The situation

[source: Wells Fargo] The insurance market has firmed in 2011, especially in property, workers’ compensation, and lead umbrellas. As a result, some companies may see rate increases and reduced capacity from carriers at renewal time. This is especially true for companies with historical losses, large property catastrophe exposures, and high-hazard occupancies.

Consider these notable shifts in the U.S. property and casualty market:

Catastrophe losses

With the start of the hurricane season, the first six months of 2011 had $27 billion in pretax catastrophe losses. These losses have already exceeded the $8 billion in catastrophe losses for all of 2010, which, with 19 hurricanes, was the most active hurricane season on record.

These losses are putting pressure on large property renewals that have catastrophe exposures. In addition, if hurricane predictions are correct and another major storm occurs in 2011, there may be additional impact on insurers’ capital.

Reserves adequacy

According to a recent report by Fitch Ratings, reserves in the U.S. property and casualty market continue to deteriorate moderately, but they remain adequate overall and a large deficiency is unlikely in the near term. Fitch said this capacity is due, in part, to the reserve strength that was built up in the hard market during the mid-2000s.

Going forward, however, Fitch said this level of reserve development appears unsustainable. In a recent article by PropertyCasualty360.com, Fitch said the greatest threats to adequate loss reserves are unexpected shifts in inflation or interest rates, as well as factors affecting insurance claims costs – such as medical costs or litigation settlements. Fitch added that workers’ compensation has suffered the biggest change in reserves adequacy in recent years, and the reserves currently look deficient.

The effect on insurance programs

As a result of these changes, insurance carriers may not be able to release reserves from past years to help their results. That may increase the price for new insurance and renewals.

The trends are also affecting the market in other ways. For example, according to the recent Commercial P/C Market Index Survey conducted by The Council of Insurance Agents & Brokers, insurance carriers in the first half of the year were tougher on terms and conditions, and they required more client information to underwrite risks.