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Commercial insurers look set to impose significant rate hikes on property insurance buyers at year-end as they face large third-quarter catastrophe losses, mainly from Hurricane Ian.
At industry meetings and during earnings calls last month, insurers, reinsurers and brokers all indicated that substantial rate hikes will be applied to catastrophe-exposed property risks.
The rate hikes will likely also have a broader reach as reinsurance capacity falls and other losses related to inflation and higher court awards hit liability lines (see related story, below).
Property insurers were already looking for rate hikes prior to the Category 4 storm hitting the Gulf Coast of Florida in September.
While many of the losses from Ian, which various modelers say could result in more than $50 billion in insured losses, will hit auto and homeowners insurers hard, commercial insurers operating in Florida are also expected to pay significant amounts in storm-related claims.
In addition, reinsurers, which support insurers operating nationwide, are expected to see big losses and limited retrocessional reinsurance capacity and will pass on some of their increased costs to insurers and ultimately policyholders through higher rates at Jan. 1 renewals.
In late October, several insurers and reinsurers announced hundreds of millions — and in some cases more than $1 billion — in catastrophe losses for the third quarter. Industry bellwether Travelers Cos. Inc. reported a 20% drop in quarterly profit and said it expected $512 million in pre-tax catastrophe losses.
Executives at the world’s largest brokerage, Marsh & McLennan Cos. Inc., on its earnings call said property insurance rates will likely increase and property catastrophe reinsurance rates, which were already expected to rise 20% to 25% or more, will likely rise even higher.
“The property market, particularly property cat, was already in a massive transition where everyone was expecting 1/1 to be a difficult date,” said Mike Karmilowicz, New York-based CEO of Everest Insurance, a unit of Everest Re Group Ltd.
He was speaking during an interview at the Insurance Leadership Forum held Oct. 7-11 in Colorado Springs, Colorado. The annual event is organized by the Washington-based Council of Insurance Agents & Brokers.
Prior to Hurricane Ian, property rates were expected to rise, said Mike Rice, Denver-based CEO of CAC Specialty.
“A lot of people were saying they thought rates probably were going to go up 10 points, but after Ian maybe it’s 20 points,” he said.
“There’s clearly a prognosis that the market is going to get more disruptive as we go into 2023,” said Kevin Smith, Chicago-based president of global risk solutions, North America, at Liberty Mutual Insurance Co. “Capacity is going to be very, very valuable, and who’s going to deploy it and where is yet to be determined, but it’s fair to say it’s going to be a tumultuous market.”
Losses from the storm likely mean that renewals will be even tougher for reinsurance cedents and primary insurance buyers, said Mike Kerner, CEO of Munich Re Specialty Insurance, a Princeton, New Jersey-based unit of Munich Reinsurance Co.
A demand for more catastrophe coverage as valuations have increased due to inflation, the strength of the dollar reducing available U.S. capacity for some overseas insurers, and climate concerns were already putting pressure on the market, he said.
Even insurers that don’t face huge losses from the storm may see their reinsurance costs rise, said Jonathon Drummond, Chicago-based head of broking North America for Willis Towers Watson PLC.
“Every carrier is concerned about the downstream effect of this, meaning all the reinsurers and retrocessional reinsurers will be impacted,” Mr. Drummond said.
Reinsurers usually have broad coverage agreements with insurers, so higher reinsurance prices will likely affect insurance pricing beyond Florida, said Paul Lavelle, New York-based head of U.S. national accounts at Zurich North America.
“Even without Ian rates in property were probably going to go up, and this is just an event that can’t be ignored,” he said.
Reinsurers were also expected to look for rate hikes before Ian hit, said several attendees at the American Property Casualty Insurance Association’s annual meeting in Dallas Oct. 2-4.
Ian had an immediate effect on available capacity, which is going to be a challenge for the industry, said Justin Lorence, Minneapolis-based senior broker at Lockton Re, part of Lockton Cos. LLC.
“The largest of the large reinsurers were already trying to come to grips with how they’d support potential increased demand at 1/1 in light of inflation and the risk appetites of clients,” he said.
According to Aon PLC, global reinsurance capital declined 11% in the first half of 2022.
A further $10 billion to $20 billion in limits is being sought at Jan. 1, said Paul Anderson, Minneapolis-based executive managing director, U.S. property growth leader, at Aon. “What everyone’s working through right now is where that capacity will come from … and Ian will add a little challenge along the way.”
Claire Wilkinson contributed to this report.
While the direct effect of Hurricane Ian will likely hit property insurance lines hardest, casualty rates are also expected to continue rising.
General inflation and social inflation, or higher court awards and settlements, are still affecting liability lines of business, but the casualty market has been hardening for four years, so insurers are more comfortable with rating levels for many lines of coverage, insurers and brokers say.
“Rates were going up 20% to 30% and now they are going up 5% to 10%. I don’t think the market is giving up ground relative to inflation,” said Mike Kerner, CEO of Munich Re Specialty Insurance, a Princeton, New Jersey-based unit of Munich Reinsurance Co.
Inflation and social inflation continue to pressure the liability insurance market, but rate hikes have come off their highs, said Paul Lavelle, New York-based head of U.S. national accounts at Zurich North America.
“After three years, they’re still increasing but not at the pace they had been,” he said. “It’s probably high single- to low double-digit rate increases.”
Liability rates have stabilized but are unlikely to soften, said Paul Smith, Parsipanny, New Jersey-based senior vice president, carrier relations, at H.W. Kaufman Financial Group Inc.
Cyber liability, though, where rates have rocketed since the beginning of the COVID-19 pandemic, will likely remain difficult, he said.
Liability capacity is also returning, said Jonathon Drummond, Chicago-based head of broking North America for Willis Towers Watson PLC.
At the height of the market in 2018, it was possible to buy up to about $2.2 billion in excess liability capacity, Mr. Drummond said. After the market began to harden in 2020, capacity for individual clients fell to about $625 million on average, but since then insurers have expanded capacity and it’s now possible to buy about $1 billion in capacity, he said.
“The capital that’s here is offering more capacity than they did in the heart of the hard market,” Mr. Drummond said.
In directors and officers liability, more than 20 new entrants have entered the market over the past year, he said.
D&O renewal rates have fallen significantly as more insurers have entered the market, following sharp rate increases over the previous three years, said Denver-based Mike Rice, CEO of CAC Specialty.
“People are targeting anything where they think there’s some rate,” he said.