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Commercial property insurance rates increased again at midyear renewals, albeit at a more moderate pace, and the overall cost of programs is rising as inflation pushes up values and premium costs.
Average property rate increases were in the mid-single digits or even flat for good quality risks with accurate valuations, no loss activity and no catastrophe footprint, brokers say.
For loss-hit catastrophe-exposed accounts and challenged occupancy classes of property, such as habitational and condo business in Florida, rate increases of 20% and higher were typical.
Uncertainty remains about how July 1 reinsurance renewals could affect primary pricing, industry experts said. Midyear reinsurance renewals showed hefty increases in U.S. property business, Gallagher Re, the reinsurance unit of Arthur J. Gallagher & Co., said in a July 1 report.
Another variable is whether any major hurricanes hit the U.S. this season, brokers say.
Catastrophe capacity pressured
Capacity is generally adequate to meet demand, with some exceptions in difficult areas, said Rick Miller, Boston-based U.S. property practice leader at Aon PLC’s commercial risk solutions business.
Losses for most property insurers, certainly in the first quarter, appear to have been less severe than in the prior-year period, allowing for a “bit more optimistic view of the world,” Mr. Miller said.
It remains to be seen what the impact of July 1 reinsurance renewals will be, he said. “Logic may tell you carriers are going to try to pass on those costs. … I suspect they will try, because they feel like values are not where they should be,” but it’s not a one-size-fits-all approach, he said.
Repercussions of the reinsurance renewals are starting to be seen, making for a difficult market for loss-hit coastal properties, said Brian Dove, Dallas-based national real estate practice leader at USI Insurance Services LLC.
“There are capacity issues as it relates to those types of accounts… Because of the restrictions carriers are putting on their aggregates, especially in coastal wind, we are seeing the potential of demand outpacing supply,” Mr. Dove said. Properties exposed to California wildfires are in the same situation, he said.
Some insurers have cut capacity for coastal property accounts, or repositioned capacity on shared and layered programs, and some are exiting programs, brokers say.
Insurers are closely monitoring their accumulations and thus replacement capacity associated with catastrophe risks is typically coming at a much higher cost than in the past, mainly driven by what appears to be a contraction in supply, said Michael Rouse, New York-based U.S. property practice leader at Marsh LLC.
This applies to anything considered a high-hazard peril, such as convective storm, flood, Gulf Coast wind and California earthquake, Mr. Rouse said.
Primary insurers are finding it difficult to put together adequate catastrophe capacity, and pricing is higher for whatever capacity they can offer because there is less supply on the reinsurance side, said Peter Fallon, national property practice leader at brokerage Risk Strategies Co. Inc. in Boston.
“Those of us who were working on deals with 7/1 dates were trying to get underwriters to focus on accounts and give us quotes. They were very reluctant to do anything because they were anticipating what was going on in the market and what they should be preparing for,” Mr. Fallon said.
Even the market for California earthquake risk, previously viewed as being somewhat more competitive, is tightening, he said.
Deductibles are also increasing. “Where you used to be able to get away with a 5% deductible for wind, now it’s going to be 10%. ... It depends on the underwriter and their view of the risk and what we can show from a modeling standpoint,” he said.
High inflation and ongoing supply chain disruptions have prompted insurers to focus on accurate reporting of property values and replacement costs.
Where they are uncomfortable with valuations, insurers are imposing coverage restrictions, such as margin clauses and occurrence limits of liability endorsements, brokers say.
Insurers are more concerned about their attachment points because of the increase in exposures, and in some cases may be moving up in a tower on large property programs in certain locations, Mr. Rouse said. “There’s a cost associated with that from a premium standpoint,” he said.
Even where rates are flat, property buyers face premium increases of around 20% due to the spike in values in the inflationary environment, brokers say.
Twane Duckworth, managing director, risk management, for the city of Garland, Texas, and a Risk & Insurance Management Society Inc. board member said the municipality’s property premium increased by $586,104 to $3.52 million at last October’s renewal, and its total insured values increased by 13% to just over $1 billion.
This year, Garland is considering restructuring its insurance program to carve out some of its power generation risks. This could “potentially reduce overall costs to stay within my budget,” Mr. Duckworth said.
The municipality’s power generation and utilities assets account for 75% of its TIV, he said. With supply chain pressures, a major loss could lead to business interruption issues as the waiting period on a replacement turbine is around 18 months, for example. An appraisal of the city’s property portfolio was just completed to ensure valuations are accurate, he said.
Business continuity planning becomes very important as insurers look to understand what an entity is going to do should there be a loss, said Michael Williams, Whitehouse Station, New Jersey-based executive vice president, manufacturing industry practice leader, commercial insurance, at Chubb Ltd.
As time frames are longer and costs go up, it becomes more important that they have those plans in place in advance, Mr. Williams said.
Brokers are having to be creative and if they are unable to get a deal done across the board for all locations, they may have to carve things out to reflect where the risks and exposures are today, Mr. Fallon said.
Buyers are fatigued and frustrated by the continued pressure and are looking for alternatives such as insurance-linked securities, parametrics or structured solutions, Mr. Miller said. “The alternative market has expanded, but it’s still not for the majority of clients yet,” he said.