Surprise!

Surprise!

More Competition = Lower Prices

Insurance premiums for commercial buildings have

been falling as competition increases in Florida. It's a good lesson in free markets for regulation-happy legislators.

INSURANCE by Jean Gruss | Editor/Lee-Collier

Gov. Charlie Crist and Florida legislators are getting a lesson in Economics 101, courtesy of the insurance industry they've vilified in public hearings and burdened with regulations.

Legislators may be surprised to learn that insurance premiums on commercial properties are dropping not due to regulators but because there's more competition. Some insurance brokers report premiums on newer commercial buildings have fallen by as much as 50% recently.

"Profits are a good thing, contrary to what the state or the governor might tell you," quips John Pollock, president of Oswald Trippe, an insurance brokerage firm in Fort Myers.

Because hurricanes have not hurt the state in the last two years, insurance companies flush with profits have been chasing new business in Florida with renewed vigor. "It's still a very competitive industry and a lot of people lose sight of that," says Bud Hornbeck II, president and chief executive officer of Lutgert Insurance in Naples.

"Everybody has short memories in the insurance business," says Guy King, president of M.E. Wilson Co. in Tampa. "There's a lot of surplus capital chasing a lot of premiums out there," he says.

Meanwhile, the state-run Citizens Property Insurance Corp.'s entry into the commercial nonresidential market last year has been a non-event. Russ Bobbitt, a partner with Purmort & Martin Insurance Agency in Sarasota, says he's never written a commercial nonresidential multi-peril policy with Citizens. "Citizens has not made a big impact with the commercial buildings," he says.

For commercial-property owners, this is a bright spot in an otherwise gloomy economy. Vacancies in office buildings, warehouses and shopping centers are rising as tenants halt expansion plans or move out. Pollock jokes that commercial-property owners are happy to see him again.

But it's not clear whether premiums will continue to decline. Hurricanes Ike and Gustav may yet have an impact on premiums as insurance companies seek to recoup losses. More recently, insurance companies may be under pressure as their investments sour in the financial crisis.

Commercial rate relief

The drop in commercial property insurance rates couldn't have come at a better time, as many building owners face rising vacancies and declining rents in many areas of the Gulf Coast.

With a tenants' market, landlords can't pass along the rising costs of such items as taxes and insurance like they used to when they had the upper hand during the boom. For example, landlords are agreeing to tenant caps on insurance and taxes, says Paul Sands, a broker with Sands Commercial Group in Fort Myers.

Tenants who previously agreed to pay rents net of volatile expenses such as insurance and taxes are now demanding and getting gross rents, where expenses are included and any increases are paid for by the landlord. "The landlords are unsuccessful passing all the costs to tenants," Sands says.

Not everyone is getting 50% off their premiums, however. Sands says his clients are seeing 10% to 15% drops in commercial-property insurance costs. "A lot of people don't think that's much of a bargain," Sands says, especially after the big increases in 2006. "The owners and tenants still think it's too high."

Indeed, declines appear to vary by location. In the Sarasota area, they're down by 10% to 15%, says Bobbitt. In Naples, some premiums are down 50% to 70%, according to Hornbeck, and in Tampa they're down 20% to 25%, says King.

After the huge increases in 2006 and early 2007, insurance companies and reinsurers made huge profits. Now, as many as 40 small domestic companies have rushed in to sell property insurance, says Samuel Miller, executive vice president of the Florida Insurance Council. In addition, Miller says reinsurers (insurance companies that insure other insurance companies) have loosened their purse strings.

Even deductibles and other restrictions are becoming less onerous. "I'm seeing a big difference in deductibles," says Lutgert's Hornbeck. For example, one commercial building owner saw a 50% decline in premiums even as the deductible was 5%.

Of course, the owners of newer buildings are seeing the biggest premium declines because they comply with newer hurricane-resistant building codes. "The newer construction has really held up well during the storms," says Hornbeck. As a rule of thumb, newer buildings are those built after 1995.

But even some older buildings and ones located near the coast are seeing stable rates or declines of a few percentage points. "We've corrected over the last 18 to 24 months in a significant way," says Pollock.

Even if standard carriers won't write policies for older buildings in risky locations near the coast, there are always companies such as Lloyds that will, albeit at higher rates.

Ike, Gustav and AIG

Despite the fact that no major hurricanes hit Florida, two storms hit the U.S. Gulf Coast this year: Gustav and Ike. Pollock says he recently returned from an industry conference where some experts projected Ike's hit near Houston caused $20 billion in damage. "You have to lay that on top of Gustav and Fay," Pollock.

"Had Hurricane Ike hit Homestead or Miami as it was projected to, we probably would have had a crisis," says Miller.

Still, it's not clear how much of an impact Ike will have on reinsurance rates. Ike was such a big storm it caused damage through the Midwest. King explains it this way: "When they hit Florida, we have problems. When they don't hit Florida, we don't have problems."

Of greater concern is the financial health of insurance companies because of the financial turmoil in the stock and bond markets. "We went for a couple weeks when it seemed like all we talked about was AIG," says Hornbeck, referring to conversations he had with customers about the insurance colossus that was rescued by the federal government.

Will insurance companies' investment losses carry over to how they price premiums? "You would think that would make them less eager to continue to lower pricing on general liability and product liability," says King. But these companies still have plenty of capital. What's more, they're regulated businesses that are required to maintain capital levels to pay claims.

In any case, state legislators won't let any insurance company raise rates. "They're only going to charge what the state allows them," says Bobbitt. "You get subpoenaed if you raise rates."

REVIEW SUMMARY

Industry. Insurance

Trend. Lower premiums for commercial properties

Key. More competition has lowered premiums, proving the market works without government interference.