Author: James Rozzi
Goodbye 2020! Good riddance and bring on 2021. If you are a follower of the Chinese zodiac signs you will be welcoming the year of the Ox. According to the tea leaves, the year of the Metal Ox brings career advancement, success in business, prosperity, and wellness for all zodiac signs. Who wouldn't want that, right? The year also predicts new career opportunities, and tells us not to let anxiety or negative thinking affect us. I think we could all use a little of that! Ironically enough, when I was beefing up my Chinese zodiac knowledge, I also learned that 2020 was the year of the Rat…enough said!
As I wrapped up 2020 I spent a fair amount of time in Lake Tahoe. There is something about sitting by the lake in the winter that clears the mind, lifts the spirit, and helps me focus. There was a lot to think through, because on one hand, 2020 was a disaster and on the other hand, it helped put things in perspective for all of us.
In talking with many of you, 2020 allowed us to refocus on what is most important in our careers, our families, and our lives. The various lockdowns and social distancing required us to do more with less and focus internally. The end result for many was a lot of positive improvement both personally and professionally. On the other hand, many people suffered, felt alone and isolated, lost jobs or businesses and continue to suffer while humanity tries to find the right path forward to hopefully put COVID-19 in the rearview mirror for good.
For those of you who have dealt with a great deal of adversity in 2020, I can assure you that you are in my prayers and I wish you an amazing 2021. For those of you that continue to make lemonade with lemons, stay strong, stay focused, and keep up the hard work. Overcoming adversity in any aspect of one's life is the most challenging thing you will ever do.
It's hard to want to chat about insurance and day-to-day business during times like these when there are so many bigger things to concentrate on. But in an effort to keep us focused on the year ahead and on the property marketplace, the best way to sum up 2020 is to merely say that the property market felt a lot like everything else in 2020. It was a record-breaking hurricane year, a record-breaking wildfire year, a top five recorded property loss year, and a year that challenged insureds, brokers, and carriers alike.
Heading into 2020, most major P&C carriers had not seen an underwriting profit in three or more consecutive years and major changes needed to be made. The catastrophic loss events of the last few years hit a crescendo when COVID-19 derailed the global economy in March and sent businesses and carriers into a panic about rate adequacy and long term financial solvency. Throughout the year, the insurance industry kept a watchful eye on the virus and the claims that unfolded as a result (some of which have been paid and most of which remain uncovered/uninsurable).
Over the entire year, rates accelerated and carrier retentions remained at all-time highs. Carriers were doing their best to be business partners with long-term clients while also making much needed corrections to their portfolios in an effort to turn an underwriting profit. They say timing is everything, and unfortunately, the changes carriers were required to make to solidify long-term solvency came at a time when core businesses needed to reduce costs most.
Hospitality, restaurants, office space, retail, general real estate and many more industries spent most of 2020 trying to survive, trying to find ways to operate and keep the doors open, and the increased insurance costs did not help. In fact, for many Main Street businesses, the doors are shut for good.
2020 required a lot of tough conversations and decisions. Market conditions created a "lose-lose" situation that we had not seen in our industry for over a decade. Carriers moved forward cautiously with reduced lines, curbed appetites, and increased rates, while clients struggled to find capacity at competitive pricing that made sense for the immediate business forecasts they were grappling with. Reinsurance rates continued to rise and capital did not enter the market at the same pace it had in the past, which immediately slowed the supply of capacity on some of the most hard-to-place risks, making it even tougher to get those accounts across the finish line.
By the numbers, rates were up on average 15% to 25% almost universally across the property market throughout 2020. Carrier retentions averaged well over 85% for the bulk of 2020 unless carriers were shedding business by design. Even then, however, almost every major market I spoke with had more new business than they knew what to do with, making retentions a non-issue.
Even after all the changes and rate increases, 2020 was a tough year for carriers. It was a record setting hurricane year and another challenging loss year. Initial results are showing that several carriers had less-than-favorable loss ratios and that they continue to struggle to make an underwriting profit, which means that 2021 will be another wild ride.
