By the time you read this market update, it is my hope that you had a fantastic holiday season filled with good cheer and enjoyed some time off with family and friends. I always enjoy the end of the year because it is a magical time filled with joyous songs, festive lights, and holiday get-togethers. Most importantly, it is the time of year when we get to close out one year and kick off another.
The end of the year allows us to have a few days where we can reflect on our accomplishments or shortcomings and start creating a plan for the year ahead. For those of you that know me well, you know I am very type A and love nothing more than finding time to set goals, both short term and long term, and to make sure those goals encompass every part of my life personally and professionally. The best part about making goals is that you are the one in charge! When you push yourself to get better and have something to look forward to accomplishing, good things happen.
The closing of this year is a little sweeter than just your average year because we are moving into a new decade. With a nice scotch in hand, I used the time off around the holidays to really reflect on the previous 10 years and all the events that had transpired in my life. Upon the completion of my decade-long self reflection, I promptly took a nap, because for me, the last 10 years have been a bit exhausting.
Without dating myself, the last time we rang in a new decade my colleague and I had just decided to join the RPS family and help establish an office in San Francisco. It seems like an eternity has gone by since we turned on the lights and opened the office doors, but 10 years is really a short amount of time and even though we have a lot of work left to do, we have also celebrated some major milestones along the way.
The San Francisco office now has a personal lines presence, executive lines, casualty, and continues to remain a property-focused operation with three full property producers and more on the way. Over the last decade, we have taken the office from two people to 19 people, and when we close the books this year, our property team will have placed over $160M of premium in the market with no plans to slow down. When we started the office the premium figure was right around $35M so I remain very proud of the office and the overall RPS culture that allows us to continue to have professional success.
A lot can happen in 10 years and it will be exciting to see what the next 10 years has in store for us all. I hope that you had some time to reflect on the last decade of your life and career and it is making you as equally as excited as I am about the year ahead. If your last 10 years wasn’t what you hoped it would be I would encourage you not to worry but rather remain focused on how your next 10 years will be even better.
From a more property insurance focused perspective, the last 10 years has been filled with a lot of “I” words: incredible, interesting, intense, intriguing, irresponsible, irrational, etc. Up until 2018, we more or less operated the entire decade in a soft market cycle. The decade was marked by an extraordinary amount of market-moving events but due to the favorable economic conditions that trailed the 2008 global recession, the access to capital from non-traditional sources, low interest rates, carrier focus on top line growth, and a number of other factors, the market remained a buyers paradise right up until the last two years of the decade.
Below is a small snapshot of how we ended up in a hard market. It is certainly not a complete list of all major market events but as you can see, the culmination of the below events coupled with a decade of rate reductions has put the market in a place that needs correction and more underwriting discipline.
- Hurricane Irene - 2011
- Japan EQ -2011
- Super Storm Sandy - 2012
- Chilean EQ - 2015
- Hurricanes Harvey, Irma, Maria - 2017
- Hurricanes Michael & Florence - 2018
- Kodiak Island Alaska EQ - 2018
- Ridgecrest EQ in 2019
- CA Wildfires in 2017, 2018, 2019
- 5 Years+ of Hail in TX and CO - According to the August 2019 NICB Hail Report, between 2016 and 2018, 395,025 claims were filed due to hail in CO and that was the second most active state behind TX at 811,381 for the same period. According to NOAA, hail storms in the US have caused an average of $15B in insured losses per year over the last 5 years and the size and scope of tornado hail claims is on the rise.
When you sum up the above, you are looking at several hundred billion dollars worth of insured losses with the bulk of the losses stemming from 2017 and 2018 (respectively, the worst and fourth-worst insured loss years on record in the insurance industry). Pair that with rates that are less than 50% of what most carriers would deem to be “proper rate adequacy” on a book basis, and the end result is a multi-year lack of carrier profitably that has caused a shortage and pull back of capacity.
The end of this decade is a time marked by carriers doing what they must to right the ship and make corrections on their books in almost all areas of the property insurance space (both standard lines and E&S). In late 2017 we saw signs of firming but it was mainly limited to loss affected business and Multi Family. In 2018, E&S carriers began pulling back with continued pressure on Multi Family and in Hospitality.
By Q2 of 2019, the market had firmed up in just about every asset class imaginable. As 2019 rolled on, the standard markets and large line carriers started playing catch up which further propelled the challenges we all faced in the market on a day in and day out basis. In brush zone areas of California and in wide swaths of hail-exposed America, package carriers began running for the hills and leaving clients with very few options. Pricing increases have been as high as 250% on some dislocated accounts and in the large engineered space, you have seen clients go from having $1B worth of coverage at the same premium that will now only get them a $25M Loss Limit.
2019 was a challenging year because every account saw some level of difficulty and a lot of the broad brush decisions that were made by carriers left some really good non-loss affected customers wondering what happed to the relationship focus that is spoken about with such pride and vigor at all industry events. In the end, macro economic theory caught up with the insurance industry and what we are seeing now is the market correction that will allow insurance providers to shore up their balance sheets and be there to continue to pay claims for their customers when the big events do occur.
