Disruption in the Property Market: What Years of Catastrophe Mean to You

The disruptions caused by catastrophe can have major impact on business capacity, rates, limits and sublimits, cyber perils, and deductibles. Learn the best strategies for minimizing the damage to your business.

Many insurance professionals were left scratching their heads as 2018 came to a close. 2017 was one of the worst years in decades for catastrophes, including three massive hurricanes, devastating earthquakes, and horrible wildfires, yet property premiums barely moved. In early 2018, property insurers were commenting that rates were unsustainable given the $135 billion in 2017 insured catastrophe losses, but by mid-2018 there was only a small movement in rates. And that was mostly focused on certain industries and/or risks with high catastrophe exposures. Capacity—the amount of capital available to deploy on property risks—was plentiful and this kept pricing pressure in check.

Catastrophic fire burning in the hills

Despite the relative calm of the first half of 2018, trouble was brewing. There seemed to be fewer natural disasters than the previous year, but then two large US hurricanes, large hail events, typhoons in Asia, and the California wildfires wreaked havoc, for a combined $80 billion in insured losses. Despite this staggering loss number, December 2018 renewals were relatively modest, but as we entered January, property market conditions began to change rapidly.

What Happened to the Property Market?

Both insurers and reinsurers knew there was trouble looming as they watched another costly year develop in 2018. Lloyd's of London initiated their performance management directorate in 2018 and the property market was specifically identified as one of the worst-performing classes of business at Lloyd's. The directorate provided strict guidance on premium levels and expected rate increases leading several syndicates to exit the property market.

By early January of this year, several US insurers were signaling expected changes in their property business and the result has been a steady uptick in rate, starting in mid-January and continuing for the foreseeable future. Market cycles are typically driven by a decrease in capacity (insurers' withdrawal capacity due to discomfort with risk profiles or insolvency). There have been no major insurer insolvencies in the past year and, although some London syndicates have exited the property market and a few US insurers have cut limits, capacity has not significantly decreased. This market cycle is being driven by underwriting discipline.

As insurers reviewed their property portfolios in 2018, several problems were evident. Most notably, many insurers have observed chronic underreporting of values. Property insurance premium is based on the value of the properties. If the reported values are not adequate, the insurers base their premiums on inaccurate data which can lead to insurer financial problems over the long term. Another issue that emerged was loss control recommendations that were not implemented by insureds and not enforced by insurers during the soft market cycle. A loss control recommendation that is not followed does not always lead to loss but insurers are making loss control issues mandatory for some risks as a means to improve the risk profile of their property portfolios. Finally, the introduction of cyber perils to property forms has led to higher business interruption losses. The Petya/NotPetya cyber attacks caused billions of dollars in business interruption losses arising out of supply chain disruption. These are some of the places, in addition to catastrophe exposures, where underwriters are looking to impose discipline.

What Does this Mean for My Insurance Renewal?

Through the first quarter, rate increases have averaged 10% for risks with a good loss history and minimal catastrophe exposure. Problematic risks (i.e. poor loss history, high catastrophe exposure, no demonstrated commitment to risk improvement) can expect to see rate increases ranging from 15–60% and sometimes higher based on the specific risk issues.

Certain classes of business are experiencing significant reductions in capacity along with increased rates, such as companies with a habitational, heavy manufacturing, or wood-related exposure (i.e. sawmills, engineered wood).

In addition to rate increases, insurers are cutting limits and sublimits, increasing catastrophe deductibles in high hazard zones and adding hail and wildfire deductibles. Most insurers are reducing cyber sublimits or removing the coverage altogether. Risks with wildfire exposure are receiving extra scrutiny and some insurers are modeling all locations for wildfire exposure, which may lead to a drastically different result in your renewal. Some risks are being non-renewed based on loss experience or an insurer choosing to reposition its book.

The best strategy is to market all stand-alone property renewals, but be aware that this disruption has resulted in a flood of submissions to property insurers. In fact, some insurers have already met their new business budget for the year, which is leading them to be even more selective when reviewing new risks. The increased scrutiny means the underwriting process is taking longer, so the earlier the process begins, the better. Also, thorough submissions with property engineering data receive the best results.

How Long Will this Disruption to the Property Market Last?

We expect capacity to remain stable, but we do expect this upward trend in rates to continue through 2019.

Our experts at Woodruff Sawyer have the experience and insurer relationships to help you navigate this difficult and complicated property market cycle. To learn more, reach out to Woodruff Sawyer's Vic Tushner or Doug Huntington.


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