Good risks + good data = better pricing

“Rates are continuing to increase as a result of a convergence of factors,” says Brian White, director of P&C underwriting and product at Nationwide Mutual Insurance. Increasing frequency and severity of catastrophes, supply chain delays, inflation and tight reinsurance capacity have all contributed to rising property insurance costs, he adds.

But even as those issues linger, rate increases for many risks are tapering, sources say.

The rate acceleration that “started in earnest” in 2018 following a spate of catastrophe losses the previous year has slowed, says Erik Nikodem, senior vice president, global head of property, Everest Insurance. “We are still seeing rate increases but it is important to point out that it’s not universal. Every client and account are differentiated. Some are flat but nothing is coming down as of yet.”

It is the “unprecedented increased frequency and severity of global natural catastrophe events” that continue to fuel price increases for many property buyers, Nikodem says.

Insured losses from major natural catastrophes in 2021 totalled an estimated $116bn, according to a report released earlier this year by Gallagher Re. Only the $143m in losses in 2017 and the $120m in 2011 are higher than last year’s total, the report notes.

Rate increases moderate
“We’re at 17 quarters of increasing rates in property,” says Rick Miller, Aon’s US property leader, referring to rate hikes through 2021. That follows more than 20 quarters of rate reductions, he points out, “so I would think most markets now feel like most of the corrections that were necessary” have been taken.

In last year’s final quarter, Aon’s clients saw average rate increases of 7.5% and that has trended downward, Miller says. The “most desirable clients” are seeing increases close to flat, he notes, and some are seeing “moderate decreases but I wouldn’t say that’s the norm”.

Most risks can expect hikes at least in single digits, sources say, with some seeing double-digit increases.

“Prices are going up for certain classes of business and for risks that aren’t high quality or don’t follow good loss prevention control. It really depends on the account,” says Peter Fallon, national property practice leader at broker Risk Strategies. Risks that are “where they should be from a technical pricing standpoint” will see modest increases at most, he adds.

Polly James, senior director risk management at Feld Entertainment, says she is not expecting big changes when coverage is renewed with FM Global in June on her company’s property in Florida and Maryland. Her rates rose last year and the property deductible was increased, she says. “So, I think the rate will be pretty good this year.”

James notes, however, that because property values are rising, insurance premiums will necessarily follow, even if underlying rates are flat. “The cost of everything has gone up to some extent, but even more in the building industry where there has been so much demand, and that is causing a strain on resources. Of course, when you have limited supply and high demand, prices go up.”

Impact of inflation
Inflation in the US is making property valuations difficult and contributing to higher claims costs, both of which make underwriting tricky, sources say.

“That’s the main event for 2022,” Fallon says of inflation. “Where rates are moderating for the good risks, everybody is now focusing on property valuations and business interruption valuations,” he adds.

Underwriters had been routinely accepting valuations reported to them, but “over the past year, with what’s going on between inflation, costs going up for materials and labour, supply chain issues and everything else”, they are more carefully considering property values, Fallon says.

“It’s definitely having an impact on the property market,” White of Nationwide says of inflation. The cost of construction and claims are experiencing rapid increases, he adds, which means underwriters have to consider whether risks are adequately covered and identify gaps where policyholders may be vulnerable.

Adding to that, supply chain delays have increased construction downtime and lengthened building schedules, which adds costs that are also rising with inflation, White says.

Sizeable property losses in recent years have hit insurers, who discovered the claims were much larger than expected based on the exposures reported to them, Miller of Aon says. “I think you’re going to see a lot of pressure on valuations going forward.”

“We’re spending a lot of time with our clients trying to understand where they got their numbers from,” Fallon notes, “and the insurance company will work with us to come to an agreement around what the values should look like. It is taking time to go through every single account and try and justify what the values are, and not just apply a straight factor across the board.”

Business interruption
Business interruption is “part of that valuation conversation, too,” says Miller. “It’s not just about the building values. There’s a business interruption valuation component on top of that,” he adds.

