The collective impacts of climate change, COVID-19 and civil unrest have converged to form a perfect storm raining down on the U.S. property insurance market.

With populations growing in regions more susceptible to wildfires and hurricanes and businesses struggling with government-ordered COVID-19 closures falling prey to damage from riots and looting, the cost of property insurance is soaring while capacity is shrinking, according to the 2021 U.S. Property Market Outlook released by Risk Placement Services.

Meanwhile, higher reinsurance costs also are affecting insurers' capacity, pricing and terms, especially for catastrophe cover.

Insurers paid rate increases upwards of 10% to 15% to renew their treaties at year-end 2020 after having been hit with even larger rate hikes at midyear, according to Wes Robinson, National Property Brokerage President.

With capacity shrinking in the admitted market, more property risks are seeking coverage in the E&S market, where they are discovering much higher pricing and stricter terms while still being unable to acquire the limits they desire.

Contractors also are looking to E&S carriers to obtain builder's risk coverage extensions that admitted carriers are reluctant to provide.

Retail brokers need to prepare their commercial clients for tighter market conditions overall and work closely with buyers to ensure their placements are presented to underwriters in the best possible light.

This becomes especially important in lines most heavily impacted by firming market conditions such as habitational, hospitality, industrial manufacturing and processing, and builder's risk.

For example, underwriters will want to know if a hotel property has been converted into temporary housing for medical staff or COVID patients requiring quarantine or if it is being used as alternative office or meeting space by remote workers, because it changes the exposure.

Underwriters are also interested in any weatherproofing or other improvements made to mitigate damage to commercial properties in catastrophe-prone areas to ensure their models accurately predict potential claim costs.

COVID-19 is also creating new concerns for building contractors, many of which must suspend operations whenever an employee is diagnosed with the virus.

While temporary, these shutdowns often require additional extensions on builder's risk policies that may not have been considered when the coverage was placed initially.

The pandemic also is changing property exposures for restaurants expanding their operations onto sidewalks and parking lots to serve patrons outside, leaving their main properties used solely as bathrooms and kitchens.

To ensure their models accurately predict potential claim costs, underwriters also are seeking more detailed information on the condition of properties, such as age of roofs, electrical/plumbing/HVAC upgrades or other improvements, and weatherproofing.

While it remains to be seen whether COVID-19 will disrupt the supply chain for building products, surge pricing almost always follows a natural catastrophe.

And if the past few years are any indication, hurricanes, tornadoes and wildfires will continue to plague the nation as climate change disrupts historic weather patterns.

2020 CAT Losses Driving Rate Hikes

The property/casualty insurance industry's third-quarter 2020 natural catastrophe losses were the largest since the third quarter of 2017, a year in which over $105.7 billion in insured CAT losses occurred, according to a report by Fitch Ratings.

From January through the end of September of 2020, the United States experienced 16 weather and climate disasters with losses exceeding $1 billion each, according to the National Oceanic and Atmospheric Administration (NOAA).

More than 800 wildfires in the states of California, Oregon and Washington burned close to 6 million acres, and destroyed thousands of structures, causing billions of dollars in insured claims.

These losses, though still below the record levels of 2018 and 2017, make 2020 "one of the costliest for fires," according to the Swiss Re Institute.

In most cases, CAT models indicated that excess layers shouldn't have been hit. As a result, underwriters at many excess carriers are re-rating policies internally, pricing the risks as much as 40% higher than what is submitted or what their models estimate.

"Insurance-to-value is a very, very hot topic, and it will be again for 2021. It has been challenging placing excess coverage without solid valuations," said Stephen Adair, Senior Vice President.

When preparing any property insurance submissions, agents and brokers should make sure their clients provide recent appraisals. Otherwise, underwriters may limit recovery amounts based on their models' replacement cost projections.

Documenting loss control measures to demonstrate that property owners are committed to protecting their assets could also improve their ability to secure coverage at a more reasonable price.

"There is no doubt that the costs of rebuilding are increasing," said David Novak, Area Vice President. "Markets are aware of it and are trying to adjust to it. They are seeing inflation of losses. After big natural catastrophes, we have seen prices rise for labor and materials."

Civil unrest and damage from riots protesting police brutality also heavily impacted the commercial property insurance market during 2020.

Many of the impacted businesses that were closed because of government-ordered COVID-19 lockdowns experienced physical property damage-broken windows, fire damage, looting-on top of their income losses.

Because many of these losses occurred in cities where insurers did not expect rioting to occur, such as Kenosha, Wisconsin and Minneapolis, insurers are adding exclusions for riots and civil unrest to commercial property and business owner's policies, especially on risks that include storefronts.

In some cases, insurers have been reluctant to insure properties being rebuilt after they were destroyed in the riots, labeling cities where the unrest occurred as potential "hot spots".

Informing Underwriters is Essential

Although it's pretty much a given that insurers will add communicable disease exclusions to property policies in the wake of COVID-19, it's also important to watch out for riot exclusions and restrictions on time element and mileage distance for ingress/egress coverage, especially on classes of business vulnerable to business interruption losses like dine-in restaurants and those with storefronts.

"The best advice we can offer clients at this time is to convey as much information as possible (to underwriters) about what operations have ceased at their respective properties and what operations are ongoing," said James Rozzi, Executive Vice President at RPS.

In all renewal discussions with clients, agents and brokers should clearly explain how any changes in the amount and types of risk they assume will affect their attractiveness to underwriters as well as the premium they will be charged.

Providing examples of potential claim scenarios may be especially useful in helping clients understand the financial impacts of coverage changes.

Ultimately, the firming property market provides an opportunity for agents and brokers to advise their clients on the benefits of risk management to reduce their exposure and to verify that they are buying appropriate coverage limits.

Experience and relationships still matter in today's market, maybe now more than ever. Independent agents and brokers should choose a wholesale broker with a solid track record and longtime relationships with underwriters.

They also should partner with a wholesaler that has longstanding relationships with non-admitted carriers to get the attention of underwriters who have been overwhelmed with new submissions.

Seasoned wholesale brokers who have experienced the market's historical ups and downs know how to negotiate and structure placements to make them affordable, even in today's market.