We seem to have survived what has easily been the most challenging property insurance environment in recent history. Several reasons explain why this cycle has been so challenging, but the most appropriate explanation is tied to capital.
Simply put, capital is the lifeline for just about every business and every industry. In the insurance world, capital is the resource that pays claims and allows reinsurers to support the carriers that write the business that protects our clients. When that capital stops yielding enough returns to sustain the business, the capital becomes more expensive, and capital available to the marketplace shrinks. This situation creates a supply-and-demand issue for the insurance industry and raises the cost of coverage, because the demand (limits needed on a macro level exceed the supply, or the capacity needed to adequately cover customers at a sustainable price.
After longtime lackluster results for major property insurance carriers, the capital available to markets shrank during the past year and a half, because it went to other industries and market segments that promised less risk and better returns. This problem was compounded by surging inflation. Remaining capital became more expensive and as a result, the cost structure for carriers to deploy capacity went up significantly. This increase required them to cut back their exposure and charge more for what they could offer.
Looking ahead to the latter half of 2023, here are a few property market themes that carriers will be scrutinizing and clients will be considering when positioning their renewals.
Many industry professionals and underwriting companies believe we’re years away from a full correction on insurance to value (ITV), when the vast majority of clients properly report their exposure base in a way that allows carriers to adequately underwrite and price the risk. Many markets we trade with think this issue will continue to make the market challenging. Why? Because a fair number of clients will need to continue to raise their values year after year to eventually have an adequate replacement cost per square foot reported on their properties.
As a result, we continue to see fewer programs with blanket limits, and many carriers are adopting strict new business guidelines on ITV. With inflation still driving up replacement costs, ITV remains one of the top items carriers will drill down on. Clients should stay ahead of ITV and do what they can to demonstrate to the markets that the replacement costs they bring are serious estimates of the cost of rebuilding after a loss.
CAT capacity in Florida, Louisiana and coastal Texas continues to be a precious commodity. CAT hurricane capacity anywhere is precious, but in these three states, underwriters have become increasingly selective. Throughout the first half of the year, rate increases have been up from 25% to 65% for quality accounts without adverse loss experience. Accounts with geographic diversification have seen increases on the lower end of this range, and clients with single-state CAT exposure are on the higher end.
Many clients have opted to buy less limit to offset increased costs, and several carriers have more or less tapped out on writing new business in these states until they get a better sense of how the wind will blow during this year’s hurricane season. The clients that have been hardest hit are the middle-market ($300M and under) real estate clients that are 100% Florida, Louisiana or Texas. Some clients have seen massive changes to their programs, and many have seen rate increases well north of 50%+. Many ground-up rates are pushing north of $1.50, depending on geography and individual risk characteristics.
Shake, rattle and roll
The earthquake (EQ) market always has moved a bit behind the CAT wind market and was usually more of a buyers’ market. That changed in the second quarter of 2023, as carriers struggled with the rising cost of EQ capacity. Many of the big names have increased minimum premiums on a price-per-million basis and have cut limits. One of the largest managing general agents (MGAs) in the EQ market has struggled with the mega accounts ($1B+ schedules) and has significantly increased rate on many of those programs. That MGA has also seen a reduction in capacity, which is driving the market because there aren’t enough carriers to fill the void. As a result, increases are pushing 25%+ and averaging much like the broader market, which is hovering around 25% to 35%. We’ve seen several accounts increase 100%+ when a major correction was needed and a significant amount of capacity had to be replaced.
What’s unique about the EQ market is that for many clients, it’s a voluntary cover and one that lenders routinely waive, so most clients are buying less or dropping the coverage altogether if they can’t make the math work for their respective purchasing budgets.
It’s not all doom and gloom. Carriers are doing what they need to do this year to put themselves in a healthy position. Trimming aggregate and shrinking per-risk-line size will help carriers if the wind season is above average and active. The market should continue to stabilize as we finish off 2023, and we should see the market stabilize even further in 2024, barring any major CAT events.
James Rozzi ([email protected]) is area executive vice president at Risk Placement Services. He specializes in large property and construction risks with a focus on national real estate, multi-family/habitational schedules, inclusive of low income housing, hospitality, higher education and municipal risks.
Any opinions expressed here are the author’s own.
Also by this contributor: Key factors driving the property insurance market in 2022