A Hard Look at Today’s Property Insurance Market

Some are calling today’s Property insurance market the hardest in a generation, characterized by a significant increase in rates, shrinking capacity, and tighter underwriting requirements and scrutiny. Climate-driven events, incorrect valuations, inflation, high claims costs, a decline in capital markets, reinsurance rates, and portfolio changes have impacted both the personal and commercial Property market.

Climate-Driven Events

Hurricane Ian was the second-costliest insured loss after Hurricane Katrina and a significant driver of underwriting losses for the industry. Global insured losses from disasters exceeded $130 billion in 2022, with about $50 billion to $55 billion attributed to Hurricane Ian, according to Aon. Secondary perils, such as winter freezes, convective storms, wildfires, and mudslides, are also causing more frequent and severe losses. In 2022, severe storm events and the ongoing U.S. drought resulted in insured losses of $29 billion and $8 billion, respectively. (See chart below based on an Aon report, reproduced by the American Property Casualty Insurance Association (APCIA).)

Property Valuations

Valuations on the commercial side have been off for several years resulting in a huge disparity between the amount of insurance to value for a property and the cost of an actual loss. Further exacerbating the valuation gap were supply chain issues and the spike in the cost of building materials in the aftermath of the pandemic followed by high inflation – all contributing to higher claims costs.

Reinsurance

In January 2023, reinsurance renewals were the most challenging in years, with tightened capacity and increased rates and retention levels. Reinsurance rates increased between 45% and 100% while reinsurers also looked to rebalance their portfolio for catastrophe coverage by reducing capacity. April reinsurance renewals experienced increases of 20% to 40% for loss-free non-catastrophic-exposed risks; 30% to 50% for catastrophe-exposed, loss-free accounts; and 50% to 100% for catastrophe-exposed loss-hit accounts, according to Gallagher Re.

Insurers as a result have increased premiums, limited their capacity, and reduced their appetite.

Impact on Insureds

Commercial and personal property insureds, particularly those in high-risk regions, are feeling the effects of today’s market. According to the most recent report by the Council of Insurance Agents & Brokers, the average increase in first quarter 2023 commercial Property premiums spiked to 20.4%. In addition to rate increases, insureds are seeing significant terms and conditions changes, larger deductibles, more significant exclusions, and reduced coverage.

In addition, insurance carriers are now hyper-focused on making sure property valuations are correct. Appraisals and other documents are required to verify value statements for insurers to feel more comfortable with a risk. Without correction valuations, insurers are implementing margin clauses and coinsurance endorsements and increasing premiums. The age of a building is also impacting underwriting acceptability.

On the personal side, those living in disaster-prone coastal or wildfire areas are seeing double- and even triple-digit increases in Homeowners insurance. Insureds are also receiving non-renewals and are seeking coverage in state-funded programs in Florida and California.

Today’s market conditions are also impacting homeowners across the country – outside typical cat zones. Rebuilding and repair costs following a loss continue to rise and impact the cost of claims and ultimately premiums. According to a report by APCIA, since the start of the COVID-19 pandemic, the price of single-family residential home construction materials rose by 33.9% (January 2020 through December 2022), contributing to significantly higher underwriting losses. In addition, the 2022 combined ratio for Homeowners insurers is estimated at 107.9%, which will exert upward pressure on insurance rates, according to the APCIA report.

Moving Forward

Agents and brokers should continue to emphasize risk mitigation, the understanding of one’s risk tolerance, and the importance of planning ahead for renewals. Population, housing, and business growth in hazard-prone areas has exacerbated the effects of climate change, resulting in more frequent and severe disaster losses and emphasizing the need for property owners to harden their homes and businesses to reduce potential loss and damage. Insurers must also consider how much more risk they can accept in terms of catastrophe deductibles and retention levels.