The year continues to fly by! I hope everyone has enjoyed the summer and found new and creative ways to have some fun amidst what is certainly shaping up to be a year I believe we will all be happy to forget.
As I write this, California is in the thralls of another massive fire in Napa Valley that has destroyed some of the best hotels and wineries in the St. Helena and Calistoga area. It has also destroyed lives with homes lost and as it stands today, Californians have endured close to four million scorched acres which quadruples the previous record. Smoke fills the air daily, and just a few weeks ago the news broadcast pictures of the Bay Area in an apocalyptic orange hue due to the heavy smoke and fog that made an entire day dark because the sun couldn’t not shine through.
I remember chatting with my family at the end of March thinking things would return to “normal” in a few weeks and all the hysteria around COVID-19 would die down. Boy was I wrong! Here we are, six months later and while the outlook appears to be more promising, the timeline doesn’t look as good and sadly, the hits of 2020 have kept coming. Without some sort of miracle, I believe we will have to continue to embrace a “new normal” with masks, social distancing, less travel, and more challenging work environments for the foreseeable future.
Human nature is to be social and collective, and the current environment goes against that. Just like the rest of you, I am looking forward to some better days and more positive global news and I have to believe we are overdue. As we head into the fourth quarter I can only stress that we are resilient people and that we should all focus on “making lemonade with lemons.”
A Challenging Time
When it comes to the E&S property market, the year continues to unfold as predicted and the challenging market environment remains. Current expectations are that the trading environment will remain status quo without any material change through 2021 and likely into early 2022. Record wildfires, record numbers of hurricanes, construction losses, and convective storm losses continue to hurt carrier balance sheets and trim margins despite what has been close to two full years of double digit rate increases.
This year, on a macro level, most carriers are averaging well north of 15% to 20% up on their property business irrelevant of asset type, and combined ratios are still not where carriers want them to be. Hurricanes Sally and Laura were not major market events but they continue to do just enough to erode margins where carriers were hoping to bank it. We have run out of letters for Named Storms in the Atlantic Hurricane season and have had to move on to the Greek alphabet, which was only done one other time in the history tracking hurricanes (2005).
Carriers continue to operate cautiously and despite new capital coming into the market, the capacity being universally deployed is being done so in a very disciplined manner. Carriers and MGAs are tightening terms, reviewing broker forms heavily, and controlling their line size on just about every deal, which makes everything take a bit longer and every deal that much harder to put together. When you sprinkle in continued COVID concerns and record amounts of social unrest in major American cities, you end up with an environment that is making every decision a client or carrier makes economically relevant.
The Carrier Perspective
On the carrier we side, we are seeing increased competition on deals as new capacity starts to trickle into the market, which means there is some expectation that rate increases will level off in time. As I said before, this capacity is being deployed in a very disciplined manner, so while the increased capacity will soften some increases and make it easier to fill holes in programs, it certainly does not allow us to see the start of a soft market cycle.
In very distressed asset classes like multi-family, brush zone/wildfire business, and hospitality, markets will continue to push rate until the renewal retentions drop. Carriers are enjoying some of the highest renewal retention levels they have seen in years and that is on top of the fact that they are looking to trim their books down on some of the exposure types they deem to be less desirable. Carriers are also dealing with a difficult reinsurance market because the retro reinsurance market is stagnant. When carriers can’t get the protection they need, it makes underwriting far more challenging.
The other major issue carriers will continue to struggle with is the uncertainty that is existing in the broader global economy. The long term effects COVID-19 is going to have on business, insurance-related claims, and remote work will take a long time to play out. The uncertainty around continued social unrest and riots around this year’s election and a potential new Supreme Court justice will likely have carriers concerned about the growing number of vandalism claims that are working their way into the market at staggering loss levels. As we wrap up 2020, all of these factors will play a major role in the insurance environment of 2021—and let’s not forget that we still have another two months left of hurricane season which could detrimentally effect the market.
The Client Perspective
On the client side, we have major economic issues to contend with. COVID-19 is putting a drain on many businesses and short of another government stimulus bill, capital is getting harder to come by. Travel and Leisure, Retail, Hospitality, Food & Beverage, etc., are all types of clients who are dealing with increased costs and very little relief on signs of income returning to previous levels in the near future.
The simple fact is that insureds who operate hotels have had their worst year ever. Clients that operate restaurants are struggling to stay in business. Retail stores are empty because just about everyone is shopping online. These are tough times and clients are looking at increased insurance costs very carefully. In the last six months, several customers have started buying less limit or dropping coverage altogether when it is not required by lenders or equity holders. These are not choices that are made lightly, which likely come down to simple math of buying less insurance at higher retentions to keep one’s business running or not being able to pay the bills and stay in operation.
I know all parties in the insurance transaction feel sympathetic to this concern and as brokers, we will continue to find the best and most optimal way to protect clients with the best coverage possible that fits their budget. We will also continue to push carriers to focus on the client relationships they have preached about during every renewal cycle, but we also need to remember that if carriers don’t make a profit and start banking some premium dollars for future events, it is unlikely they will be able to stay in business or continue to provide the capacity clients need.
A Feeling of Balance
Normally I would provide a breakdown of the market by asset class but in light of everything going on right now it is hard to pigeonhole any one asset class. Yes, multi-family is going to remain challenging and yes, wildfire business is getting close to uninsurable, but for every challenging deal in this space, there will be an alternate example of a smooth renewal.
Hospitality business in an excess position is going to continue to be of concern, but primary business is starting to get easier because margin and deductibles have returned to those layers. Loss-adverse accounts will continue to see their deals get re-underwritten and likely have increases above market levels. For every large increase that doesn’t make sense there will also be a story about a flat renewal that probably needed an increase.
I think the most important thing to remember as we finish this year is that each deal is different and each client’s story is different. The more information we have about an insured that can be conveyed to an underwriter will be very helpful and allow brokers to differentiate that customer.
Making Sense of a Difficult Year
On the client side, I think it is important to remember that for the most part, carriers are not fueled by corporate greed and are not looking to take advantage of a market cycle that has clearly swung in their favor. Carriers are happy to build relationships with their customers but clients do need to appreciate that because of a record number of hurricanes, riots, wildfires, tornado and hail events, flooding, and other attritional type losses, carriers can only do so much. They too have a business to run and underwriters are tasked to help carriers run that business profitably.
Manage client expectations as best you can and be realistic with them about the broader picture of our current trading environment, and I am sure they will appreciate the honesty. I know that message will be tough to deliver but I am a firm believer in the full disclosure and honesty and believe that clients appreciate those that don’t blow smoke.
2020 hasn’t been the best year, but if you look hard enough, there have been a ton of positives that have come from it. For myself, I have had a lot more time with my family and my young kids which has been a tremendous blessing. I trust that we all can find a few good things that have come as a result of all this craziness and I would encourage you to focus on those as we finish the year. I hope that as we wrap up 2020, you find yourself happy and healthy. RPS will continue to serve you and your clients to the best of our ability and the team we have is second to none.