US commercial property rate acceleration picks up pace
A hard market in 2023 was pretty much a given for the US commercial property market, but the degree of hardening seems to be far more acute than what was anticipated before the January 1 renewals, according to carriers and brokers canvassed by this publication.
In mid-December, sources in the E&S and admitted property space had arrived at a firm consensus that insureds would be paying more for less coverage this year, with projected rate increases entering double digits even for some clean, vanilla accounts.
Two months later, not only have rates increased at an even steeper pace in the early phase of approaching spring renewals, but most US property insurers have cut their exposure and line sizes, as they applied costlier reinsurance prices and higher retentions to their underwriting.
That adds on top of an industry-wide recognition that severity and frequency for weather events are only going to increase, including unmodeled perils like convective storms and winter freezes that the industry has not completely wrapped its head around.
Joffre Mishall, Zurich NA head of large property, said: “People need to understand that going forward, insurance rates are going to go up each year until we get this stuff measured, get the exposures understood and [we’re] able to apply underwriting as best we can at a proper price.”
Rates and terms
While property rates can vary hugely by accounts, sources’ projections of rate increases in December were single-digit to 15% rate increases for non-cat, clean accounts in the admitted market. Cat-exposed, loss-hit accounts were anticipated to face rate hikes of at least 25%, or possibly 40%.
For March 1 renewals, the consensus among commercial property market participants in the US was that everything has slightly moved up, with one underwriter pegging 15% hikes as the new average for clean accounts.
“And then cat exposed businesses – [it’s] anyone's guess at this point in time,” said one carrier executive.
For E&S, one property underwriter noted that the minimum threshold for increases on clean accounts had moved up to 25%, compared with estimates of around 15%-25% increases that were given by sources in December.
When it comes to loss-hit accounts in regions like Florida, hikes of 50%-100% still largely stand, while one source witnessed rate increases hitting above the 200% mark.
On what has driven the rate increases to re-accelerate in the past two months, some underwriting sources highlighted the harder market for January 1 reinsurance treaties than expected. Prices for US cat treaties went up at least 40%, while attachment points have largely doubled.
Others say there’s a human element to it, where underwriters have become more bullish as they continued to push up rates little by little, and have seen those rates actually stick.
“I think carriers are getting to a point where they're like ‘we didn't make profit for many years. Now's our chance to actually have some years of profitability.’ So, we want to continue this trend, because it’s working for us,” one underwriter said.
Terms and conditions
When it comes to mid-year property renewals, some sources have indicated that tightening terms and conditions is a more important mission than raising prices.
“What difference does it make to have an additional 10%-15% rate increase when you have a $100mn loss?” one property underwriter said.
To this end, valuation updates remain another prominent driver behind the rise in premiums, as insurers seek to minimise exposure to outsized claims that surpass out-of-date valuation information.
Insurers have spent the last year attempting to shine a light on property valuations, which had remained largely untouched by many accounts, until Covid-induced supply chain constraints elevated loss costs at an unprecedented pace.
According to Amwins, carriers fear that property insurance to value ratios are off by 30%.
This year, sources said they expect to see roughly 10%-15% increases in property valuations. “Anything less than 10% is very questionable,” one underwriter said.
One key question was how tightened reinsurance terms would shape out in the primary insurance space, as insurers have been left with much reduced cover for terrorism and strikes, riots and civil commotion (SRCC) under property treaties.
For January 1 reinsurance renewals, the “all-perils minus” option - which covers significant exclusions but stops short of named perils terms - has gained major traction with exclusions on terror and SRCC widely achieved by reinsurers.
However, from a coverage standpoint, multiple sources said that terms and conditions for primary insurance have not been impacted by January 1 treaty results to a significant extent.
“While the treaties in the reinsurance world definitely put some more challenge to the direct insurers, we have not seen a significant change from a coverage standpoint,” said Rick Miller, Aon Commercial Risk Solutions’ US property leader.
One underwriter noted that for any industry-wide change in terms and conditions, there has to be a commotion where insurers, starting from leading players like Chubb or AIG, all push for the same initiative.
“That's a very important nature of insurance - you can't be the only one pushing something,” the source added.
At this point, the industry has just entered the first phase of mid-year renewals, so it’s still early to establish whether momentum will spread beyond questions of rate and valuation updates.
As witnessed in Q4 2022 earnings calls, US commercial property pricing has been strong, with many executives indicating a re-acceleration by the end of the quarter. Data from wholesale broker Amwins showed that pricing for property renewals in January moved further up closer to 25%, compared with December when it barely passed the 20% mark.
Chief executives at some of the largest property underwriters, such as Chubb and AIG, have identified the current marketplace as an opportunity.
However, sources indicated that there are only a few carriers whose balance sheets are big enough to deal with the volatility which comes with taking advantage of property insurance prices and expanding capacity.
The majority of US property insurers are rather trying to cut down on risk exposure, which resulted in reduction of line sizes by an average of 25% in the admitted market, to above 50% in the E&S space, a source estimated.
For MGAs, the dislocation in commercial property has led to withdrawal of delegated authority. Cat-focused MGA AmRisc, for example, reduced its line size from $300mn to just $50mn following the exit of some paper providers, including AIG.
That capacity shortage was felt by US property brokers, who managed to complete March 1 placements as capacity from Lloyd’s or other London underwriters filled the void created by US carriers at the last minute.
However, brokers and E&S underwriters said they have increasingly witnessed clients take up less limit because they can’t sustain the elevated prices.
Some clients, like those whose lenders require purchasing insurance, will have no choice to bear the full brunt of this challenging market, Miller added. But clients with a sizeable balance sheet and which are free of such obligations could start looking into alternative self-insuring options, which in the past were perceived as more expensive than insurance.
“As the cost of traditional insurance is going up, it's going to lessen that gap,” the Aon executive said. “And that will drive some clients to explore some different options.”
That complicates the equation for insurers trying to find a path for sustainability while recovering losses from the past few years.