While the impacts of the 2020 election and COVID-19 on the U.S. economy remain hazy at the onset of the new year, one thing is crystal clear: The cost of property insurance is expected to continue to rise for the foreseeable future.

Every commercial insurance buyer will feel the effects of the firming property market, whether through higher premiums, less capacity, stricter terms, or all three, according to the 2021 U.S. Property Market Outlook by Risk Placement Services (RPS), the E&S wholesale broker and managing general agency.

In the first half of 2021, insureds can expect to see rate increases in the high single digits to 15% range on clean accounts, higher on accounts with losses, according to the report.

Reinsurance Role

The rate hikes are, in part, a trickle-down effect attributable to insurance carriers' higher reinsurance costs. According to the report, insurers paid rate hikes upwards of 10% to 15% to renew their treaties at year-end 2020 on top of midyear rate increases averaging 25% to 35%.

During 2021, expect reinsurance to "play a larger role in rates, capacity and terms as carriers continue to improve their book composition and move toward the use of 'technical pricing'," said Wes Robinson, National Property Brokerage President of RPS. Although reinsurance rates have climbed precipitously, "the losses have not let up, so many carriers are still not making money," he said.

Climate Change Impacts

The property market also has been impacted by climate change, particularly bearing the blame for more than 800 wildfires along the west coast that burned close to 6 million acres. Billions of dollars in insured claims prompted a standard market exodus in many parts of California. And while the E&S market is available to cover many of these losses, premiums are much higher than most insurance buyers are willing to pay.

The shifting of Tornado Alley also has been attributable to climate change, causing a significant increase in the number of tornadoes occurring in the Mid-South region.

Additionally, 12 hurricanes made landfall in the contiguous United States, with Hurricane Laura representing the largest single loss event with insured losses estimated at $11 billion to $15 billion.

Accurate Valuation Reporting

Because rebuilding costs are often higher due to increased demand for materials following a natural catastrophe, as well as increased use of technology in building properties, some claims have been piercing excess coverage layers, taking excess carriers by surprise.

In most cases, their 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 at RPS.

Capacity Tightens

Capacity also will be especially tight for buyers in catastrophe-prone coastal regions and in parts of the Midwest, requiring many to layer coverage from multiple carriers to get the excess limits they need, the report said.

Fortunately, there is one bright spot on the horizon: More ILS capacity is coming into the E&S market as investors see potential profit-making opportunities there.

Other highlights of the RPS 2021 U.S. Property Market Outlook include:

  • Multiple insurers will be needed to assemble higher excess limits
  • New communicable disease and riot exclusions
  • Restrictions on time element, ingress/egress Business Interruption cover
  • Builders' risk extensions, and food processing accounts moving into the E&S market
  • Enhanced scrutiny of hospitality and habitational accounts
  • Demands for more detailed and up-to-date property valuations
  • Increased focus on engineering/loss control