Author: James Rozzi
Is it just me or did summer go by way too fast? Don't get me wrong, I love the fall but I could have sworn that we just finished watching fireworks, BBQing with friends, and celebrating the birth of our great nation. I remember when I was young and people would always tell me that "time flies" and that I should enjoy my youth. The more I reflect on that expression the more that it has become clear to me that we are always looking ahead and while I am sure many of us do our best to stay present and live in the moment, it is always easier said than done.
Think about it, when you were on a tee ball team, you couldn't wait for coach pitch; when you were 15, you couldn't wait until you turned 16 and got your license so you could drive freely without your parents telling you what to do. I remember being a junior in high school and at that moment in time I couldn't wait for my senior year and graduation. The same story seems to play out in our lives because I also distinctly remember being really excited about graduating from college and joining the workforce and not realizing how great college is and how easy I had it.
I suppose that we are all focused on "what's next" and I think the "what's next" philosophy is very prevalent in the insurance industry. The fall in particular always seems to be about looking ahead. There is something special about the fall that brings on a sense of change. The weather gets colder and brisk, the leaves begin to fall from the trees, and we begin to experience a cycle that will eventually give way towards new life and spring (once we survive the winter).
During the fall from a professional standpoint, we spend most days budgeting for next year, finding new opportunities that will help us finish the year strong, and of course, doing what we can to get end of the year business done early in an effort to allow us all to enjoy the holidays (or at least that is always the plan before things start to derail). We also spend a lot of time in the fall chatting with fellow industry peers to try and predict the market we will find ourselves in when we ring in the new year.
The same sense of change we feel in the fall is the change we are starting to see in the property insurance market. As we close out the 3rd quarter and head into the 4th quarter, things are definitely starting to stabilize. There is a growing feeling that while we are not done with the firm market conditions of the past few years, we certainly appear to be on the tail end of it and the market is beginning to transition. Year to date (and do please knock on wood), we have experienced two notable CAT events in Winter Storm Uri and Hurricane Ida. The CAT activity in 2021 is strangely quiet compared to the last few years and it is almost shocking to think that as I write this, we are in the last few weeks of wind season and the waters in the Gulf are all quiet.
If the year ended tomorrow, carriers would be thankful to not see record wildfires, record hurricanes, and large convective storms for once. But despite the lack of CAT activity, many carriers will still struggle to make a profit this year. There are a myriad of reasons for the lack of profitability, but it is probably the single most important thing that clients need to remember as they look ahead to 2022.
The last few years have been unlike any other period in insurance history because despite increased rates, carriers' books are still not performing, which indicates that while rates may level off, we should all be cautious about anticipating or expecting meaningful rate reductions in the year ahead. Early expectations are that reinsurance rates will increase in the mid- to high- single digit range and as a result, carrier costs will continue to go up which will put rate increases on the forefront of carriers' minds when evaluating client renewals.
Clients who have been adversely impacted by losses will see increases that are easier to justify, but the clients whose rates have returned to levels where underwriters see margin will be under competition from a lot of the new capacity that is coming into the market. This new capacity is strategically positioned to come into the market when rates are more or less at their peak and while we all expect this new capacity to be disciplined, it will likely prove to be a major check and balance to carriers that try to push rate on the more profitable accounts.
I spent the last few weeks in various client renewal meetings and there were a few recurring themes that underwriters seem to be unified on:
- Valuations - The biggest problem in the property marketplace today is insurable values and how clients determine their replacement cost, and how they adjust these replacement cost metrics over time. This is likely one of the single biggest factors that is contributing the lack of profitability among insurance carriers, because even though rates are adequate, these rates are on values that are suppressed because of a massive uptick in the costs of both labor and construction materials worldwide.
No one seems to have a solution to this issue but everyone has a comment on it. From the carrier perspective, losses continue to exceed expected modeled losses and buffer layers are getting harder and harder to price because losses are creeping into these layers with far more consistency than in the past. From the client perspective, they are happy to get appraisals and run replacement cost tools but sadly, the data that appraisers and valuation tools spit out seems a decade or two behind the reality.
- Social Inflation - Carriers seem to be drawing the short straw with greater consistency these days, and public adjusters as well as those that look to game the system are allowing client's property maintenance plans to be their insurance policies. This is a growing concern in the multi-family space which continues to present challenges to underwriters.
Social Inflation is also a major theme in liability insurance, which is also experiencing its own challenges. At the end of the day, the reinsurers that support that type of business also support property business. As such, Social Inflation is becoming a major concern of the P&C industry and the legal framework of some states is slowing stripping away any protection carriers have against clients who file claims three years later in what a common person would call "bad faith."
- Anomalies/Shock Losses - This last theme is a sign of the times. I really don't care what side of the global warming conversation you are on and frankly, it doesn't matter because this is not a political statement but more of a fact: weather patterns are changing. We used to call a Polar Vortex an anomaly and a one-in-a-million type event but sadly, they are happening around the globe with more frequency and more severity.
