Buyers of commercial property insurance are seeing further rate increases at renewals this year as insurers continue to limit catastrophe capacity.
Since the Jan. 1 reinsurance renewals, when reinsurers imposed tough rate hikes and higher retentions and cut catastrophe coverage, the tightening of the property insurance market has accelerated as inflation and insured value continue to affect pricing and the availability of limits, experts say.
All options are being explored as buyers — especially those with heavy catastrophe exposure — try to balance how much they can afford to pay for their property insurance programs and how much risk they’re willing to retain, they said during the Risk & Insurance Management Society Inc.̵7;s Riskworld annual conference. in Atlanta last week.
“Even benign risks are seeing frequency increases and those with heavy cat exposures at least 20%, more like 30% increases; plus you’re seeing necessary value increases,” said Joe Peiser, New York-based head of commercial risk solutions, North America, at Aon PLC .
Mid-year renewals are likely to be worse with 40-45% increases for distressed properties, he said.
There is a consistent message from the market about the need for interest rates, said Martha Bane, Glendale, Calif.-based managing director of the North America Property Practice at Arthur J. Gallagher & Co.
As insurance companies have cut capacity, it’s also a matter of replacing that capacity, she said.
“When everyone reduces their capacity by 20% to 25%, where does that capacity come from?” Ms. Bane said.
Higher rates are still required and needed, and capacity is an issue, said Michael LaRocca, New York-based head of real estate and specialty North America for Swiss Re Corporate Solutions.
“We’re coming off an active hurricane season last year and we ended the year with Hurricane Ian, which was a big loss for the industry, and that really put a damper on wind capacity. Going into 2023, and we’re seeing that in the first five months, LaRocca says.
Catastrophes — particularly wind, severe convective storms and freezing events — continue to hurt results for insurers, so “whether it’s deductibles or capacity, everyone has been cautious about how they underwrite those risks,” said Yohei Miyamoto, a Los Angeles-based vice president at Zurich North America.
“Capacity is particularly challenging for certain operations such as warehouses and the food industry. Interest rate increases are general, he says.
Policyholders should review property program structures and explore different options, including different retentions and limitations, Mr. Miyamoto.
Much of the increase in rates is driven by losses from unmodeled catastrophes, said Lyndsey Christofer, New York-based industry leader for the construction industry., real estate and hospitality at Chubb Ltd.
Hurricane losses have largely come in as expected, but secondary hazards such as wildfires, cold weather and tornadoes are increasing and affecting large parts of the United States, Christofer said. In addition, attrition water losses, such as floods from burst pipes, increase.
Chubb has started using more real estate capacity as rates and deductibles have risen, Christofer said.
Between 2003 and 2019, FM Global’s rates had fallen by nearly 60%, said Bret Ahnell, chief operating officer of the Johnston, Rhode Island-based mutual insurer. After the heavy disaster years of 2017 and 2018, the insurer’s total expense ratio approached 130%.
“We started to get back to being disciplined, getting more money for the exposures we had and changing terms and conditions as appropriate,” Mr. Ahnell.
Since 2019, the insurer’s rates have risen by about 45%, he said. “Our rates for the first quarter of this year have been subdued, up around 5% (on average) which is keeping pace – probably lagging a little bit behind inflation,” he said.
FM Global’s total expense ratio was 83.1% in 2021 and 76.7% in 2022. The insurer continues to focus on valuations, he said.
There is a two-pronged approach in the market, says David Bell, Dallas-based area manager at Hub International Ltd.
Insurers are raising rates and retaining and reducing capacity, particularly on quota share-type programs that affect companies with larger insurance plans and values and communities along the Texas Gulf Coast and Florida, Mr. Bell.
Policyholders also have to raise their values as insurers push for accurate valuations, which affects the premium, so “customers double up,” he said.
Insurers are forced by reinsurers to ask for accurate valuations, said Alexandra Glickman, senior managing director, global practice leader, real estate and hospitality, at Arthur J. Gallagher & Co. in Los Angeles.
“In 2020 the interest rate was 2% and we didn’t have runaway inflation. What was $100 in 2020 from a replacement cost standpoint is now probably closer to $128,” Glickman said.
Limits the withdrawal
Some buyers are choosing to reduce limits and many are retaining more risk, experts say.
John Barrett, senior vice president of U.S. complex properties at NFP Corp in New York, cited an example of a recent redevelopment of a sports venue that previously had a $300 million limit.
“The most competitive rating we could get was by capping it at about $60 million at renewal,” Mr. Barrett.
“The sheer cost of capacity made it unaffordable for the customer. There’s still capacity out there. It’s just a matter of pain threshold and what a client can afford to spend on it,” he said.
Commercial real estate business continues to flow into the excess and surplus market at a “fast and furious” pace, said Jack Kuhn, Summit, New Jersey-based CEO of Westfield Specialty, a unit of Westfield Insurance Co.
“It is a very challenging market for buyers. You see a strong retraction of boundaries, says Kuhn.
He cited the example of a municipal account that two years ago was able to place more than $200 million in limits with three insurance companies.
Last year, the municipality secured close to the $200 million mark, but it required 16 underwriters; this year, it decided to buy only $25 million in limit, driven by costs and the availability of limit, Mr. Kuhn said.
Policyholders are being asked to take on more risk, which goes against what they would probably prefer to do, said Patrick Mulhall, New York-based vice president, global head of real estate at Sompo International Holdings Ltd.
On some catastrophe programs, property insurance buyers can look at retaining the first event and explore a secondary event or subsequent event catastrophe coverage, Mulhall said.
Gavin Souter contributed to this report.