Property Market Update - Q4 2022: Navigating a Challenging Landscape

The property market landscape is undergoing significant changes, with recent events reshaping the trajectory of the E&S marketplace, particularly for catastrophe-exposed property accounts. Despite expectations of a deceleration in rate increases for 2023, factors such...

The property market landscape is undergoing significant changes, with recent events reshaping the trajectory of the E&S marketplace, particularly for catastrophe-exposed property accounts. Despite expectations of a deceleration in rate increases for 2023, factors such as CAT weather events, inflation, valuations, and reinsurance renewals have led to a continued hard property market for the foreseeable future.

This update aims to provide valuable insights into the factors shaping the current market landscape. As we observe more defined market trends, our goal is to keep our clients well-informed through our traditional State of the Market report and help them find solutions that yield the best results for their clients. Remember, your Amwins specialty broker is always available for a review of specific accounts.

The Impact of Catastrophic Property Events in 2022

Catastrophic weather events, whether attributed to climate change or bad luck, have played a pivotal role in shaping the insurance marketplace over the past decade. With major hurricanes making landfall in the U.S. five out of the last six years, it begs the question: are these events still accurately labeled as once-in-a-century occurrences?

Additional Factors Influencing the Market

Global inflation, economic uncertainty, and unmodeled factors have led to an increase in the cost of capital. This, in turn, is exerting pressure on rates to rise as markets focus on profitability. Additionally, rising interest rates translate to higher capital costs, compelling investors to seek optimal returns. Consequently, the market is experiencing a scarcity of alternative capital options.

As rates and inflation continue to rise, insured parties must revisit reported valuations and make necessary adjustments to account for true replacement costs and current rental prices or business income. Losses are becoming costlier, and carriers now penalize accounts that neglect to proactively adjust reported valuations. Market estimations suggest that insurance-to-value (ITV) can be off by 30% or more, with significant regional variations.

The confluence of various factors has created a perfect storm of complications in the marketplace:

  • Carriers require increased valuations, generating more modeled AAL/PML compared to expiring valuations.
  • Many carriers plan to implement updated wind/quake modeling versions, leading to potentially higher AAL/PML estimates.
  • CAT MGAs and carriers may have less capacity to deploy compared to previous years.

Moreover, it is essential to consider the unmodeled costs resulting from social inflation, nuclear verdicts, supply chain issues, ongoing impacts of the COVID-19 pandemic, and the Russia/Ukraine conflict. These factors compound the overall cost of losses.

The Florida Market

Florida plays a significant role in the CAT reinsurance market, accounting for 30-37.5% of global annual premiums. However, the state also bears a substantial portion of global losses.

The 2022 Florida reinsurance renewals encountered difficulties, with an estimated 25% of renewals not being placed by May 30. Additionally, the main Florida rating agency, Demotech, decreased ratings for three carriers and withdrew from others.

Nevertheless, Senate Bills 2D and 4D, passed in May 2022, brought some positive changes. Key provisions of these bills include options for roof repair and replacement, measures to reduce frivolous litigation, home hardening fund matching grants, and enhanced insurer access to the Florida Hurricane Catastrophe Fund (FHCF).

As we approach Q3 2022, many Florida homeowner's specialist insurers have significantly reduced surpluses. This implies that the market will remain challenging in 2023, and some insurers may struggle to write policies.

Reinsurance (Treaty and Facultative)

The current reinsurance renewals are proving more challenging compared to the last cycle. Market uncertainty has delayed the issuance of firm order terms (FOTs) for 1/1 accounts, affecting many Lloyd's and European treaties. Larger players in the market have prioritized profitability over growth and aim to eliminate ambiguity by redlining all-perils catastrophe coverage.

Reinsurers are expected to recalibrate their risk views individually. Higher attachments are likely on most programs, with reinsurers pushing for clients to retain more net risk. Furthermore, inflation has eroded some of the rate increases gained by reinsurers, resulting in a continued bullish stance on rates.

As a result, a shortage of capacity is anticipated in the market, regardless of price, terms, and conditions offered. The outcome of the 1/1 renewals will set the tone for 2023.

Facultative reinsurers are refraining from early quoting, anticipating inevitable price rises as placements are completed. Many now quote within 30 days of binding. Additionally, line sizes are being reduced as portfolios are "rightsized." The loss of retro capacity has limited deployable capacity, which means higher prices will accompany reduced capacity.

In 2022, the insurance-linked securities (ILS) and retrocession market faced challenges due to increasing exposures from natural disasters, financial volatility, and global political uncertainties. Hurricane Ian further strained this space. The retrocession market relies heavily on capital from the ILS market, which cannot move forward until the full extent of Ian losses is understood. Attracting new investors with fresh capital will be challenging since this line of business has not been lucrative in recent years. External investment opportunities, such as treasury bills, now pose competition by offering outsized returns.

Pricing and Capacity

The growth in the E&S property market has led carriers to seek flexibility in rate and form requirements across various states, enabling them to enter and exit business classes more easily. The Stamping Office reported a year-over-year premium growth of 32% in surplus lines during the first half of 2022. However, there remains a shortage of capacity to meet consumer demands.

In general, it is safe to assume that CAT-driven and loss-driven accounts will experience reductions in capacity and significant rate increases. Terms and conditions will also be tightened across the board. Expectations of favorable pricing, large line sizes, and attractive attachment points may not be met, especially in the Florida condo marketplace.

James Drinkwater, President of Amwins, believes that, apart from certain classes such as D&O, a firm rate environment will persist through 2024. He also predicts that capacity challenges will be an additional hurdle in specific classes. The Lloyd's market has experienced 19 consecutive quarters of rate increases. Although syndicates have announced increased stamp capacity for 2023, these increases will likely address higher rates and inflation rather than accommodating new business. However, some markets may present opportunities for those looking to capitalize on the hardening property market. Overall, Lloyd's alone may not be the solution for all accounts, but some opportunities may arise.

Succeeding in a Challenging Market

Navigating the CAT property market requires collaborating with a wholesale broker who possesses extensive knowledge of the marketplace, including insights into your insured's specific business class, strategies, and carrier relationships. Access to resources that can aid in navigating the marketplace and filling towers is equally crucial.

To structure CAT deals that protect both the insured and carrier, it is imperative to utilize catastrophe modeling and interpret it correctly. Different carriers align better with either RMS or AIR models based on specific account characteristics. Armed with this knowledge, you can target specific markets accordingly, providing you with a significant competitive advantage.

Amwins boasts a dedicated team of actuaries with licenses for full versions of RMS and AIR, offering consultation on modeling results at no charge to our clients. With relationships with over 440 carriers, Amwins' property practice handles more than 90,000 accounts and $9.4 billion in premium annually. Leveraging data and analytics, we provide value-added reports that include information on which of your insured locations lie in storm paths. Additionally, we use this data to build exclusive property capacity, giving you a distinct advantage over competitors. With a presence in London and Bermuda, Amwins also offers expertise and direct access to these key international marketplaces.

Reach out to your Amwins broker to discover more about our services and discuss placement strategies for your accounts. Together, we can navigate this challenging market and achieve success.