The “real culprit” driving property insurance woes
Why it’s not just rate that’s proving a challenge
A lack of capacity in the property market is causing challenges for insureds and the industry, with terms & exclusions tightening and growing interest in captives for large accounts.
This is according to Wes Robinson, Risk Placement Services (RPS) national property president, who spoke during RPS’ 2023 Property Perspectives webinar.
“I can’t believe I’m sitting here telling you it’s a lot worse than it was last year, because last year by all measures was – I think everybody would agree – an extremely difficult year for anybody involved in property insurance,” Robinson said. “So, to sit here now a year later to say it’s that much worse – it’s interesting.”
Rising rates and premiums may be one offender driving pressure in the market, but Robinson said that the “real culprit” right now is a lack of capacity, and this is particularly true in catastrophe prone regions.
“There’s a massive ripple effect coming from that,” Robinson said. “Supply and demand economics are absolutely in full swing, and there’s a lot of frictional costs out there, when you think about the lack of capacity given per carrier relative to, in some cases, their minimum premium.
“Start stacking all that together and there’s an added cost, in addition to the rate that all the carriers feel that they need.”
Insureds’ needs may differ across the piece, from small to large accounts, but everyone is feeling the pressure. The cost of risk transfer “has just about never been higher”, Robinson said.
T&Cs tighten and “concurrency” complicates matters
In one example shown during the webinar, an unnamed smaller middle market account went from having three carriers on board from 2021-22 to being bound with 18 in 2022-23.
“That’s just a by-product of what the market is dictating,” Robinson said. “That’s been part of the cost … there’s a lot of frictional costs buried in that as well.”
Terms & conditions are also tightening, and with growing numbers of carriers looking at a policy, “concurrency” is becoming an issue, Robinson said.
RPS gave four examples of more restrictive changes being sought:
- Scheduled limits/margin clauses
- Flood stripped from named storm definition
- Roof valuation clauses
- Deductible increases
“One of the key problems is, when you have that many carriers on an account, every carrier wants their own terms and conditions … their attorneys have put together the package of things that they must have,” Robinson said. “That is in addition to the general terms that they’re driving – they’re probably driving a larger deductible, or they’re making schedule limits be part of the program and getting agreement from 22 different carriers is very difficult.”
Challenges are particularly fraught on the US excess & surplus (E&S) side, Robinson said, whereas business placed with Lloyd’s will see terms & conditions matched by all syndicates involved on a line slip.
“In the US, you end up with 15 different terms, forms, endorsements, what have you,” Robinson said. “Getting everybody on the same page, including London, together to package all that up? It takes time, which is fine, except the amount of flow into the E&S space is unprecedented.”
Property valuation challenges
Hurricane Michael’s destructive impact in 2018 – the hurricane drove insured losses of $13.25 billion in 2018, according to Aon, likely to be a fraction of the cost of 2022’s Hurricane Ian – was a tipping point for carriers to start “really beating the drum” on valuation, according to Robinson. With this now being raised at most if not all renewals, clients are feeling the pinch and accounts are being driven towards the E&S market.
“There are horror stories that I have been a part of and seen where insureds have just not agreed to increased valuation to a point where the marketplace declined to even afford the risk – it was not a good situation,” Robinson said. “The problem is … had they been just trending all those years, the rubber band would not be would not have snapped nearly as hard as it has this year, and it snapped hard for a lot of people.”
Captive interest grows – even for cat property
With all the challenges in the space, there is growing interest in alternatives, including property captives.
“Historically, property captives, especially on the cat side, just really didn’t make a lot of sense,” Robinson said. “Captives typically are mechanisms for very predictable types of risk financing, which cat property is not necessarily that.
“However, lately I have seen captive being formed for large property, and I’ve actually seen it being formed with effective use, where the reinsurance world piles on and all sudden, they’re reinsuring, a captive, that used to be direct and E&S carriers, and now it’s a little hodgepodge of both.”
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