Insurance Marketplace Realities 2022 Spring Update – Property

Rate predictions: Property

	Trend	Range
Non-challenged occupancies		Flat to +10%
Challenged occupancies		+15% or more

Key takeaway

Rate increases continue to decelerate, but the current inflationary spike in insurable values will sustain premium updraft.

Premium pain will continue through 2022, but premium increases for most insureds will likely be driven more by inflation raising insurable values than by increases in rate.

• The market is at an inflection point, whereby insurer balance sheets have been strengthened, and rate levels are beginning to keep pace with loss costs. As a result, rate increases will continue to slowly moderate throughout the year for most insureds.
• The bifurcated state of the market remains, as underwriters continue a highly discriminating approach to risk selection and pricing. For challenged occupancies — such industries as forest products, metals, waste management and food and beverage, and insureds with losses, protection challenges or cat exposures — double-digit rate increases are likely. On the flip side, those accounts that have performed well from a loss perspective, have reached a level of rate adequacy and have monetized retentions to rid themselves of attritional loss effects will find themselves in an advantageous position, with over subscription across all layers of the program becoming common.

Insured natural catastrophe losses for 2021 are estimated at $105 billion to $120 billion, according to several sources, making it the third highest nat cat loss year since 2011.

• While there was no mega event, the accumulation of catastrophes, which included hurricanes, floods, tornados and freezes, well exceeded the $70 billion average annual loss since 2011. So-called secondary or non-modeled perils contributed significantly to the industry loss record yet again. These perils include flood, tornados, hail, extreme temperatures, winter storms and wildfires.
• Whether attributable to climate change or greater insured values being in harm’s way, the frequency and magnitude of these loss events are an increasing component of loss costs that must be priced for.

Valuation of assets used to produce a schedule of values will be the marquee issue for property insurance buyers this year. Without proper valuation, insureds may find themselves underfunded for retained risk, not properly purchasing adequate cat cover or setting sublimits improperly for key coverage elements.

• The challenges in asset valuation are set against a background of climate change-related natural disasters that have become more frequent and severe. This potential new normal could render current cat modeling out of date.
• Other factors include the global pandemic, which has caused severe supply chain issues from availability/price of materials, a shocking shortage of skilled workers in the labor market and longer-duration business interruptions.
• In determining replacement costs, no factor has more potential significance than inflation. According to a recent report, four leading construction cost indices saw upswings for the U.S. as of January 2022:
  • Marshall & Swift: +16% to +24.53%
  • RS Means: +15.83%
  • FM Global: +18.4%
  • ENR: +13.94%
• Property premiums are determined by a simple formula: rate X value. Although value derivation may be more fact- and data-based than rate, it is still a negotiation. However, proper, reliable asset valuation is essential. Accurate modeling outputs will help with setting of limits, deductibles, business continuity planning, claim adjustment/payment and, ultimately, pricing.
• While many buyers are concerned that underwriters will use the valuation issue as a reason to push for increased premiums (after three years of sustained rate increases for many), underwriters counter that changing valuations help determine probable maximum and/or maximum foreseeable losses as well as the return period loss estimates produced by catastrophe models — and must be part of their equation.
• Many underwriters recognize the factors at play causing spikes in values and will to some degree have an open mind on the issue. Some underwriters may be agreeable to trading rate for value to some degree, while others may be agreeable to a stair step, multiyear approach to getting the values right.
• For buyers perceived by the market as presenting inaccurate or out-of-date values, underwriters will push for the imposition of potentially claim-limiting clauses, such as the occurrence limit of liability clause, which restricts recovery to no more than 100% of the values reported for each location (thus negating the blanket aspect of most policies) and margin clauses, which similarly restrict recovery for the value reported for each location but add a buffer, typically of 10% – 25%.
• Some underwriters may also ask for an increase in deductibles commensurate with the spike in insurable values.
• As a result of the focus on valuations, many buyers may wish, or in many cases, be compelled to get an independent appraisal. This approach should go a long way toward providing the carriers with some concrete value accuracy and a comfort level when assessing an insured’s risk.

Treaty reinsurance renewals were late to finish on January 1 and show signs of continued rate firming and withdrawal of capacity from catastrophe lines.

• Retrocessional markets and insurance linked securities (ILS), which play an important role in catastrophe reinsurance, held back capacity and were looking for a greater return on capital.
• Insurers will need to absorb these additional reinsurance costs, or more likely, attempt to pass them through, at least in part, to insureds.

COVID claims related to business interruption losses currently being litigated have thus far been substantially decided in favor of insurers.

• There are still hundreds of cases wending their way through the courts, and final outcomes are still years out.
• As insurers appear well-reserved for these potential claims, and infectious disease exclusions in property policies are now universal (like cyber exclusions), any further direct pricing impacts from COVID-related issues on property policies appear to be in the rear-view mirror.

Contingent business interruption exposures still concern underwriters due to continuing supply chain/logistics constraints, lack of exposure information and unexpected losses.

• As a result, sublimit reductions are being imposed as well as requirements to fully name key customers and suppliers.
• Better data relating to contingent exposures leads to better outcomes in retaining customary sublimits.

Insurers are focused on perils that have increased in recent years.

• Given the frequency of severe convective storms (SCS) that continue to plague the southern U.S. along with wildfire in the west, carriers will continue to scrutinize these exposures and exert greater pressure to implement tornado/SCS/hail and wildfire percentage deductibles, though they have yet to be mandated across the board.
• The spate of violent political events that occurred in 2020 and 2021 and sadly continue today reinforces the underwriter’s desire to maintain vigilance around the peril of strikes, riots and civil commotion (SRCC). Many insureds may find this peril sublimited or, in some cases, subject to higher deductibles, particularly for retail risks.

Underwriters continue to push for the implementation of company/carrier policy forms in lieu of manuscript policies.

• Carrier forms typically appear to be more standard in the single carrier universe, but on large shared and layered accounts, the manuscript remains the most common approach.
• In some cases, carriers will assert that a broader capacity offering can be garnered with a company/carrier form, but cracks in the armor are appearing.

What can insureds do to prepare for upcoming renewals? The simple answer is that the need to differentiate risk has never been greater. Property is not a one-size-fits-all market; carriers are scrutinizing submissions more closely than ever. Key elements for a successful renewal are:

• Start early and take control of the renewal with a commitment to broad data collection and data quality.
• Increased information will help buyers more accurately model any changes (e.g., reduction in limit or increased retention) and help assure that risk management strategies reflect organizational risk appetite or corporate philosophy.
• Analytics provide important guidance as buyers align offerings in the marketplace to their rapidly shifting risk transfer needs. Cat modeling should be conducted annually at a minimum but, certainly, additional runs should be sought if substantial exposure changes present themselves during a policy term.
• Insureds should also consider alternative structures, such as parametric programs, to complement a traditional insurance plan. A parametric contract could provide immediate liquidity in the event of a covered loss while the loss adjustment for the traditional program is processed.
• Buyers need to distinguish themselves from their peers, especially in challenged occupancies. Risk managers must help tell this story and provide the necessary data to satisfy underwriters’ insistence on robust underwriting information.
• Underwriter meetings are encouraged; telling a story of mitigation efforts, improved loss control measures and disaster recovery/business interruption plans remains critical in differentiating a buyer’s risk. Risk managers need to manage stakeholder expectations as rate increases continue; they should consider creative solutions and alternative structures to mitigate the total cost of risk.
• Accessing the global marketplace (London, Bermuda and Asia) along with a trusted independent third-party wholesaler to source capital is crucial, especially for shared and layered deals.

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