Some asset classes fared better than others and many accounts beat the market by taking increased retentions, focusing heavily on limits, or staying focused during previous renewal cycles on what we call "long-term carrier-client partnerships." Other accounts whose loss experience was less favorable or who happened to be in some of the more distressed parts of the market saw results and increases that were well above the national averages. Capacity constraints in the most difficult market segments fueled the fire.
Below are a few notable examples:
- Brush Zone/Wildfire -CA and the PNW set new records in 2020 with the largest number of acres that were scorched and blew previous records threefold. Standard carriers continued to expand excluded geographies and zip codes within wide swaths of CA, OR, and WA which for some clients meant rate increases that were well over 300%. These days, it is hard to get capacity for 100% brush zone exposed risks that are larger than $100M in TIV and carriers willing to write the risk control capacity, which fuels the costs.
- Wood Frame Construction -The riots, civil commotion, and unprecedented social unrest that plagued American cities in 2020 also caused urban wood frame construction rates to rise for the fifth straight year. It is hard to believe that three years ago we were seeing deals get put together with annual rates in the low $0.20s range and today, market rates start at $0.40 annually and go up from there. There is a handful of lead markets in this space that continue to support clients and customers, but carriers are heavily focused on rate, deductibles, and preventative security measures because most markets have found that even with a large and profitable book, one or two bad claims can erode a few years' worth of premium. There is also no sign of social unrest dying down, and that alone is causing major capacity issues in urban areas.
- Multi-Family/Hab -For the fifth straight year, the multi-family market remained stagnant with the list of carriers writing primary staying at roughly the same. Multi-family continues to be one of the industry loss leaders and clients have had to get real with retention levels in an effort to not trade dollars with carriers as the market continues to evolve. Rates in this space ranged between 10% up for best in class clients with large retention programs to 50%+ for those accounts that needed market corrections. There has also been a major decline in the availability of Risk Purchase Groups in this space, and some clients coming out of these defunct programs are seeing real sticker shock.
- Hospitality -This asset class was heavily impacted by past hurricane events and then more so in 2020 by COVID, as most major hotels remained vacant or with very low occupancy rates. The hurricane losses that stemmed from the hospitality sector in 2017 and 2018 really made a dent in carrier balance sheets and hospitality clients saw rates rise 25%+ for two to three consecutive years. 2020 made carriers cautious for a multitude of reasons, and heavy focus was put on how BI values would be captured during COVID, how losses could play out with government ordered shutdowns, and how impactful the increased hurricane activity would be. As the year unfolded, a record number of hurricanes did not help matters and we anticipate most carriers to move cautiously on this asset class as 2021 unfolds. We expect excess layers to be among the most challenging in 2021 because loss creep on various types of claims continues to be a major issue.
I wish I had a crystal ball or could leave you with some good news. There are certainly a lot of positive signs about capital returning the P&C market and carriers are starting to feel rates are returning to levels that make each account more appealing. As more capacity flows to the property market and rates are deemed adequate by the carriers, competition will increase and rates will stabilize. How quickly this happens is hard to predict, and I suspect we will have some challenges to overcome through the first two quarters of the year and maybe through the summer months before things settle down.
One thing is certain, carriers need a few years of profit before major changes are made. The initial outlook is that increases will soften and likely be somewhere between 10% and 20% (with some less or more depending on account characteristics) as the year begins to unfold. While rate increases are expected to be more tempered, carriers are still proceeding with caution and we expecting the underwriting to be very disciplined for the foreseeable future.
Clients should continue to use the tools they have to create the most effective risk transfer possible. Look heavily at deductibles, limits, CAT exposure, and data adequacy to make sure underwriters are able to evaluate those exposures in the best light possible. Our business, like all others, is cyclical and hopefully just like COVID, this too shall pass and we can all enjoy a bit more stability in the market and in our lives in the days and months ahead.