- San Francisco, CA
Cheers! You made it! 2022 is here and I hope you had a wonderful time around the holidays and enjoyed some time with family and friends. My holiday was spent with too much family and a brand new puppy which made for a chaotic holiday but a good one nonetheless. The good news about a brand new puppy is that it created ample time for a cigar and some scotch in the yard while reflecting on 2021 and trying to tire out the little guy so he would sleep! The bad news about a new puppy is that I have quickly come to learn that even though my six- and four-year-old were very excited, they have proven to be a lot less helpful than I was anticipating and I got to enjoy some "I told you so" speeches from my wife as a result.
I am not sure how everyone feels about 2021 or the start of 2022, but if you are at all like me, it feels like 2021 ended way too fast and 2022 has started way too soon. It also feels like 2022 is sadly starting the same way as 2021. I really don't want to go on a tirade about COVID, Omicron, vaccines, etc. I think we can all agree we've had enough of that. I am a glass-half-full person so it is important recognize that without sounding too much like a preacher on his pulpit, the human race is finding ways to overcome and cope with immense adversity. I am certainly frustrated by the latest turn of events in the COVID battle but I do feel like there is light at the end of the tunnel. While it is still a ways away, progress is being made.
I hope that each of you continue to stay safe and find more silver linings in all of this. Remember that Muhammad Ali once said, "Don't quit. Suffer now and live the rest of your life a champion." Whether we like it or not, the road ahead will present challenges to us both personally and professionally. It's how we respond to those challenges that defines us.
Looking Ahead to the 2022 Property Market
Much like COVID, the outlook for the property market in 2022 is moving in the right direction. As I said in my last newsletter, there is light at the end of the tunnel. Things will be difficult, some aspects of our business will be distressed, but all in all, the market is beginning to stabilize. I suspect that as the year unfolds, market conditions will start to become more favorable for insurance buyers, provided their accounts perform and there are not any major surprises that impact the balance sheets of P&C insurers at a meaningful level.
The fourth quarter of the year always has some anomalies in it because some carriers opt get aggressive to pad the books and finish off the year strong. As such, it is hard to use the fourth quarter as an indicator of the year ahead but I do think the fourth quarter and the WSIA conference (which was very well attended in San Diego in November) provided some really great takeaways for the year ahead. Below are some thoughts on for 2022:
- Capacity - There is plenty of it out there for most business segments and new MGAs are popping up weekly. Many carriers have a positive outlook on the way rates have trended the past few years (how could they not, after almost 4 straight years of double digit rate increases) and as a result, with the exception of manufacturing business, wood and paper products, wood frame builders risk, and wildfire, there is a lot of capacity to go around.
The major outliers from a capacity standpoint will be the excess layered and shared market and the way in which other markets will control pure CAT account capacity deployment.
Excess carriers with large line capacity are still trimming their line size, opting for quota share participation, and are becoming more and more conservative with respects to their attachment. The retreat we are seeing in the market for larger stretches of excess capacity is the result of several years of "surprises" that have hit these markets hard. These "surprises" have been the direct result of valuation issues, coverage terms and conditions that were too expansive, and lack of underwriting discipline. I am sure most underwriters would agree that hindsight is 20/20 and these issues were not really "surprises" at all.
In the pure CAT market, carriers are controlling aggregate, covering cost of capital, and managing line size on a portfolio level very closely. This is happening more frequently on Tier 1 wind-driven business compared to DIC EQ accounts, but carriers are monitoring CAT deployment closely in order to reduce the impact this could have on their reinsurance pricing.
As a result, we do anticipate accounts with a heavy CAT footprint and a lack of geographic spread to be less stable in terms of renewal rates and pricing. We also expect to continue to see some markets pull back on their CAT writings throughout 2022 to ease their exposure and better manage their reinsurance costs at future renewal cycles. As those carriers pull back, we often find that while there is plenty of capacity to replace the capacity that was lost, the price point is much higher which will adversely impact a client's overall renewal.
- Rates - By and large, rate increases slowed down throughout 2021 and we saw several deals get done flat, and even some with slight decreases, to finish the year. Underwriters are willing to have fair conversations with clients that perform well and have been profitable long-term customers. The relationship element is starting to return—underwriters realize that they don't want to drive good business out the door.
Competition is back on quality accounts and underwriters want to retain renewals while new markets want to write the business. The increase in competition is a welcomed relief to brokers who have not had as many options to deliver to their clients in past renewals. On the flipside, accounts with claims and poor performance continue to be hit hard, because less desirable business is not being sought after by insurers. It becomes a basic supply and demand conversation.
As we move to 2022, the expectation for profitable non-distressed business will be rate increases in the flat to 7.5% range, and I have every confidence that the decreases will be available to some but on very rare occasion. I also believe that loss-driven risks impacted by both CAT and non-CAT events are likely to see increases in the 10% to 25% range depending on how they have performed over the past few renewal cycles.
If you ask a handful of underwriters, they will happily tell you that there is no such thing as "shock" losses anymore so it is important to manage a client's expectations if the reality of their renewal will be a tough one due to loss ratio metrics year after year after year. It is also important to point out that bifurcated programs will enjoy competition compared to more middle-market single carrier placements who might drive increases purely based on the lack of competition available to the customer. You will see a similar result in some of the major shared limits property programs out there because those programs are traditionally still well below market pricing and with lower deductibles than the open market will offer.
- Terms & Conditions - Underwriters have continued to tighten down and exclude expansive coverages built into broker forms but are still willing to provide broad coverage and robust sub-limits for quality accounts. Items like non-damage BI are more or less a thing of the past and as a result of Uri, carriers are clamping down on landscaping coverage. Claims folks are also getting creative in the way in which they are applying policy language in an attempt to exclude freeze related losses. All things considered, underwriters will continue to monitor T&Cs with a magnifying glass but will still have a dialogue with those clients that can prove a need for an item that can be underwritten accordingly.
- Valuations - This was a WSIA buzzword! In every meeting valuations came up as one of the biggest problems facing the property market. The irony is that there is no easy solution. Inflation is at a record high and labor and construction costs have soared during the pandemic. Valuations have been an industry problem since I started my insurance career and I suspect it will be an industry problem long after I retire. I think it is worth noting that many customers are doing the right thing and working with their carrier partners to keep increasing replacement cost metrics year over year. Those that are not being proactive are likely to lose the benefits of blanket limits and eventually be forced to make a major adjustment at an inopportune time.
Change Doesn't Happen Overnight
If there is one thing I am certain of, it is that 2022 will be another interesting year. The firm market will be over for some and not for others, and I think there will be a lot less consistency on the underwriting side which will add to the challenge of managing client expectations. There is no sign that the market is turning overnight and frankly, with reinsurance rates still trending upward, I suspect the challenges of our market will linger just like COVID.
The industry needs a few years of profit to fully stabilize, and even though most of the major P&C companies will have turned a profit in 2021, the margins are not where they need to be to sustain a more competitive environment going forward. The best advice I can offer is to get ahead of renewals and start renewal conversations early with underwriters so everyone can avoid surprises.
The RPS property team delivered an exceptional performance in 2021, demonstrating that we are meeting the challenges placed upon us by the brokers and underwriters that we work with. Our team is ready to meet the challenges of 2022 head-on, and rest assured we are all here for you and look forward to solving any problems that may come up. I hope that 2022 is off to a good start for all of you and I also trust that you have set some goals to help get things moving in the right direction.