Key factors driving the property insurance market in 2022
It’s important for brokers and underwriters to understand the themes that have driven the market in 2022 thus far.
The market is not getting any easier, from a property insurance perspective.
The volume of business that continues to work its way into the excess and surplus (E&S) arena is staggering. It feels a bit like the insurance community is suffering from the same supply chain issues that other organizations are dealing with as most underwriters and brokers will tell you that keeping pace with the volume of business that comes across their respective desks continues to be a major struggle.
At this point in the year, it would be wise to get as far ahead of renewals and new business opportunities as possible, so underwriters have ample time to assess the risk and provide corresponding options that clients want to see. The more time the brokerage community has to work through various methods of risk transfer will ultimately make everyone’s life a little less stressful.
Additionally, continue to exercise some realism and remember that we are still a ways away from being in a buyers’ market. Stressing carrier and client partnerships should continue to be a major focus for clients who have spent time fostering those relationships over several insurance renewal cycles.
As we move forward throughout the rest of this year, it’s important to understand some of the key themes that have driven the property market in 2022 thus far.
Valuations and replacement cost
Insurance to Value – or “ITV” – and “valuation method” are the buzzwords for 2022. The insurance-carrier reckoning with clients who aren’t adequately valuing their properties has finally happened, and valuation is the first item all carriers want to address as part of a new business opportunity or a renewal submission.
Gone are the days where valuation was just another underwriting criterion to consider in a rating tool. In today’s market, clients who don’t have the right values are seeing margin clauses, scheduled limits and in some cases, declinations from markets that don’t feel the client is taking the matter seriously.
For some clients, valuation isn’t an issue because they kept up with the market on increased valuations over time. Others have several years of neglect and are now in catch-up mode, where even a 100% increase in replacement cost is likely still below the level needed to support accurate reconstruction costs in various geographies.
Wood frame builders risk
With increased construction costs, the need for more capacity is pushing the limits on what is available in the market. We also continue to see carriers scaling back on mid- to high-crime score areas as well as areas where there is brush zone exposure. Urban areas with social unrest, high crime and population density are being selectively underwritten, which is leaving clients with limited markets and rates well above the mean.
On top of limited capacity and increased rates, markets are being selective on terms and putting low sub-limits and high deductibles on water-damage-related coverages. Site security on these high-risk projects is one of the main items carriers need to confirm with clients before a risk can be bound. In some cases, the site security can cost hundreds of thousands of dollars. In this take-it-or-leave-it market, carriers are leaving clients with few options.
California wildfire and brush zone business
Carriers are spending a lot of money to integrate changing climate patterns into their underwriting models.
When it comes to wildfire and brush zone exposure, states continue to adjust their maps, which continues to push standard carriers out of the market, forcing clients into the E&S world where some will see a market price adjustment that could range from 100% to 500% up.
On top of that, E&S carriers are closely watching aggregate accumulations and are cutting back capacity on both new and renewal business to better manage cumulative exposure. We are seeing a sheer lack of ability to secure north of $100 million of market capacity on single-location risks. We are also seeing clients who can’t afford the capacity available to them, requiring many to take quota share self-insurance positions within their program or buy lower loss limits, which doesn’t leave them adequately protected to catastrophic loss.
California earthquake and difference in condition
This market is among the most stable, in that clients continue to see capacity available to them and pricing is still competitive. Some clients are seeing slight reductions and flat renewals, while larger clients with more values at risk see mid- to high-single-digit increases.
We have seen several decreases in the middle market space this year. Although I would not call it a buyers’ market, this is one segment of our industry where clients routinely have some options to evaluate.
Southeast CAT wind
Catastrophic wind in the Southeast is another frustrating pocket of the market. Capacity is very restricted in parts of south Florida and Louisiana, which is having a major impact on the region. Most carriers are closely watching aggregates, trimming lines and being selective on both new and renewal business.
As a result, most deals have to be restructured. It’s safe to say there is no such thing as an easy renewal in this space. New business in Florida has been put on hold for some carriers, which will make things challenging for any customers who have renewals later in the year. Rates are averaging well north of national averages in this space, as a result of how much new capacity is needed when deals are restructured.
Large real estate
Clients who have a total insurance value exceeding $750 million and well into the multi-billion dollar exposure base are generally considered large real estate clients — for example, hoteliers, REITS, higher education and municipal clients. Most of them have seen four years of rate adjustment but now are starting to see stability from markets that have stuck with them year after year.
Clients who have heavily bifurcated, layered and shared programs are having a much easier time managing their renewal expectations and are enjoying carrier and client partnerships that have been fostered over the years. Depending on risk characteristics and adjustments to excess layers that are still seeing major changes, clients in this space are seeing low- to mid-single-digit increases when loss experience is favorable. Clients who have seen a few claims ping carrier balance sheets are still seeing stability and increases are averaging 15% to 20%, unless a major loss has worked its way into multiple layers.
Multi-family and wood frame garden-style apartments
Poor replacement cost valuations and outsized losses still plague this space. As a result, carriers continue to struggle with their approach to writing this business.
In general, clients with programs that have a lot of carriers sharing both the primary and excess, good losses, proper valuations, and newer properties are seeing favorable renewals with rate increases in the 5% to 10% range.
On the other side are clients who have horrendous valuations, own older properties and are in tough areas of the country that will continue to see renewal challenges and rate increases well above 25%. Several programs have been unable to get their capacity renewed or had to renew with severe underwriting changes. In some cases, customers coming out of these programs are seeing rates adjust north of 100%.
The road ahead
The market is certainly getting easier to predict and expectations are easier to manage, but E&S carriers are still in “selective” mode, and standard markets aren’t looking to set any new business records.
Most E&S markets still aren’t under any pressure to grow and are happy to walk away from risks that don’t generate the rate or return on capital they’re looking for.
As the second half of the year unfolds, we are going to see more of the same. Rates are expected to continue to increase 5% to 15% across multiple asset classes, and all eyes will continue to be on the Atlantic and Gulf Coast to see how hurricane activity impacts the years ahead.
The good news is that with increased rates, better valuations in the market and favorable deductibles for carriers, many insurance companies can still weather a few storms and make a profit. The market is poised for more carrier profitability in the future, which should continue to give clients relief.
At RPS, we expect that this relief will come slowly and depend heavily on some quieter years from a macro-insured loss standpoint.
Rates will continue to rise on average between 2.5% and 12.5% for accounts that don’t need to be restructured, aren’t loss-affected and don’t have meaningful exposure to some of the industry hot spots. Clients who don’t fit this demographic are likely to see increases above 20%, and it will require a lot of time and hard work to reposition them for future stability.
James Rozzi (James_rozzi@rpsins.com) 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.
These opinions are the author’s own.
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