Winter Storm Uri is a prime example of a major event that no underwriter ever priced for or contemplated because no one ever envisioned waking up and seeing the state of Texas frozen solid for three days. Hurricane Ida is a lesser example but the number of hurricanes have we seen in the past few years that are moving quicker and getting into more inland areas while wreaking havoc with intense rain and flooding is growing.
We also saw a condo building collapse in Florida this year and it is hard to find anyone who remembers the last time something like that happened in America. The aftermath of that tragedy is highlighting how valuation issues plague our business and on top of the loss of human life, we have a building that we are finding was massively underinsured.
Underwriting today is extremely difficult and even harder to get "right." I am sure if you pooled a handful of underwriters they would tell you that these days, it seems to be 50% underwriting and 50% luck. The simple fact is that underwriting models don't price for winter storms, they don't price for subways flooding in NYC from a storm that made landfall in Louisiana, and they certainly don't price for a public adjuster getting a client a brand new roof because one shingle was damaged in one out of the ten buildings in the property after a minimal hail storm. These anomalies have eroded carrier profit for the better part of the last decade and one could easily argue that they are no longer anomalies and carriers need to start charging for the "unforeseen events" that show up year after year.
Despite all of the above, it is important to remember that insurance is a commodity and follows the rules of supply and demand. Luckily for us all, insurance is not like other commodities in that that price is the only differentiator. We are lucky to work in a business that supports carrier and client relationships and the better those relationships are, the better the results are over a period of time on both sides of the coin.
It is also important to note that not all coverage is created equal and that while almost any savvy insurance buyer is price conscious, most clients also want a product that will cover all the exposures that carriers deem acceptable to transfer and many clients understand that buying a bottom feeder with limited coverage won't taste good when you get it on the plate. As a supply and demand driven business, we still cannot ignore that the supply of capacity is increasing and that will have a major effect on 2022 in the absence of any market-changing event between now and the end of the year.
I would anticipate rates to level off and average somewhere between down 2.5% to up 7.5% as we cruise through the first two quarters of the year. We have already seen a handful of accounts see relatively flat renewals and slight reductions as we wrapped up the third quarter.
Breaking it down by sector, here's my outlook:
- Brush Zone/Wildfire - Arguably the most distressed segment in our business with limited capacity available and increasing demand. Rates will likely push north 10% to 15% and I would also expect more standard carriers to drop insureds in brush zone areas, which means those clients will see material rate change and material terms and conditions changes as new entrants to the E&S wildfire market.
- Wood Frame Construction - This will remain challenging but rates have leveled off and there are some new markets entering the space which will allow brokers to have more choices in the $100M and under projects. The larger projects will still have capacity challenges and security and deductibles will remain the focus.
- Multi Family - This segment continues to be a loss leader for most markets and seems to be the biggest valuation/replacement cost offender in the industry. As such, I would expect clean accounts to see flat to 10% increase as we head into 2022 and loss-affected programs to still be faced with taking increased retentions or trading more premium dollars with carriers with increases north of 25%.
- Hospitality - Rates and deductibles have returned to this space over the past three years and I expect some clients to see some reprieve. Attritional losses on most programs are back under control due to increased retentions (especially Water Damage). Rates will likely range from -5% to +5% for accounts that have seen some major uptick in years past and whose programs are stabilized. The biggest area of concern within these programs will remain the higher excess layers because there still remains a lot of dislocation among carriers who are cutting their line size and leaving gaps in programs.
- National REITs/General Real Estate/Higher Ed/Municipality - This business will be aggressively targeted by new capacity and accounts that have performed well both historically and who have seen some increases through the last few renewal cycles will likely see much smoother renewals. Rate expectations are -7.5% to +5%. Loss-affected deals from CAT events will continue to see increases tied to actual loss performance but I would not expect those increases to be as severe because it is likely that retentions and past increases are starting to smooth out loss ratios and loss underwriting.
It would be nice to have a crystal ball and be able to give you a more exact answer as to how the rest of the year will unfold and how 2022 will start. Based on what we are seeing in the market, the thoughts put forth certainly give us some guidance on what the expectations are, but there will always be surprises and outliers.
The best part about our industry is that nothing stays the same forever, and these days it feels like nothing stays the same for more than week or two. Every time I read an industry press release there is a story about someone leaving one shop and heading to another with aggressive growth goals. There are also stories about exclusive capacity arrangements, sidecars, and tech-driven insurance solutions. At the end of the day, all these stories are just "noise" and in reality, clients who believe in the partnership they have with their markets and trust the advice of their brokers will always fare better.
I am sure I have said this before, but we at RPS are in the relationship-building business and partnerships are important to us. It is also important to us to make sure everyone understands partnerships work both ways. Someone once told me that the best result in a negotiation is when both sides feel like they got screwed just a little. I wouldn't dwell on that statement too much but the more I think about the nature of our business, the more I think the statement is a good one and worth noting.
I hope you all have a great finish to the year and please do reach out to any of us at RPS. We are here to help you and your clients!