Reinsurance, capacity are concerns, following rising storm damage, inflation

Insurers, reinsurers, and property owners are girding for one of the toughest markets ever as they head to the January 1 renewal period. With natural catastrophe losses at record levels, spiraling costs from inflation, and an unyielding investment environment with which to backstop losses, carriers are scaling back capacity, exiting markets in some areas, and rising prices to such a degree some property owners are dangerously deciding to go uncovered.

“Yes, we're in crisis, we're definitely at a time of crisis,” said Jeremy Burr, vice president of sales for Insurance Office of America. “And unfortunately, if we look back to the last time this occurred, back in the early 2000s, we can expect this to be an 18- to 36-month-long period. Hopefully not that long.”

Hurricane Ian and other destructive storms have doubtlessly wreaked havoc on the market.

“Even before Hurricane Ian struck at the end of September, reinsurance pricing and availability were a key concern for the sector,” said Meghan Merris, Group Property Broker with CRC Insurance Services Inc. “However, the hurricane’s devastating impact has served to amplify those concerns and solidified the reinsurance market’s resolve in a rapidly hardening property market. Inevitably, these concerns will impact insurers’ capabilities and capacities available to insureds in 2023.

Burr said predictions that capacity – generally the amount of insured risk underwriters are willing to cover – will plummet 50% from previous years may be overstated. Still, he said, capacity is definitely tightening.

An 'absolute gut punch'

“A couple of years ago the market started hardening and we’re still experiencing part of that,” he said. “Right now, we're experiencing an absolute gut punch of an already hardening market post hurricane with a lot of uncertainty as to how the January 1st renewal will go.”

Burr pointed at some reports that predicted a $100 billion reduction in capacity, owing to major players in the market anticipating a significant pullback.

“Just this morning I was speaking with a major, major, major player in that space who was predicting more of a 25% to 40% reduction in PML (probable maximum loss) estimates for next year.”

Fitch Ratings recently released an analysis concluding that overall reinsurance prices are expected to increase by more than 10% in 2023, pointing to losses from disasters such as Hurricane Ian and “increasing frequency and severity of natural catastrophe claims.”

“Price rises will be most pronounced in the regions worst affected by natural catastrophe events in 2022, including Australia, Florida and France,” the ratings agency said. “Hurricane Ian is likely to have caused between ($35 billion and $55 billion) of insured claims, making it one of the costliest natural catastrophe events ever.”
But it’s not only the frequency and intensity of storms that’s roiling the market, experts note. Inflation, supply disruptions, labor, and a down market are also to blame which could impact disaster insurance for inland property owners nationwide.

Greater focus on property valuations

“Rising property values are likely to be reflected in rates,” CRC’s Merris and co-author Chris Carlson, CRC Group’s Director of Property Practice wrote in a recent report. “Faced with higher attritional losses, insurers are placing a much greater focus on property valuations to avoid surprises from claims. Wary of rising inflationary costs, uncertainty in the labor supply, underwriters are scrutinizing property values much more stringently. In some cases, insurers may tie limits to reported property values.”

Amid supply chain logjams, the CRC report said, clients should review how rising building costs, and the availability of materials, may impact them in the event of a claim. Clients should also review their business interruption values to account for potential delays in repairs or re-building, it said.

“With the impact of 2022 inflation not previously priced into January 2022 renewals, 2023 pricing will have to make up for the missed inflation and factor in forecasts for 2023,” the CRC report said. “Some reinsurers have suggested rate increases of 15% percent would be insufficient without adjusting for the risk and uncertainty around secondary perils that also must be reflected in January 2023.”

It’s no surprise that some insurers are turning tail and simply leaving the property casualty market, especially in Florida where losses have been extreme.

UPC Insurance, once one of the largest insurers in Florida said recently it plans to exit its property insurance business in the state.

The St. Petersburg-based reported it wrote off, or sold, 166,000 residential polices in August after sustaining significant losses from Hurricane Ian.

“Hurricane Ian created new uncertainty related to the viability of our previously announced runoff plan for [UPC] and is clearly a significant risk factor going forward,” CFO Brad Martz said during an investors call.

UPC lost more than $151 million for the last nine months versus $60 million during the same period last year.

The challenging market is also complicating negotiations between insurers and brokers.

People 'are getting nowhere'

“People are getting nowhere at the moment,” said a senior executive in the Lloyd’s of London recently told the Financial Times. He said negotiations are running late and could even run into January.

The rising costs are also causing property owners to seriously re-evaluate the market.
“I literally had a client yesterday with $100 million portfolio of multi-family apartments tell me that his business is simply becoming commercially unfeasible,” said Insurance of America’s Burr. “They’re getting to the point that real estate with property insurance is no longer a profitable business.”

Burr said insurers will likely push to significantly raise deductibles to a level that could risk putting property owners out of compliance with lenders.

“The insurance products being proposed won’t meet large lender requirements and clients might have to purchase secondary policies to buy down those deductibles, and things like that,” he said. “That’s the definition of a crisis.”

CRC agreed that completing renewals by January will be difficult.

“While the last four years of market conditions have been about insurers attempting to return to profit by increasing rates, this market will be driven by the increased cost and/or unavailability of reinsurance,” the CRC paper said. “Even at higher prices, the shortage of additional catastrophe appetite needed to match demand means that getting renewals across the finish line will require a significant effort. As 2023 renewals approach, both sides of the negotiation will face challenges.”

Doug Bailey is a journalist and freelance writer who lives outside of Boston. He can be reached at [email protected].

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Doug Bailey is a journalist and freelance writer who lives outside of Boston. He can be reached at [email protected].