Property and casualty (P&C) insurance rates are on the rise. Again.
In the first six months of last year, the U.S. P&C market saw $22 billion in underwriting losses, Swiss Re’s U.S. Property & Casualty outlook reports. Losses have been driven by a number of different lines, ranging from auto and property to cyber risks — and they’re driving carriers to push up rates with the hope of reestablishing profitability.
Yet while markets like cyber and financial and professional lines are showing signs of softening as new capacity brings rates down, the hard property market has persisted and is indeed driving continued P&C rate increases.
Risk Strategies predicts that in 2024, companies without CAT risks and a favorable loss history will still see property rate increases of between 5 and 10%. Those with CAT risks could see increases of 50% or more. Carriers are struggling to respond to an environment where 100-year storms are now occurring about every eight years.
“This is unique. It’s quite a prolonged hard market. It’s one of the longest ones I’ve seen,” said Mark Manzi, national brokerage leader, Risk Strategies. “It’s taking some time for carriers to get back to profitability. It’s not a one-year fix.”
Ever-rising rates have some insureds questioning whether their risks are affordable or even insurable. Risk managers are increasingly turning to alternative risk transfer solutions for their property and other exposures, including E&S markets, captives and parametrics. Manzi is adamant, however, that property markets are still a viable option for insureds. They just need to invest in risk management solutions and prepare for a difficult renewal process.
What’s Driving Prolonged Hard Markets in Property Lines?
A number of factors — from increasingly frequent storms to inflation driving up claims costs — are causing rate increases in the property space. Last year, the Atlantic basin experienced 20 named storms, making it the fourth most active hurricane season since 1950, and the Northern Hemisphere experienced another record-breaking wildfire season.
Claims costs are increasing too, in part because construction costs are going up with inflation and buildings are undervalued. The Risk Strategies 2023 State of the Market report notes that 90% of buildings appraised in 2020 and 2021 had appraisal gaps. It’s likely that 2023 will be the third year in a row that CAT losses will reach $100 billion or more, according to the Council of Insurance Agents & Brokers’ Commercial Property/Casualty Market Index.
“Everything continues to be more costly to build or repair, or to even find some of the labor to repair it,” Manzi said.
Consequently, some carriers are starting to withdraw from particular high-risk markets. California and Florida have already seen major insurers withdraw from the region. For now, the problem is more common in personal than commercial property lines, but it doesn’t bode well for the future.
“Carriers are withdrawing from certain states and certain exposures,” Manzi said. “We’re at the point where capacity has withdrawn in those areas that we’re all well aware of, and our clients have fewer and fewer choices.”
How to Solve the Property Insurability Problem
From E&S markets to captives and parametrics, difficult property markets have many insureds turning to alternative insurance products to find the choices they lost as the property market contracted.
With their rapid growth, E&S markets have proved a viable solution to some for their property exposures. E&S premiums increased 20% between 2021 and 2022, and are expected to reach an apex of $179 billion by 2030. The E&S market has proved more than capable of handling increased property business.
“We’ve not seen anything like this, that I can recall, where there’s been such an influx of business into E&S,” Manzi said. “That’s why E&S is there — to take on risks the admitted markets cannot.”
Others are opting to take on their risks themselves. Captives have long been an attractive option for a variety of risks. Cyber, workers’ comp and cannabis are all areas where captives have seen interest, Risk & Insurance® reported. Why not property too?
“We’re seeing a lot of traction in captives; it’s one of the fastest-growing areas in the industry,” Manzi said.
He cautioned, however, that insureds can’t view captives as a short-term solution. They need to invest in their program and design it for the long haul. “Captives are not for everyone,” Manzi said. “They’re not a short-term solution, but I think we have some long-term problems that need some long-term solutions, and captives are a valuable tool.”
Certain insureds with a specific problem might consider parametrics. Parametric policies are set to pay a predetermined amount if a given weather event occurs. As an example, if wind speeds reach 74 miles per hour, the policy might pay out $2 million. Insureds appreciate them because they respond quickly with no need for an adjustment period, which many companies need in the wake of a natural disaster.
Approaching Renewals with a Hard Market in Mind
Alternative risk management solutions and E&S markets certainly play a critical role in ensuring that businesses and individuals can continue to protect their properties with insurance. Still, traditional property markets can and should remain an option for many.
There is still viable capacity in the admitted markets, Manzi said. “Just because something’s risky doesn’t mean it needs to be an E&S. There is still opportunity for direct admitted markets to write a fair amount of our risk out there.”
Insureds who are looking to house their risks within traditional property markets need to work with their brokers to prepare for complex renewals and employ pre-loss risk mitigation solutions.
On the renewal prep end, risk managers should start working with their brokers at least three to four — and in some cases as much as six — months ahead of time. Gone are the days of prepping for renewals only 30 days in advance. Submissions need to be detailed and persuasive. You need to prove to underwriters why they should take on your risk.
“Don’t be surprised that renewals will be very difficult and tougher than you might have experienced in the past,” Manzi said.
“It’s very important to position your risk to get to the top of the pile. Underwriters are inundated with submissions, especially in certain areas like property. The more prepared you are, the better your risk is.”
One way insureds can show their carriers that they’re taking property risks seriously is through pre-loss risk mitigation solutions. Removing bushes and other shrubbery that could make a property more vulnerable to wildfires is one solution. Monitored smoke/heat detection systems are another. On the water damage end, strategically placed sensors that detect flooding due to broken water lines or clogged drains can allow risk managers to intervene before the damage becomes severe.
Insureds can work with their brokers to determine what risk management solutions would be most beneficial for their organization. Working with a broker who specializes in a particular product, industry or line of business can help risk managers feel certain they’re getting the best advice.
“Hope is not a good strategy, especially in a market like this,” Manzi said. “Specialization and preparation is very important in this market these days.” &
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