- Alpharetta, GA
It's been a tough start to 2023 for the US property market, with rising reinsurance costs, rapid claims inflation and reduced capacity all impacting the way insurers price and agents sell cover.
To help brokers navigate these choppy waters, RPS has examined three of the key trends affecting the property market to help you understand the pressures affecting the way you do business and how your clients manage their risks.
1. Rising Property Insurance Claims
One of the biggest trends in the property sector is a hardening market in which increasing rates are seeing premium rises north of 50% for customers in some sectors.
Wes Robinson, National Property president at RPS, says that the recent reinsurance renewal period at the beginning of the year had a big impact on these rates at a time when direct insurers are already facing serious cost pressures.
"The average insurance carrier that deploys catastrophe business is looking at 30% to 80% increases in its reinsurance costs," Robinson says. "This increase would be tough to bear at the best of times, but with the recent pressure on underwriting results in the direct market, insurers have no choice but to pass these increases on to their insureds."
The market has also suffered from the rise in costs that hit most aspects of the economy in the wake of the COVID-19 pandemic and the subsequent supply chain crisis and ongoing labor shortages.
The rising frequency of natural catastrophes has also led to a "demand surge" that makes large-scale claim events increasingly costly from a claims perspective.
"It's not simply about the growing cost of individual losses," says RPS Area President David Novak. "If you have a hurricane that hits the Florida Gulf Coast, there's a shortage of materials to deal with and a shortage of labor that means everyone is looking for a builder and the same piece of lumber to rebuild.This phenomenon is known as a demand surge.
"This surge in demand increases the cost of repairs significantly, and I've had a number of accounts with a significant loss event where the overall cost has exceeded the values associated with those locations, and as this happens over and over again, it becomes a real issue for the insurers."
2. Capacity Cuts
These rising costs have led to direct insurers reducing their appetite and limiting their capacity, with Novak warning that some carriers could reduce their capacity by as much as half over the coming year.
"Whereas a deal might've had 10 carriers involved to cover a risk last year, we are now seeing that number rise to 20 because capacity has been cut so drastically," Novak says. "That increase doubles the amount of work that agents have to put into completing a deal, taking more resources from a staffing perspective as well as taking more time — but most importantly, it contributes to an increase in costs to the insured."
RPS Senior Property Broker Nicholas Cavaness agrees, and says that the minimum rates insurers place on policies means that many risks will also face rising costs simply because of having more insurers on a policy.
"A lot of this market has minimum premiums or minimum price per millions, and when you add in a number of new insurers to a policy, the prices can quickly add up," Cavaness says. "Some insurers are also increasing their minimum premiums in order to reduce the number of submissions they're receiving, as they simply can't cope with the increased submissions flowing through the market at the moment."
3. Increased Pressure on Valuations
Insurers are also putting additional pressure on valuations, requiring their policyholders to update the value of their portfolio for rising inflation and the increased cost of construction.
"The market is putting a lot more emphasis on proper valuations on their property portfolios," Cavaness says. "Much of this emphasis comes from adjusted claims being higher than anticipated based on the bound valuations which often proved to be too low. This has then led to a large number of outsized losses that have hit underwriting results, and the market is now trying to readjust."
And RPS Area Vice Executive President for Property Christa Nadler says the issue of rising valuations has been compounded by a complacency from the insurance market on this issue over recent years.
"You can look back across some accounts and see that valuations haven't changed in the last eight to 10 years," Nadler says. "You then have insurers in a situation where they need to get a higher rate due to increased costs, such as reinsurance etc., and they're asking for valuation increases, as well.
"When you combine the two, this can be a hefty year-over-year premium increase for an insured."
Nadler says that many insurers are also using conversations around valuations as a negotiating tool to move away from blanket limits for a policy to more restrictive scheduled limits that reduce the ability for insureds to claim for loss events across multiple locations in one single claim.
Learn more about what's next for the Property Insurance space in the RPS 2023 US Property Market Outlook.GET THE REPORT