I think the old fable of the tortoise and the hare best sums up the type of market we are currently dealing with. In the story, as we all know, the tortoise chugs along steadily and slowly and ends up beating the hare who takes a more lackadaisical approach to the race. I am reminded of this story because in today’s environment, it seems like the carriers are the tortoise and over the course of the last 12 months, they have slowly and steadily transitioned us to what is certainly a “hard or hardening market” in almost every segment of the property world.
In some asset classes, it appears the tortoise took some NFL-approved PEDs because the level of rate increases seen in distressed wildfire business, garden style multi-family, and the hospitality sector seem to be well above market. In other hard markets, the carrier reactions were almost instantaneous, but in this market, the transition was slow; it took time, and it continues to build on itself. If you look back at Q3 and Q4 of 2018 the market showed signs of movement but was primarily restricted to garden style multi-family and hospitality. As 2019 rolled around, the market was reeling from continued CA wildfires, hurricanes in the Atlantic, increased loss reserves from HIM (Harvey, Irma, and Maria) and ultimately a full realization by some carriers to modify business plans and appetites which started the slow push to drive rate across the board. Early in 2019, rates were up 5% to 15% on average, sans garden style multi-family. As we rolled into Q2 2019, rates were averaging 10% to 20% up and in some cases, clients were seeing well over 50% rate increases because they had accounts that required what many have come to call a “market correction.”
The “market correction” accounts can be divided into four categories:
Category #1 - Single carrier placements from large line players like FM, AIG, Travelers, etc. - Many of these placements were essentially non-renewed as single carrier placements and went layered and shared. The change in appetite by these firms and their push to reduce exposure to municipal business, higher education, large CAT-driven REITs, and what was previously deemed “preferred” or engineered risk has caused the market to be flooded (excuse the pun) with new E&S opportunities that E&S markets were happy to write but at E&S rates. We have seen accounts in this space experience increases well over the market average, even as high as 100%. Most of these accounts also required changes to T&Cs and deductibles.
Category #2 - Distressed wildfire business in CA, WA, OR, and other wildfire exposed states - The standard market withdrawal from wildfire zoned business is CA has occurred faster than Antonio Brown’s fall from grace with the Raiders and subsequent arrival with the Patriots! Over the course of 2019 we have seen countless opportunities that were previously with package middle market carriers that are now being pushed to the E&S market at rates that have doubled or tripled. In many cases, customers have had few options and in some of the smaller accounts, the increased costs have caused financial burdens to their respective organizations, driving some clients to self-insure wildfire all together.
Category #3 - Multi Family - I hate to date myself, but I arrived in the insurance world in 2006 and ever since that time, people have been talking about the difficulty of garden style multi-family and what a challenging asset class it is. Over the course of my career, carriers have entered and exited the space, programs have come and gone, and in some cases, lawsuits have been filed over blatant client misrepresentations regarding loss history and valuations. What we are dealing with today is an extreme tightening of rates, coverage, and is the direct result of carriers exiting this space due to an inability to make a profit over a multi-year period. I am sure if you polled some of the major carriers who entertain this class, they would all tell you that over the last three or four years, this asset class has been the loss leader on their balance sheets. Multi-family is plagued by attritional losses, aging buildings that trigger code upgrades, and poor property maintenance (not in all cases because every customer is different but generally speaking, this is the market perception). You also have numerous clients that still tell you that they can replace the structure at $65 per sq ft because Marshall & Swift says so but after every major event or storm, the cost to repair or replace is likely double and in some metropolitans, the new construction costs are soaring because of labor shortages. Due to all of these factors, garden style multi-family is seeing rate increases that average 15% to 25% for best in class customers and for those with losses or with suppressed rates and those that are dealing with a carrier non renewing, rates can accelerate well above 50%.
Category 4 - Hospitality - It is a simple fact that hotels are where people want to vacation, and people don’t find themselves sitting in their office at their job daydreaming about visiting the world’s biggest ball of yarn in Middle America (no offense if that is your cup of tea). Most people envision themselves sipping some tropical drink with an umbrella in it on a perfect white sand beach while their kids swim happily in the ocean and they quietly read the weekend edition of the Wall Street Journal or their news periodical of choice. Hotels are built along the coast and unfortunately, over the past few years, increased hurricane activity, mudslides, and other events have plagued the hospitality sector. Everyone will agree that this is not the fault of the hotel operators but 2017 and 2018 marked the worst and fourth-worst CAT years on record in the United States and as a result, the hospitality sector has seen rates jump an average of 10% to 15% a year for non-loss-affected business and likely closer to 30%+ a year for loss-affected accounts depending on the magnitude of their claims. The other issue fueling the rate rise is the continued loss creep regarding BI claims and increased construction costs that are being noted on all the major hospitality accounts that were hit hard by Hurricanes Harvey, Irma, Maria, Michael, and Florence.
If you aren’t in one of these four categories, you are not immune to market conditions but you are likely seeing a more tempered approach to account rate change and are probably feeling a bit better about your property insurance renewal. We don’t have a crystal ball and as we head into the last few months of the year, market conditions in the future are going to be largely determined by whether or not the Atlantic Hurricane Season has an impact in the Atlantic and Gulf and whether or not any other market events contribute to what has so far been a relatively benign year. Sans the mass devastation from Hurricane Dorian in the Bahamas, the industry had a near miss because if the storm had smashed into Miami the way it initially tracked, we would have been singing a different tune right about now.
In the absence of any major CAT events for the remainder of 2019, it is still the expectation of many that the tortoise is going to continue to run and the race is not over. As mentioned previously, this “hard market” or “transitioning market” is unique in that the changes were not abrupt and most industry professionals believe that there remains a shortage of capacity in the market that will keep rates from dropping back down in the near future. The changes seen in Lloyds, with large line carriers like AIG and FM, and the adjustments being made in the reinsurance market due to the withdrawal of outside capital is going to continue to tighten the availability of capacity. The reinsurance world sits atop the capacity pyramid and with the shutdown of CatCo and with reinsurance making model adjustments as a result of past storms, the access to capacity and balance sheet protection is becoming more costly and difficult for upfront carriers. These issues and market changes will not correct themselves overnight and that is why I believe the market will continue to transition slowly in whatever future direction it may take.
For the look ahead, I would continue to advise clients that the market of 2019 will look very much like the market of 2020. The market of 2019 really started accelerating in Q2 so I would expect Q4 2019 and Q1 2020 to follow the conditions we have seen thus far and from there, I think rates will continue to firm but at a lower level with averages heading towards the single digits versus the double digits we are seeing more frequently today. We must all remember that most carriers believe that rate levels are still below where they need to be as a result of the four to five years of consecutive rate decline that led up to this market and as result, most carriers I have spoken with are not budgeting for any rate reductions in the new year. I have said it before and I will say it again, you can’t run a business at a loss forever and in order for the market to balance itself a bit more, the carriers will need to operate healthier balance sheets. I believe we are on track to get there soon, but it does not appear we are there yet. What I would advise for now is that we all continue to maintain a high level of client and carrier communication to avoid any surprises. As brokers, we can continue to use every tool we have to make adjustments to clients’ programs to ensure they get the most competitive and effective means of risk transfer. I know that RPS is here for all our customers and we can solve any problem presented to us. I hope that all our clients continue to have confidence in the full suite of products and capabilities we have and we look forward to working with you to navigate these more difficult market conditions.
In closing, I wish everyone a lot of success in the months ahead and I hope we are all able to close out the year with our heads held high knowing that we did our absolute best to maximize the relationships we have and do what is best for our client base.