By the time you read this, the first quarter will have concluded, many of us will have celebrated the resurrection, and most of us will be welcoming spring weather. We will also be celebrating some COVID-19 milestones as more and more people continue to get vaccinated and we slowly start putting this horrific pandemic behind us.
As you read this, I certainly hope you all are well and that you have become acclimated to what we now call the "new normal." I'm looking forward to some sort of combination of the "new normal" and the old way of doing things that I hope to kick off with a mask burning party once wearing a mask is no longer required.
A Challenging Start: Winter Storm Uri
2020 was an interesting and challenging year all around. 2021 has started in a similar way but with more light at the end of the tunnel. From an insurance perspective, the last few years have been challenging for the E&S property arena and 2021 has set the bar high with Winter Storm Uri kicking off year.
This event has most insurance careers reeling as losses continue to trickle in and current estimates put the total insurable loss figures somewhere between $20B and $30B. Uri is already being labeled as the largest non-CAT event to ever hit the U.S. insurance market, and carriers are hoping that this event is not a sign of things to come because they desperately need to make an underwriting profit in 2021.
Difficult Underwriting Decisions
The carriers have seen lackluster results the past few years and when speaking with some of the larger and more prominent players in the E&S property space, there is a feeling of pressure this year on property executives who are managing the strategic position of their respective books of business. The numerous CAT events (hurricanes, wildfires, floods, and convective storms) over the last few years have plagued our business because it has made underwriting decisions harder and also created hardships for many insurance buyers.
On one hand, the products the buyers have purchased have been there to help them through losses and their policies were ultimately put to their intended use, but on the other hand many customers are now in their third straight year of increases and have likely seen their insurance costs go up somewhere between 30% to 50% over the last three years. As a buyer, this is not sustainable, but it is also not sustainable for major insurance companies to lose money on their underwriting year after year.
The Good News: More Capacity Has Arrived
The good news is that like the end of COVID-19 (which is still a ways away), there seems to be more capacity coming into the market in 2021 and rate increases are easing. Accounts that have seen larger increases the past two years are being deemed accounts that have rate adequacy and underwriters are treating them much more favorably.
The increased capacity is creating more competition which has not yet turned into a capacity surplus, but deal by deal, brokers are starting to be able to deliver more options to their clients which will ultimately suppress the level of increases we are seeing. Several accounts we have worked on to start the year have renewed close to flat, and when you analyze results layer by layer, we have even seen some decreases on new capacity that replaces carriers who were price gouging during more challenging renewals.
Tides Are Turning
All of these signs are pointing to the fact that even though Winter Storm Uri has set a bad tone to start the year, the market is still healthy and starting to turn. Carriers who think that they can get away with "broad brush" underwriting and "broad brush increases" are in for a rude awakening.
This year more than the past few, every account will be looked at on its own merits and deals that continue to perform well will be targeted by new capacity providers and see more competition which will yield a much better rate change result. Incumbent markets on deals that have performed will also look to deploy additional capacity which will only increase the competition and take even more pressure off the level of rate increase the client will see.
On the flip side, accounts with heavy losses that continue to lose carriers money can and should expect more increases as well as deductible changes. We have seen poor performing accounts take increases well over 25% to start 2021 and most of those accounts are being loss rated by markets who will also push deductible changes as part of the renewal process. With the unprecedented level of business still coming into the E&S market and the amount of business underwriters have on their desks, loss prone deals will be less attractive and continue to see adverse renewal results.
Texas: A Regional Challenge
As for Winter Storm Uri, in the absence of additional major CAT activity throughout 2021, Uri will likely continue to be treated as a regional event that highlights some of the many challenges of writing multi-family business in Texas. It is likely that when all is said and done, Uri will hit the Texas market harder than the broader market because carriers continue to struggle with writing multi-family business profitably, especially in Texas.
Numbers speak for themselves and Texas excess and surplus lines premium is up 20% through Q1. March alone recording its largest excess and surplus lines premium month ever and was up over 41% year over year. Many of the multi-family risk purchase programs that focus on the Texas market have been hit very hard by this winter storm and will see substantial changes over the coming months. Clients should be prepared for these changes and begin looking for alternatives immediately.
As 2021 unfolds, there will be more of these types of micro firm markets that don't see the easing rate pressure that will be felt by the broader market. Multi family, wood frame construction, and west coast wildfire business are a few example of micro firm market pockets that won't see much relief in the year ahead due to pure supply and capacity constraints.
Looking Ahead to Q2
Below is a breakdown of what we expect as we head into Q2:
- Brush Zone / Wildfire - Rates on middle market business are trending well north of $1.0 and in some cases, can be as high as $4.0. There are limited markets with limited capacity offerings and the "sticker shock" factor for those exiting a standard package program is real. Accounts that have already seen rate adjustments and have been through one or two renewal cycles in the E&S world will likely see rates in the +15% range but those on their first E&S placement could still see rates go up more than 100%.Clients who can, are headed for the CA Fair plan as a way to lessen the exposure that needs to be picked up by the E&S markets which creates some premium savings.
- Wood Frame Construction - 2020 was not a good year for urban America. The riots, civil commotion, and social unrest that plagued American cities in 2020 have caused wood frame markets to proceed with caution. You also still have many major American cities that are virtually empty, with most people still working from home and the levels of lawlessness are at all-time highs. Wood frame rates vary deal by deal and long term master COC programs are seeing results that are well below market. Current non-CAT annual rates range from $0.40 to $0.60 depending on the size of the deal and COC extensions as well as capacity replacement on an extension continues to be among the most challenging aspects of this space.
- Multi Family - Winter Storm Uri is highlighting the challenges inherent in this space. Older buildings, poor building codes, increased construction costs, poor insurance to value, human element. The list goes on and it is a long list of factors that makes underwriting business in this space profitably an immense challenge. Accounts that have rate adequacy and have performed well should see favorable results from carrier partners who have been with them for a while. Rate expectation in this group will likely be somewhere between 5% and 15% up. Accounts that do not yield an underwriting profit, need deductible adjustment, and loss ratios that are in excess of 40% gross should expect rate increases to be in the 15% to 30% range.
- Hospitality - This space has been hit hard the last few years due to hurricane activity and attritional loss issues. The good news is that most of these accounts have seen rate come back and as a result, the profitable risks are seeing really good renewal results to start the year. Rate increases will average somewhere between 5% and 12.5% for accounts that have performed well and have seen the rate adjustments that were needed in previous renewal cycles. Other accounts with adverse loss experience will see increases in the 15% to 25% range and major CAT impacted accounts could still see increases north of 30%.
Navigating an Uncertain Path
As with anything these days, nothing seems to be set in stone and is always subject to constant change. My family has an annual tradition of watching the movie "The Ten Commandments" with Charlton Heston on Good Friday, and I wish I could tell you that the outlook for the property market is as clear as the Ten Commandments God gave Moses on Mount Sinai, but that would be a lie.
The truth is that the outlook for the property market is about as clear as mud and future events, just like COVID-19 variants, will continue to vex us all. All we can do is remain diligent in our efforts, creative in our approach, and communicate all possible outcomes to clients to make sure expectations are both conveyed and met.
I know that I speak for all my RPS colleagues when I say thank you for your trust in us and that we will all continue to work hard to make sure clients get the best coverage possible at the best possible price.