Because even at this early stage, the classic signs of a hard market in property are there.
A re-acceleration of rate was already making itself apparent in mid-to-late 2022, but participants in the space are now describing a market with huge rate rises, higher retention, tighter terms and conditions and the withdrawal of delegated underwriting capacity.
Wind accounts are the greatest focus for pushing rate, with fire or earthquake risk not seeing the same magnitude of pricing movement. Top-tier cat accounts, in particular coastal property, are bearing the brunt of the rate increases.
In December sources were giving broad-brush ranges of 50%-100% rises for these cat-exposed E&S accounts, but post reinsurance renewal it appears that some carriers feel the top half of this range is more appropriate.
There is anecdotal evidence of US domestic insurers being happy to price themselves out of business by taking a tough line with clients.
Harder markets often spell tougher times for MGAs, and increasingly carriers are taking back the pen. In the most notable demonstration of the withdrawal of delegated authority paper, cat-focused mega-MGA AmRisc has had to reduce its line size from $300mn to just $50mn following the exit of some paper providers, including AIG.
There has, however, been a huge reduction in line sizes virtually across the board, with sources pointing to multiple instances of carriers halving their deployable line.
As a result, brokers are having to work significantly harder to scrape together the needed limit for insureds – who will in many cases not be able to buy the amount of coverage they need or wish for.
Old-school, patchwork-style wholesale placements had already made a comeback in recent years following the pull-back of large-limit strategies from the biggest players. However, they are now proliferating rapidly (and surely the London market and domestic E&S players will be rubbing their hands together at the thought).
But what makes this market dynamic all the more remarkable is that there has already been going on five consecutive years of rate rises in the commercial property space.
That move was driven by the market-wide recognition that property books were unprofitable and the risk was woefully underpriced, after years of soft market dynamics.
The arrival of hurricanes Harvey, Irma and Maria in 2017 started to move the needle, but the real change came about in the 18 months which followed, as major players led by AIG compressed large limits, shed unprofitable accounts, hiked rates and changed appetite in order to rectify wrongs.
But it is now clear that the work which was done back then did not fully address the challenge of adequately assessing and pricing cat risk.
The truth is that during this time, cheap, low-lying and plentiful reinsurance continued to paper over some deep cracks in the market – long-term, structural challenges in the class which have now been laid bare following the contraction in the treaty market.
Those unaddressed challenges include an elevated frequency of small- to mid-sized cats, and increased secondary peril losses which continue to be poorly modelled – and have as such created shock losses for the industry (Winter Storm Uri being a prime example).
Notably, Munich Re also said in its 2022 cat report that severe thunderstorms caused $23bn of insured losses, greater than the five-year average of $17bn for this peril.
But there are other human factors which have also altered the risk landscape in property. More people are moving to coastal areas. Florida is an extreme case study for how litigation and the proliferation of fraud can significantly amplify the loss experience for insurers.
Meanwhile, Uri also laid bare how underinvestment and poor maintenance of infrastructure can complicate and prolong the claims picture for insurers in the wake of a natural catastrophe.
It is not clear whether these fundamental changes to the risk landscape have been truly addressed in the commercial property space – and in reality the remedy will probably need to go further than pricing, placement structure and terms to make this a viable product long term, by looking at risk management and loss mitigation for example.
For now though, it appears that repricing remains the focus. And the true test for how hard this market will arrive with the March 1 renewals – which marks the beginning of the three-month period in which the majority of commercial property accounts renew.
Sources told this publication that insureds and their brokers are already asking for renewal pricing for March 1 and even April 1 in anticipation of a difficult renewal. One source warned that, for the first time, insurance premium is starting to become out of reach for some buyers.
If this holds true, it is inevitable that buyers will start to look to captives and other self-insurance initiatives to manage their risk. And once that business leaves the market, it is very hard to claw it back.
It is true that the central driver of this current pricing upswing in US commercial property has been the market turn in cat treaty.
However, it also should fire the starting gun for a wholesale reassessment of cat risk in property.
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