A recent Society of Actuaries survey found that climate change was the top emerging risk cited by respondents, and the most recent “Weather, Climate & Catastrophe Insight” report from Aon finds that natural disaster events resulted in economic damage of $232 billion in 2019, of which only $71 billion was covered by insurance.
The increasingly dire situation is creating tremendous opportunities for commercial property insurers.
“The effects of climate change are continuing to grab headlines; this offers insurers an opportunity to not just recognize what’s happening but to positively influence how the world responds,” says Charles Greer, vice president and underwriting leader of Property at QBE. “We anticipate that insurers will increasingly rely on models and analysis to help customers predict, prepare for and protect against climate-related risks.”
Nationwide is maintaining close relationships with leading researchers, trade associations, and other experts to monitor the changing climate and its potential impacts.
“Being a trusted partner to our members is more important than ever,” explains Peter McMurtrie, Nationwide’s president of P&C commercial lines. “It’s our top priority to ensure that we understand changing conditions and provide the resources, such as education and loss control services, needed to protect our members and partners with extraordinary care.”
It’s important to consider climate change in determining rates, says Kim L. Randall, senior executive vice president and property director at Worldwide Facilities, LLC. “We are on the edge of a great increase in climate-driven losses. Floods will be longer and more prevalent; hail and wind will be destroying roofs all over the country. These factors absolutely should be considered during rate-setting and deductible analysis,” she says.
Greer notes that QBE is seeing “tightening of capacity in quake and flood as well as overall blanket limits being offered. Additionally, some property programs that used to be written on a ground-up basis are migrating to shared and layered structures to find the desired capacity.”
From Nationwide’s perspective, the greatest challenges in the commercial property market currently are inadequate insurance to value and unpredictable catastrophic (CAT) exposures, McMurtrie says. “CAT exposures are very challenging because CAT historical experience and modeled losses are not always dependable predictors of the strength and frequency of future natural disasters.”
Significant catastrophe losses have led to a hardening commercial property market, McMurtrie notes. “The reinsurance market’s capacity is tightening. For habitational specifically, we have seen increased deductibles, particularly for risks such as wind, hail and fire.”
In addition, broader enhancement coverages are now being offered. “The Insurance Services Office [ISO] now has updated language in forms to specify flood, water, coverages and deductibles. We’re also seeing increased demand for Commercial Output Policy and Asset Defense products, and more requests for higher flood and earthquake limits to ensure that our members are covered,” McMurtrie says.
“As the risk landscape evolves, we’re seeing more proprietary forms in the middle market space to accommodate customer needs for specific, tailored coverage,” says Greer. He notes that these forms tend to be broader in scope, encompassing many of the traditional inland coverages as well.
Top carriers are structuring customized solutions to meet each customer’s unique needs and looking beyond policies, Greer adds. “The best carriers extend risk solutions to their customers that will help decrease the number and severity of their losses. With the increase in frequency and severity of hail and wind claims from convective thunderstorms, more and more carriers will be, or already are, using separate hail and wind deductibles that may be a flat dollar amount above the All Other Perils (AOP) deductible or a percentage of the values insured.”
Daley reports that between 2015 and 2018, there were changes in how insurers viewed underwriting combined with broader coverages for a wide range of critical CATs. Since 2018, carriers have been reducing capacity, increasing deductibles, and lowering CAT limits. “More traditional shared and layered programs are coming back to this structure as fewer companies are willing to commit significant single-shot capacity,” Daley says.
Over the last 18 months or so, there also has been a push for carrier forms that offer greater contract certainty than broker manuscript forms, he adds. Carriers have been increasing AOP and water-damage deductibles for softer occupancies. Markets are also starting to reintroduce percentage deductibles for convective storm and are removing maximum deductibles for Tier 1 windstorm and earthquake.”
Premiums and rate trends
Randall notes that overall commercial property insurance premiums and rates are increasing steadily. “Over the last few years, property policies continued to broaden coverage in exchange for keeping the rates from dropping. However, in the last 12 to 14 months, that has changed. Premiums are going up, and coverages are narrowing,” she says.
McMurtrie concurs, noting that commercial property premiums have been going up since 2018, with the increase even higher in 2019.
According to the IVANS Index, the insurance industry’s premium renewal rate index, commercial property premium renewal rate change reached its high for 2019 in Q4 at 4.65% in December; the lowest year high average premium renewal rate change was in April, at 3.69%.
Other researchers found slightly higher rate increases. Greer cites MarketScout, which notes that fourth-quarter 2019 commercial property rates increased by about 5% overall. QBE predicts rate increases will continue.
Steady claims, higher payouts
Overall, the number of commercial property claims is decreasing or staying the same. However, the severity of claims and payout amounts appear to be increasing, according to Randall.
“From a volume standpoint, commercial claim volume has been fairly flat, but from a severity standpoint, it depends on the type of risk and the type of peril involved,” says Shannon Grunst, assistant vice president of claims at QBE. “As always, fire losses continue to be severe. Water losses can also be severe, depending on how quickly they are discovered,” he says.
While 2019 was a relatively quiet CAT year, Grunst notes, QBE saw some severe weather losses that were classified as “non-CAT.” These losses tended to result from hail or wind damage claims to large roofs. “The labor and material costs associated with that type of claim drive severity,” he says.
Overall, Nationwide saw a total decrease of about 7% in new claim volume in 2019 compared to 2018, reports McMurtrie. “Although it’s anecdotal, we think the lack of any large-scale CAT event in 2019 is likely a driver to the total claim volume trending downward, even with plenty of smaller events.”
In 2019, the top causes of commercial property loss reported by Nationwide’s members were wind, water, theft, hail and vehicle damage. In one example, lightning hit a tower connected to a plant owned by one of the company’s large members. The ensuing fire resulted in a total loss to the plant, which was less than one year old. “The investigation involved the coordination of 30 different experts to identify a product defect in the construction of this plant that resulted in the total destruction of this $20 million structure,” McMurtrie recalls. “We partnered with our insured to identify an alternative plan for distribution of their product from another plant to ensure that they would be able to continue to meet the demands of their customers during the reconstruction process.” The reconstruction is underway, and the insured is expected to be fully operational in time for the 2020 selling period.
In another case, which occurred last May, an F-4 tornado touched down in Dayton, Ohio. Nationwide had insured a 548-unit apartment complex with 36 apartment buildings that were completely destroyed, and 14 other buildings incurred significant damages. There were 360 families that were affected and had to be relocated.
“Repairs are ongoing,” McMurtrie reports, “and families have begun moving back into their apartments.”
From a CAT perspective, carriers suffered not only from large events such as the hurricanes of 2017 and 2018 (Harvey, Irma, Maria, Michael and Florence), but also from “new” CAT perils such as wildfires in California, floods in the Midwest, and severe convective storms in Colorado and Texas. “There has also been an uptick in losses driven by water-damage claims, which can be attributed to new construction where terms and conditions have been degraded,” Daley notes. “A number of large national carriers have also suffered large fire losses.”
Cyber is one challenging area in which offerings need to keep growing and evolving. “What used to be a discussion that started with international, risk control and claim capabilities is now evolving to include areas like cyber coverage,” Greer points out.
Many carriers are starting to offer stand-alone cyber policies rather than trying to cover cyber within their commercial property policies.
One of the greatest ongoing challenges in the commercial property market for both brokers and clients is identifying carriers that can offer a full suite of solutions and services for their customers, says Greer. “Business relationships continue to grow in importance. An insured should evaluate whether their carrier can grow with them.”