“There hasn’t been a significant change in what’s available,” Miller says of business interruption coverage, although “underwriters are writing it more carefully”.

Contingent business interruption, however, is harder to come by, Miller says. “That’s an area where underwriters are being very cautious because they’ve paid losses they didn’t expect to pay. The coverage is there, it hasn’t changed, but there’s certainly a lot less available,” he notes.

Demand surge in the construction industry – which means builders are chasing the same limited supply of materials – is as big a problem as inflation, according to Nikodem. “We’ve seen instances where it’s not just having to pay more for lumber or insulation or plumbing materials and so on, it’s actually been unavailable, where you just cannot get those goods.”
That’s much harder than inflation to factor into pricing, Nikodem says. “Building in the unavailability of a certain product is far more difficult to predict in advance.”

Terms and conditions easing
Buyers are finding that insurers are more willing during the current market to loosen terms and conditions, sources say, at a time when capacity is plentiful and competition is returning.

“From a terms-and-conditions standpoint, things have definitely gotten a bit more client-friendly than they may have been last year and back in 2020,” Miller says. “It’s just a little bit of a softer approach,” he says, with insurers somewhat easier to work with on issues such as managing non-concurrencies and shared-layer programmes.

“Capacity is pretty abundant,” Miller points out. “The capital base for the industry is strong. What we are seeing from some of the traditional players in the space is slightly more aggressive lines, particularly on the business that is desirable. We’re starting to see some competition return on our big shared-layer programmes. Over the last few years, it was kind of a fight to the finish to fill layers out; that’s definitely starting to change and we’re seeing some over-subscription.”

Feld’s James agrees that it’s become a more client-friendly property market as insurers have adjusted their rates after heavy losses since the 2017 hurricane season. “Capacity was reduced for a while by virtually all the major players and then, as premiums increased, more capacity has come into the market,” while existing players have increased their capacity “and are getting a better price for it.”

“Underwriters have to be profitable, too, so they took a good look at their underwriting criteria and have gotten a lot more selective about the risks they want to underwrite and the price they want,” James says.

Natural catastrophes
While the trend for many buyers is encouraging, some property lines remain challenging, sources acknowledge.

The biggest rate jumps will be for properties exposed to natural catastrophes, they note, with some regions not previously considered high risk now seeing an uptick in insurance costs. While hurricanes in the Atlantic and earthquakes in the northwest are traditional catastrophe exposures, the map has been rewritten by such events as winter storm Uri last year in Texas, which crippled the state’s electric grid and caused widespread property damage.

More attention is being paid to what have been considered “secondary perils”, such as convective storms and extreme cold in parts of the country where insurers haven’t traditionally expected to see them, says Miller. “The freeze last year in Texas is an example.”

Insurers have taken notice and some are making moves to diversify their books as the catastrophe landscape broadens, White points out. “It’s increased the need for investment and sophistication” into risk selection and loss prevention, he says. “It’s having a pretty big impact on the market in general.”

Modelling ‘a necessity’
Risk managers with cat exposures should consider modelling as a necessity and use it to make sure coverage amounts are adequate, sources note.

“Modelling is important so that you know what your cat exposures look like and you know that you are buying the right amount of limit – not too much and not too little,” Fallon says. “What your risk looks like from a cat standpoint is going to have an effect on premium and if you are able to model (catastrophe exposures), you can use that to help underwriters get to where they should be.”

“Have good data,” James stresses. “The models default to the worst possible characteristics, so the more you can refine your information and get those secondary characteristics entered, it absolutely will improve your modelled outcomes. Understand what data goes into them and provide as much as you can,” she says.

James advises buyers to pick their insurers carefully and aim to stick with them through market ups and downs. Don’t treat insurance like a commodity, she warns, saying those that do might live to regret it. “When you hit a hard market and have losses, you can’t find insurance sometimes. I heard stories of 400% increases when the rest of us were getting 30%.”