US property market hardening accelerates as capacity contracts

US commercial property insurance buyers are seeing further rate hikes at renewals this year as insurers continue to restrict catastrophe capacity.

Since 1 January reinsurance renewals, when reinsurers imposed stiff rate hikes and higher retentions and cut back catastrophe coverage, hardening in the property insurance market has accelerated as inflation and insurance-to-value continue to influence pricing and availability of limits, experts say.

All options are being explored as buyers — especially those with heavy catastrophe exposures — try to balance how much they can afford to pay for their property insurance programmes and how much risk they are prepared to retain, they said during the RIMS annual Riskworld conference in Atlanta last week.

“Even benign risks are seeing rate increases and those with heavy cat exposures see at least 20%, more like 30% rate increases; plus you’re seeing required rises in values,” said Joe Peiser, head of commercial risk solutions, North America, at Aon.

Mid-year renewals will likely be worse, with 40% to 45% increases for catastrophe-exposed properties, he said.

There’s a consistent message from the market on the need for rate, said Martha Bane, managing director of the North America property practice at Arthur J Gallagher.

As insurers have cut back on capacity, it’s also a question of replacing that capacity, she said.

“When everyone carves back their capacity by 20% to 25%, where’s that capacity going to come from?” Bane questioned.

Higher rates are still required and needed, and capacity is a concern, said Michael LaRocca, head of property and specialty North America for Swiss Re Corporate Solutions.

“We’re coming off an active hurricane season last year and we ended 2022 with Hurricane Ian, which was a large loss for the industry, and it really put a crunch on wind capacity. That carried into 2023, and we’re seeing that for the first five months,” LaRocca said.

Catastrophes — especially wind, severe convective storm and freeze events — continue to deteriorate results for insurers, so “whether it’s deductibles or capacity, everybody has been conservative with how they underwrite those risks”, said Yohei Miyamoto, west region property manager at Zurich North America.

“Capacity is especially challenged for certain occupancies such as warehousing and food industries. Rate increases are across the board,” he said.

Policyholders should be reviewing property programme structures and exploring various options, including different retentions and limits, Miyamoto said.

Much of the increase in rates is driven by losses from unmodelled catastrophes, said Lyndsey Christofer, industry practice leader for construction, real estate and hospitality at Chubb.

Hurricane losses have largely come in as expected, but secondary perils such as wildfires, freezing weather and tornados are rising and affecting broad areas of the US, Christofer said. In addition, attritional water losses, such as flooding from burst pipes, are growing.

Chubb has started to deploy more property capacity as prices and deductibles have risen, Christofer said.

Between 2003 and 2019, FM Global’s rates dropped by almost 60%, said Bret Ahnell, chief operating officer of the mutual insurer. After the heavy catastrophe years of 2017 and 2018, the insurer’s combined ratios were approaching 130%.

“We started getting back to being disciplined, getting more money for the exposures we were carrying, and changing terms and conditions as appropriate,” Ahnell said.

Since 2019, the insurer’s rates have trended up about 45%, he said. “Our rates for the first quarter of this year have moderated, up around 5% (on average), which is keeping pace — probably lagging a bit behind inflation,” he said.

FM Global’s combined ratio was 83.1% in 2021 and 76.7% in 2022. The insurer continues to focus on valuations, he said.

Valuations push

There’s a two-pronged approach in the marketplace, said David Bell, area president at Hub International.

Insurers are raising rates and retentions and cutting capacity, especially on quota share-type programmes, affecting businesses with larger insurance schedules and values and communities along the Texas Gulf Coast and Florida, Bell said.

Policyholders are also having to bump up their values as insurers push for accurate valuations, which is affecting premium, so “clients are getting double-dipped”, he said.

Insurers are being forced by reinsurers to ask for the correct valuations, said Alexandra Glickman, senior managing director, global practice leader, real estate and hospitality, at Arthur J Gallagher.

“In 2020, the interest rate was 2% and we didn’t have runaway inflation. What was $100 in 2020 from a replacement cost standpoint is now probably closer to $128,” Glickman said.

Limits pullback

Some buyers are choosing to reduce limits and many are retaining more risk, experts say.

John Barrett, senior vice president of US complex property at NFP Corp, cited an example of a recent renewal on a sports venue that previously had a $300m limit.

“The most competitive rating we could get was by capping it at about $60m at renewal,” Barrett said.

“The pure cost of capacity made it prohibitive for the client. There is still capacity out there. It’s just a matter of the pain threshold and what a client can afford to spend on it,” he said.

Commercial property business continues to flow into the excess and surplus lines market at a “fast and furious” pace, said Jack Kuhn, CEO of Westfield Specialty, a unit of Westfield Insurance.

“It’s a very challenging market for buyers. You’re seeing a strong pullback in limits,” Kuhn said.

He cited the example of a municipality account that two years ago was able to place more than $200m of limits with three insurers.

Last year, the municipality secured close to the $200m limit, but it took 16 insurers; this year, it decided to buy only $25m in limit, driven by cost and the availability of limit, Kuhn said.

Policyholders are being asked to take more risk, which is counter to what they probably would prefer to do, said Patrick Mulhall, executive vice president, global head of property, at Sompo International Holdings.

On some catastrophe programmes, property insurance buyers can look at retaining the first event and exploring a secondary event or subsequent event catastrophe cover, Mulhall said.

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