal." Nonadmitted market had been hovering close to 5% for a few years, even though 1) the historic norm is about 3% and 2) the hard market of the early 2000's had ended some time ago. The "new normal" persisted through the end of 2012 (see Figure 1 on the next page), and early data suggest that a similar conclusion will apply to 2013. If this is in fact a "new normal," the shift is a tectonic one. By going from a 3% share to a 5% share, the nonadmitted market has effectively increased its size more than 60% in relation to the overall property-casualty market. Such dramatic change demands closer examination. Market growth reflects new opportunities for E&S insurers, but it also means new and potentially unfamiliar risks. When we look closer, we see that the nonadmitted market is not just growing-it's in the process of shifting in composition. As recently as two decades ago, liability risks were the predominant focus of surplus lines underwriting. In the current day, however, property risks-and in particular those with catastrophe exposure-are rising in prominence. At first glance, the shift is not obvious. Nonadmitted market share has risen substantially in both property and liability lines, as can be seen in Figure 2 on the next page. However, while shares in both property and liability are comfortably above their pre-hard market levels of 1999, there is a noteworthy divergence after the market peak in 2004. Liability share followed the expected pattern of easing as the market softened; property share did the opposite-rising from 4% in 2004 to 4.3% in 2012. It turns out that this strengthening is reflective of a longer-term rise in the importance of property both in the nonadmitted market and the overall market. In the early 1990s, property premiums accounted for less than a quarter of overall nonadmitted premium. Property share now exceeds 40%. A good portion of this shift can be attributed to the growth of catastrophe exposures and the flight of admitted companies from the same. The last quarter of a century featured a number of disasters that engendered retreat from various geographies and perils. Hurricane Andrew (1992), the 14 | v i e w t h i s i s s u e a t | Northridge Earthquake (1994), the September 11 attacks (2001), and Hurricane Katrina (2005) all led to significant reevaluations of risk within the industry. Many admitted companies responded by limiting their  exposures, with the consequence being an  ongoing redirection of catastrophic risk to state-sponsored insurance schemes, reinsurance markets, and the nonadmitted market. Evidence of this can be found in the case of the southeastern United States over the past decade. As the overall market softened after 2004, nonadmitted market share was subjected the usual pressures. Outside of the coastal states in the South, nonadmitted share fell from 6% in 2004 to 4.4% in 2012, with overall volume falling about 20%. Share in the Southeast, on the other hand, slipped only slightly from 6.9% to 6.6%, and overall nonadmitted premium volume actually rose by 13% over the same period. The post-2004 growth in the Southeast can be attributed to the aftereffects of the 2004 Florida hurricane season, Hurricane Katrina (2005), Hurricane Ike (2008), and other windstorms. These events served to accelerate the retreat of standard underwriters from hurricane risk, driving yet more property business into the arms of the nonadmitted market. Consequently, the Southeast region's nonadmitted premium volume surged after 2004 even as the liability market softened, playing a key role in establishing the "new normal" of today.

Table of Contents for the Digital Edition of WIN Magazine - Summer 2014

Cover Story: High Risks on the High Seas
The Rising Importance of Property Catastrophe Risk in the “New Normal” of the Nonadmitted Market
Claims Leakage: Plugging the Hole with Predictive Modeling
Managing Casualty Risks
Understanding the Data Viability and Uses for Underwriting Commercial Auto
2014 AAMGA Wholesale Insurance White Paper Winner: Pandemic Insurance in the Excess and Surplus Lines Insurance Industry
2014 AAMGA Wholesale Insurance White Paper Winner: Catastrophe Bonds: Looking Forward
Organizing Emerging Risks: AAMGA Formalizes a Collaborative Approach
In the WIN-ner’s Circle
Index to Advertisers

WIN Magazine - Summer 2014