If they don’t, the correction will be prolonged and forceful because as I have said in the newsletter on numerous occasions, unless you are the federal government, you cannot run a business at a loss for a repeated period of time and expect to stay in business.
Breaking it down further, 2019 saw rate increases that averaged 10% to 25%. If you were in the Hospitality, Multi Family, or had a large single carrier large line placement that was being non-renewed, you likely saw increases well above 25% on top of changes to retention levels.
As for 2020, the general consensus among most of the major carriers is that it will be more of the same. Carriers have not made enough profit to offset the losses they have taken the last few years and rates aren’t back to where they need to be for long term stability. As we roll into the next decade and the next year, my advice is to be prepared for adjustments to T&Cs and retention levels.
As I sit here today, there are a lot of accounts whose rates are trending to more acceptable levels and rate adequacy is returning to the property market but despite that, I would prep clients for a 10% to 15% rate uptick. In an effort to be more granular, below is an overview of what transpired in 2019 and what we see coming down the road in 2020 by asset class:
- Multi Family
- Best in Class Accounts will be up 15% to 20% with loss affected deals still seeing increases well above that
- Carriers will continue to be focused on ITV and proper replacement cost metrics
- Carriers will still be pushing base rates for primary NON CAT layers that will range from $0.15 to $0.20 depending on geography and retention level
- Hail Deductibles of 1% to 3% will be pushed as well as ACV roof limitations
- There will continue to be very few new entrants into the Multi Family space which will prolong the difficulty of this market segment as carriers look to scale back their levels of Multi Family Exposure
- Average increases 12.5% to 20%
- Accounts that saw significant corrections after major CAT claims will likely see lesser rate increases because the rate adequacy on their particular risk will be deemed adequate
- Higher Excess layers that were previously not considered exposed layers from CAT events will continue to be difficult to place
- Carriers will look to continue to eliminate non damage BI related claims from Manuscript Forms
- Carriers will continue to push higher retentions, especially water damage related claims
- Higher Ed/Municipality
- Average increases of 10% to 15%
- Accounts that have bifurcated programs will fare much better than accounts with single carrier placements
- Single carrier placements are likely to continue to see larger than normal increases without E&S solutions on a layered and shared basis at competitive prices
- Risk management practices will be in the spot light as carriers look for clients to differentiate themselves and take a pro active approach to managing the risks associated with their geography
- Wildfire Exposed
- Increases will continue to be unpredictable because the TIV and Brush Zone Score will have a significant impact on the rate change
- On average, rate increase expectations will be 25% to 50% purely based on corrections to accounts leaving the standard market and headed to the E&S market with a very limited number of carriers willing to entertain this type of business
- Rate levels will range from $0.40 to $1.50+
- Some clients will likely self-insure wildfire due to budget constraints
- Preferred Real Estate (REIT)/General Property
- Rate increases will likely average 7.5% to 15%
- Loss effected business will see heavier rate increases and be forced to significantly alter client retention levels
- Lender requirements and carrier flexibility will be met with some impasse
- Best in class accounts with good risk management and heavily bifurcated programs will see very consistent renewals
- High Excess layers will continue to be challenging as carriers catch up with ITV concerns in major metropolitan markets whose costs to rebuild have skyrocketed due to the economics of those markets
- CA EQ DIC
- Rates will average up 7.5% to 20%
- Carriers will be looking for higher multiples against their modeled results
- Carriers will continue to walk away from business they feel is not correctly priced
- The depressed rates this market has experienced since the last decade will start to catch up with insureds who have benefited from reduced costs for a long period of time and accounts with very thin rates or model adequacy issues will see larger than average increases
We all know it is nearly impossible to predict the future. When the first Terminator movie was released in 1991, Skynet caused a nuclear holocaust and became self aware on August 29th, 1997. Thank goodness movie producers are about as good at predicting the future as insurance professionals are at predicting market conditions for years to come.
It is hard to know what the next decade has in store for us but I do think 2020 will have less sticker shock and clients are starting to understand that carriers still want to see more rate back on their books in order for the market to return to more stable and healthy levels. At the end of 2020, what we know for certain is that some accounts will be non-renewed because they don’t fit with updated carrier appetites, some accounts will renew with very little difficultly, and others will see significant rate and T&Cs adjustments because they are not at a level that will allow carriers to make a profit (potentially on a modeled and actuarial historical loss basis).
It is not all doom and gloom but the honest answer that they call them “market cycles” for a reason. Right now, unless you are living on another plant, we are in a “hard market cycle” and pure ignorance is a good way to ruin a valuable client relationship. On the bright side, you are starting a new decade with endless possibilities for the future and Skynet has not taken over the planet.
I hope you all have a great year ahead. RPS looks forward to continuing to serve our clients as best we can with creative market solutions and open and honest dialogue about the expectations clients should have as they head towards another challenging year of renewals.