Mid-Market Troubles Hit US Property Insurance Market

Rising claims costs and a hardening reinsurance market are increasing the pressure facing direct insurers when it comes to long-term profitability.

This pressure has led to reduced capacity across the Property insurance market, which has hit the managing general agent (MGA) sector particularly hard.

The reduction has led to greater-than-average rate increases for middle market business — a sector that's traditionally been well served by the MGA model, with such firms able to write complex risks under one policy despite involving a number of different capacity providers, making it a much easier and more affordable approach for agents and insureds alike.

But RPS National Property President Wes Robinson says that the withdrawal of capacity from the property market has led to increased costs for these MGAs, which are finding it much harder to find the capacity they need to place these mid-market risks.

The reduced capacity shifts these risks into the open market, without the benefit of the great mousetrap these MGAs provided. "The cover is less affordable for this market segment, leading to them facing some difficult choices," Robinson says.

And this choice essentially is between paying the increased premiums or increasing the amount of risk they retain on their own balance sheet.

"The price of transferring risk now is so expensive that insureds are going to have to ask themselves how much risk they can tolerate holding onto on their balance sheets," Robinson says. "But there are philosophical differences amongst insureds when it comes to risk management, risk tolerance, risk financing and also risk avoidance, so there's a lot to consider when coming up with the right placement strategy."

RPS Area Vice Executive President for Property Christa Nadler says that insurers are also changing the way they assess risk management capabilities and requirements. Indeed, where risk management recommendations from previous years may have been advisory, they're now being mandated for cover to be accepted.

"The market has gotten to a point where they're saying 'enough is enough' and they're no longer willing to accept the increased risk associated with not complying with recommendations," Nadler says. "They are now feeling that the probable maximum loss has simply gotten too high, and the insured either has to comply with the recommendations or face either an increase to their cost of cover or a significant reduction in the capacity available."

But RPS Area President David Novak says that companies that invest in their risk resilience — including new properties built to withstand the growing threat from natural catastrophes — could benefit from lower rates compared to other areas of the market.

"Some insureds take their risk management more seriously than others, but going forward there will have to be a lot more invested into risk management," Novak says. "And for companies that see themselves as best-in-class when it comes to managing their risks, they'll have to find a way to demonstrate that to their insurers."

Learn more about what's next for Property insurance in the RPS 2023 US Property Market Outlook.