Property Insurance Rates
Are Expected to Keep Rising

NEW YORK -- Property owners can look forward to less turmoil in the insurance market this year, but one thing hasn't changed: Rates are expected to continue rising.

Property owners are hoping to avoid a repeat of the uncertainty of 2002, when insurance rates rose rapidly, insurers added limits on most policies, and terrorism coverage was nearly nonexistent. "It was a big mess last year," says Doug Linde, chief financial officer of real-estate investment trust Boston Properties Inc.

Mr. Linde and his risk managers are logging plenty of miles this winter meeting with insurers. Executives at the REIT, which owns commercial properties in Boston, New York, Washington, San Francisco and Princeton, N.J., want to make sure their insurance providers understand the company's portfolio -- and its risk profile -- when policies come up for renewal in March.

Early indications from January renewals -- one of the busiest periods for insurers -- are that such efforts are paying off, with much more clarity in the marketplace this year. However, commercial rates are expected to continue rising into next year.

The largest increases in 2003 are expected in casualty and liability lines, which haven't risen as rapidly as property lines in recent years. Property rates are expected to be higher, but the increases are projected to be more moderate than they were in 2002. Businesses also are beginning to see how much stand-alone terrorism coverage in the U.S. will cost -- likely 8% to 10% of the current premium.

Insurance rates continue to be a "moving target," varying greatly depending on the insurance product and a company's perceived risk, says Mario Vitale, chairman of Willis Risk Solutions Global, a unit of London insurance broker Willis Group Holdings. Clients looking to insure their business properties have seen anything from no change in rates to a 15% increase, he says.

Insurers' weakened financial status will figure prominently in rates. "While we do believe the industry is moving closer in some lines to rate adequacy, many lines are not there yet," Mr. Vitale said. "It's very volatile. The slightest event could trigger a new round" of rate increases.

Earlier this month, Conning Research & Consulting, an insurance research firm, estimated that the insurance industry's reserves may face as much as a $38 billion shortfall, mostly in commercial lines. Some observers have estimated reserves could be as much as $100 billion short. The Fitch rating agency recently noted concern about the need to bolster reserves, and said continued rising loss costs will partially offset the benefits of rate increases this year. Some analysts have pointed to the potential shortfalls as one reason insurers will continue to increase their rates for several years to come.

"You still have weakened balance sheets between the underwriting losses and the investment losses of the past several years," says Mark Lescault, chief underwriting officer at Swiss Reinsurance Co.

Write to Chad Bray at chad.bray@dowjones.com¹

Updated January 29, 2003