Q4 Property Insurance Market Alert
December 12, 2022
Since 2017, the market has been in one of the hardest (increasing rates) cycles in recent history. The decade leading up to 2017 experienced an influx of capital into the insurance market, which increased competition, drove down rates, and encouraged poor underwriting standards as carriers ‘bought’ their way into the marketplace. It was a fantastic buyer’s market for many years. However, the insurance market, as with every other free-market, ebbs and flows. In 2017, the HIM losses (Hurricanes Harvey, Irma, and Maria) changed the capital markets’ perspective of insurance as a diversification hedge and subsequently exited the “insurance investment class” en masse, resulting in the supply-demand curve to shift drastically in the opposite direction and kick-off this current hard market cycle. Finally, in early 2022, we witnessed a plateauing in the market and a glowing light for insurance buyers started to show at the end of the tunnel…that was short-lived.
How Hurricane Ian is impacting the market:
Early estimates from Hurricane Ian damage surveys indicate it was one of the costliest storms in U.S. history, with insured losses of $53 billion to $74 billion. To put into context, Katrina reached $85B when adjusted for current inflation. Possibly more importantly, the cost and frequency of extreme-weather disasters has increased substantially in recent years and the frequency of billion-dollar weather disasters is now about one event every 18 days, compared to one event every 82 days between such disasters in the 1980s. This turmoil continues to exacerbate the hard property market cycle and the event frequency and severity continue to wreak havoc on reinsurance balance sheets and profitability. We anticipate seeing multiple small to mid-sized carriers with exposures in Florida going out of business in the coming quarters, and have already seen other regional carriers close their doors in the past several months due to poor profitability and inability to navigate the ever changing and very costly treaty reinsurance marketplace.
Why this matters for insureds:
As of mid-year, rate increases on non-CAT desirable classes of business started to plateau with single-digit rate increases, and in some cases rate decreases, while tougher classes of business had still experienced significant rate increases. With the ongoing Derechos (what we have started to define as an inland hurricane) and increasing frequency and severity of catastrophic-related events, the reinsurance marketplace is in chaos, incurring significant amount of unexpected losses. We anticipate these dynamics to further deepen and lengthen the current hard market cycle, which will equate to more pain for many buyers of property insurance in the coming quarters. You may ask: “I don’t have exposure in Florida, or Wildfires in California (etc), or Midwest hurricanes… so why does this affect my property insurance?” Great question…it does indirectly because the reinsurance that the carriers bought to insure their portfolios of risk (called a reinsurance treaty) may be the same reinsurers that insure your carriers’ book. In short, the market is highly correlated at the top of the food chain (capital markets and reinsurance) so this pain will continue for the foreseeable future.
What to be on the lookout for:
Many standard markets are tightening their underwriter guidelines, some due to executive action, and others due to their treaty reinsurance terms. Through October and November 2022, carriers are submitting their expected losses from Hurricane Ian. Analysts will be closely scrutinizing these figures and playing a large role in establishing what rate increases the reinsurance marketplace will seek in January, when most of the reinsurance treaties renew. Throughout mid/late Q4, we should start to have a stronger pulse on the general direction of rate increases, but until then there is an apparent ‘quiet before the storm’ feeling and frankly, we’re already seeing the storm coming faster than expected. To help our insureds remain proactive and less beholden to the market changes, here are several fundamentals to prepare for:
- Ensure valuation adequacy within your Statement of Values (SOV) – this is one of the most important topics that underwriters are scrutinizing harder than ever before and a primary focal point when they open a submission.
- Obtain and act upon loss control reports in advance – third-party or carrier engineering and loss control reports are immensely helpful in elevating your submission to the “top of the pile”. While assisting our insureds with this, we have found that many loss control firms are backlogged so we recommend to plan in advance.
- Scrutinize terms and conditions – we are seeing many carriers trying to restrict critically important terms and conditions short notice; it is imperative that price not be the only focal point when negotiating the renewal.
- Analyze alternative program structures – the limits that many incumbent standard and E&S carriers can provide at renewal may be severely limited; we believe in building backup options and “courting” other carriers throughout the policy term to ensure sound contingency capacity.
The above is a brief snapshot and overview. We would be happy to talk in greater detail about the strategies we’ve successfully developed to help navigate this hard market and ease the pain. We remain committed to answer any questions that may arise and we will stay in touch as we monitor the marketplace.