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Property insurance market hardening set to continue

Property insurance market hardening set to continue

Commercial property policyholders will see ongoing price increases and cuts in capacity through 2020, as insurers maintain discipline, making for a difficult market, industry experts say.

Jan. 1 renewals saw rate increases across the board in property, though the level of increase varied by geographic location, catastrophe exposure and loss history by individual account, they say.

“It’s definitely a challenging marketplace for property,” said Brian Dove, USI Insurance Services LLC’s national real estate practice leader, based in Dallas.

“Every account is really, and in some cases fortunately, judged on their own merit. I have seen renewals as low as 5% rate increase, but I’ve also seen renewals with 400% to 500% rate increases,” he said.

The level of increase is driven by where the insured property is located, “what kind of losses they’ve had and what kind of catastrophe losses they’ve had, in addition to attritional losses,” Mr. Dove said.

“We’re seeing double-digit rate increases across the portfolio,” but the level of rate increase varies, said Michele Sansone, president of the North America property insurance business for Axa XL, a unit of Axa SA in New York. “Every account is different,” she said.

“When we’re looking at rate increases, we’re looking at everything, not just pure rate, so we’re looking at terms, deductibles, sublimits, coverage changes, we’re looking at all of those changes,” Ms. Sansone said.

“Just getting to what we think is adequate rate level is really the goal and then if your account got loss-activity, that’s obviously going to impact it also,” she said.

There’s not expected to be much pricing relief for the market in the first half of 2020, according to Rick Miller, Boston-based U.S. property practice leader at Aon PLC’s commercial risk solutions business.

“It depends on an account where it fell in terms of how much rate the market would have got last year, or in some cases the previous year. We are looking at some accounts that are probably going to see their third rate increase,” he said. 

While the industry overall remains well-capitalized, for some of the tougher occupancy classes, it’s “very difficult to get to the levels of capacity that many of these accounts have previously enjoyed,” Mr. Miller said, adding: “There is definitely some shortage (of capacity).”

Tougher occupancy classes of property include residential real estate, hospitality, and metals, foundry and any kind of molten exposure, as well as accounts with forest or woodworking type exposures, he said.

“Insurers are putting out less limit than they have in prior years and on a general basis cutting back 20% to 50% in their limits than before. The more difficult the occupancy, the more you see a limit pullback,” said Gary Marchitello, chairperson of Willis Towers Watson PLC’s North American property team in New York.

Insurance buyers are having to use more insurers to fill out programs, he said.

“If you had six to eight participants on a large program, that would have at least doubled. You have to scour the market, the North American markets, Bermuda and London, and even the Asian markets to get more programs filled out," Mr. Marchitello said. "There isn’t a capital issue – it really comes down to rate adequacy, by and large, and premiums not covering losses. There’s no capital shortage, but there’s no doubt insurers are reducing line size.” 

Property insurers are retreating in some catastrophe-exposed areas, said Jeff Ellington, vice president, business development, of Atlas Insurance Management, based in Charlotte, North Carolina. Atlas is not a participant in the standard commercial market on a direct basis, he said.

“The capacity in certain high-risk areas is drying up somewhat, with certain carriers pulling out. Terms at renewal are not as favorable,” Mr. Ellington said.

“Carriers are strictly following their disciplined underwriting guidelines as well as the modeling to determine how much capacity they can put out for catastrophe-exposed accounts,” Mr. Dove said.

“It doesn’t mean you can’t get the capacity you need, it’s just you’re going to have to engage multiple carriers and likely to pay more to get that capacity,” he said.

“We expect many of the major property catastrophe insurers to curtail their 2020 writings in California brush and East and Gulf Coast wind areas,” Richard Kerr, CEO of online insurance exchange MarketScout Corp., said in a report released Monday.

“Naturally, this will result in higher rates to insureds,” Mr. Kerr said in a statement.

Terms and conditions, and wordings, also continue to narrow, especially for catastrophe-exposed property accounts, experts say.

In places where there is more catastrophe exposure, risk managers are being forced to take more risk, said Kristen Peed, director of corporate risk management at CBIZ Inc. in Cleveland.

“They’re not going to be given the opportunity to continue to take lower deductibles. Carriers are going to force the higher deductibles onto them as a risk-sharing mechanism,” she said.

In areas outside of catastrophe zones, “risk managers will have the opportunity to see some savings on their premiums especially if they’re in highly protected risks, if they’ve got good construction and they’re not on the first floor,” she said.

“If they are not cat-exposed, this might be an opportunity for them to see if they can take on additional potential risk, by taking a higher deductible and mitigating some of those increases through that deductible or self-insured retention,” Ms. Peed said.

Insurers are also cutting back in areas where property coverage has expanded, such as cyber and contingent business interruption.

“Not only have we given back rate in the last five-to-seven years, we’ve given expanded coverage, coverage we didn’t even realize like cyber, unnamed contingent business interruption, where the market is just a victim to… it’s really stupidity, to be honest,” Ms. Sansone said.

“We’ve given way more broad coverage than we were comfortable with. For unnamed CBI and cyber we have no way to underwrite and manage our accumulations so getting those out of traditional property policies is what we’re trying to do,” she said.

The “wholesale pullback” in cyber coverage has been the most dramatic, said Mr. Marchitello.

“It’s not a time when you can expand coverage and broaden wordings. Certainly you’re seeing more conservatism out there in policy language,” he said.

Captives are being utilized more frequently by risk managers as a place to shift property risks, some experts say.

In general, more clients with captive insurers are looking to self-insure more layers, in property and across the board, Mr. Ellington said.

“Because of the tightening or hardening of the property market, they are looking to do more of that, particularly with flood and earthquake and windstorm…It’s already been forced on them as far as percentage deductibles going up,” he said. 

In the ongoing challenging market, “it’s incumbent on buyers and their representatives to understand the risk story,” Mr. Miller said.

“The advice that we give our clients is understand what you are facing, understand your risk picture. If you need better data and information it’s going to benefit you in the long run if you have that,” he said.

“We don’t wait until renewal time. We have a continuous relationship with our underwriters and our markets throughout the year and touch base with them several times a year,” Ms. Peed said.

“By having those relationships, you can help protect your own company’s insurance program and keep abreast of what is going on at particular carriers as well,” she said.