- San Francisco, CA
Charles Dickens said it best in A Tale of Two Cities when he wrote, "It was the best of times, it was the worst of times." We just concluded the first quarter of 2022, and just as we are starting to return to normal and put COVID behind us, the world gets engulfed in war between Russia and Ukraine. It is hard to imagine that in this day and age we would be on the edge of WWIII on the backend of a global pandemic, but here we are.
Resilience is a funny thing, and I'm a glass-half-full kind of guy. While I haven't had a chance to find the silver lining in current events, I'm sure in time we will all come out of this stronger and more united; at least that is my hope. For the time being, I would simply say that my thoughts and prayers are with the people of Ukraine, and I hope that the leaders of the free world around the globe find a way to bring peace and unity back as quickly as possible.
It is clear that things have not been easy in our lives lately, and they have been equally challenging in the insurance business. Gallagher CEO Patrick Gallagher once told conference attendees that "insurance is like air," in that is necessary for just about everything we do in the world. The challenges of business today that are a result of the pandemic, war and now soaring inflation are trickling over into the insurance world.
Looking Ahead to the 2022 Property Market
From a property perspective, today's challenges are arriving on the back end of several years of firm market conditions that have been fueled by increased catastrophe (CAT) activity and secondary peril losses. Weather patterns have changed and may change again, but for now underwriters are trying to find their footing while dealing with record hurricanes, deep freezes, long-lasting tornadoes, severe hail storms, wildfires, inflation, soaring construction costs, non-modeled/unforeseen costs — and the list goes on.
As a result of the last few years, all underwriters and property carriers would agree that rates are better, and terms and conditions have put them in a position where they feel they can get better return on their respective books of business. But like everything else, their costs are going up with increased rates on the reinsurance side. This increase has a trickle-down effect to buyers who are struggling with year after year of increased insurance costs on top of all the increased operational costs the insureds are dealing with in an effort to run their businesses profitably.
While 2021 ended up yielding a profit for a lot of property carriers, it by no means covered the losses they took in years prior, so while the market is in a better position to start 2022, I certainly cannot say that the first quarter is leading anyone to believe that we are anywhere close to a buyers' market.
I just returned from London after having not been over to Lloyds for almost two years. While the good news is that the market is stabilizing, several areas of distress will prolong the firm market through most of 2022 and beyond, depending on how loss activity develops throughout the year.
The first quarter of 2022 has played out quite like we expected, and good clients who are not in distressed pockets of our industry are seeing mid- to high-single-digit increases; in some very rare cases, clients are seeing relatively flat renewals.
The end of the first quarter is usually very indicative of how the rest of the year will play out, so while I don't want to say we should expect more of the same we certainly can appreciate that the pace at which the year has started means that we have a lot of hard work and challenging conversations ahead.
April 1 reinsurance treaty renewals have now been completed, and most carriers saw increased retentions and rates that were up an average of 7.5% to 12.5%; buyers will bear that cost and distribute it through carrier books of business. The first quarter has also continued to prove that each account truly does stand on its own, and the market we find ourselves in now is very hard to predict.
Each customer has a different story and a different history of navigating risk during the last few years of firm market conditions. Generalizing the market would be s a disservice to insurance buyers and not properly manage expectations. Instead, I think we can break the first quarter results and trends into the below tranches that should help shed some light on the road ahead.
This cost continues to be the number one issue on carriers' minds, and clients should heed brokers' advice to take it very seriously. There continues to be too many stories about massive losses at locations that had low insurance-to-value figures. Underwriters are acutely aware of construction costs soaring and inflation driving the costs of all services up, and they are pushing clients to take values seriously or lose the benefit of blanket limits.
Showing up with the same values as expiring will shed a negative light on an account prior to renewal, and underwriters are routinely increasing clients' value prior to modeling risk, which will push up the overall rate increase. The valuation issue is causing massive headaches in excess layers where carriers continue to push up their attachments and trim their line size, and the result could have a major impact on the overall rate increase.
Throughout the first quarter, we saw several accounts with very competitive and favorable primary renewals, with rate increases that were flat to 5% up. But building new excess layers to satisfy an increased attachment by a large line carrier added north of 15% to 20% more rate to several deals.
Managing General Agents (MGAs) and Program Business
During the first quarter, we saw some multi-family programs get non-renewed, and MGAs have had to make meaningful changes to their insurance capacity. As a result, middle market clients in Florida, Texas and Louisiana are seeing really challenging renewals — in some cases, costs are up over 100% and deductibles are doubling.
The Florida condominium market is seeing rates rise to unsustainable levels for clients, and many buyers simply cannot afford to buy adequate levels of insurance. Insureds in Louisiana who are still recovering from Hurricane Ida are seeing increases north of 25%, with further changes to terms and conditions, and increased CAT deductibles.
Middle-market Texas habitation business also continues to see rate pressure, with markets still trying to make corrections after Winter Storm Uri. Texas has always been one of the most challenging places to write multi-family business profitably due to attrition, convective losses, historically low building valuation and hurricane activity. Add that one of the large multi-family programs that wrote Texas has non-renewed, and you essentially have a perfect storm for increased rates in the Texas habitation market. I would anticipate Texas habitation to get more challenging before it gets easier. Rate increases will likely be well above market, especially for clients who are leaving shared limits programs and entering the open market for the first time.
California Wildfire/Brush Zone Business
After several years of horrific wildfires plaguing the western United States, standard markets are continuing to get more and more conservative with their ability to write business in areas with moderate and high brush zone scores. Excess and Surplus (E&S) carriers are also continuing to watch how much of this business they write, and many carriers are now tracking accumulations of exposure in various geographic concentrations.
The result is that the market has limited capacity for clients with brush zone exposures, and rates continue to rise. For many customers, the rates are becoming a major affordability issue and some clients are being forced to self-insure over rising premium costs.
Unfortunately, there's not currently any light at the end of the tunnel in this space, and I suspect it will take several years of less active wildfire seasons before markets start viewing this business differently. Clients need to spend time and energy focusing on creating the best wildfire mitigation plan they can to make their risk more attractive to markets and look for ways to protect their properties by clearing brush and having on-site water defense systems.
Builders Risk/Wood Frame Construction
This space is seeing issues similar to other distressed parts of the E&S space because of the risk of catastrophic loss when one of these projects has an issue. Carriers continue to see news of wood frame projects going up in flames on a far-too-regular basis; with rising construction costs and housing shortages in many major urban environments around America, these projects are only getting larger.
Rates continue to rise in this space but certainly have been a bit more stable the last few years. The focus on larger projects continues to be around security and water damage.
A Tale of Two Clients
As I said before, I am a glass-half-full guy, so while the outlook will be harder for some and easier for others, there is no major shortage of capacity and options for clients in the market. I wholly appreciate that some clients will struggle with the options presented, and my hope is that clients understand that the available choices are a function of the market and simple economic principles.
The most important commitment all of us at RPS make to our customers is that we will work with you to find the best possible solution available in the market to suit your clients' needs. We ask you to help us understand what items your insured can be flexible on by way of limits and deductibles, to better mitigate insurance costs while still protecting their assets for the times when they need protection the most.
Now I know some of you probably would have preferred I got right to the point, so in an effort to generalize a very complicated market I will leave you with this: rates will continue to rise on average between 2.5% and 12.5% for accounts that don't need to be restructured, aren't loss-affected and don't have meaningful exposure to some of the industry hot spots. Clients who do not fit this demographic are likely to see increases north of 20%, and it will require a lot of time and hard work to reposition them for future stability.