The cost of property insurance is expected to continue rising for the foreseeable future, according to Risk Placement Services’ (RPS) 2021 U.S. Property Market Outlook.
The effects of the firming property market will be felt by every commercial insurance buyer, according to RPS – whether through higher premiums, less capacity, stricter terms, or all three. During the first half of the year, insureds can expect rate increases from the high single digits to the 15% range on clean accounts, and higher increases on accounts with losses.
The rate hikes are partly driven by carriers passing on their own increased reinsurance costs. Insurers paid rate hikes around 10% to 15% to renew their treaties at the end of 2020, in addition to mid-year rate increases of 25% to 35%, according to RPS.
During 2021, reinsurance will likely “play a larger role in rates, capacity and terms as carriers continue to improve their book composition and move toward the use of ‘technical pricing,’” said Wes Robinson, national property brokerage president at RPS. While reinsurance rates have spiked, “the losses have not let up, so many carriers are still not making money,” Robinson said.
Climate change has also affected the property market. Climate change was a driver of more than 800 wildfires in the west that burned more than six million acres. Billions of dollars in insured claims spurred a standard market exodus in many parts of California, according to RPS. And although the E&S market is available to cover many of those losses, premiums are higher than many insurance buyers are willing to pay.
A significant spike in tornadoes in the Mid-South region has also been attributed to climate change, as well as a record number of US-landfalling hurricanes.
Excess carriers have also been taken by surprise by some claims piercing excess coverage layers following disasters, due to heightened rebuilding costs in the wake of natural catastrophes. In most cases, carriers’ catastrophe models showed that excess layers should not have been hit, according to RPS. As a result, underwriters at many excess carriers are re-rating policies internally, pricing risks up to 40% higher than what is submitted or what their models estimate.
“Insurance-to-value is a very, very hot topic, and it will be again for 2021,” said Stephen Adair, senior vice president at RPS. “It has been challenging placing excess coverage without solid valuations.”
Capacity is also predicted to tighten for buyers in catastrophe-prone coastal areas and in parts of the Midwest, requiring many to obtain coverage from multiple insurers in order to get the excess limits they need. Fortunately, more ILS capacity is coming into the E&S market thanks to investors who see a potential for profit in the sector.
Other highlights of the RPS report include:
- Multiple insurers will be needed to obtain higher excess limits.
- New communicable disease and riot exclusions.
- Restrictions on time element, ingress/egress business interruption coverage.
- Builders’ risk extensions, and food processing accounts moving into the E&S market.
- Increased scrutiny of hospitality and habitational accounts.
- Demands for more detailed and up-to-date property valuations.
- Increased focus on engineering/loss control.