2020 U.S. Property Market Outlook - Helping you come through for your clients - Risk Placement Services
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2020 U.S. Property Market Outlook Helping you come through for your clients
After consistent double-digit rate increases
throughout 2019, the prevailing expectation
is that the U.S. commercial property
insurance market will continue to firm
through at least the first half of 2020.
Although insured property losses in 2018
and 2019 averaged less than half those
of 2017, when a record $105.7 billion in
insured catastrophic losses occurred,¹
insurers are still playing catch-up.
In 2018, the U.S. saw 55 catastrophes—defined as
incidents incurring $25 million or more in insured
damage—the highest number to occur in a single year.
And during 2019, the U.S. experienced 14 separate
billion-dollar disasters, marking the fifth consecutive year
in which 10 or more separate billion-dollar events have
impacted property owners, according to the National
Oceanic and Atmospheric Administration.
Property accounts
likely to see the biggest
price increases this
year are those that
enjoyed significant rate
reductions over the last
10–15 years.
Property accounts likely to see the biggest price
increases this year are those that enjoyed significant rate
reductions over the last 10–15 years as standard market
carriers competed on both price and terms to capture
greater market share.
Since the market spike post-Katrina, property rates
in the standard market began to fall steadily, while
coverages have gotten broader and deductibles and
self-insured retentions have fallen, according to Wes
Robinson, National Property President of Risk Placement
Services, Inc. (RPS), based in Atlanta. “We had a faux
1
Facts + Statistics: U.S. catastrophes, Insurance Information Institute,
2 https://www.iii.org/fact-statistic/facts-statistics-us-catastrophes
hard market after Sandy in 2012,” he said. “That was the Lastly, because of significant payouts by investors in the
last firming market. Before that it would have been after insurance-linked securities market for losses from the
Katrina in 2006.” storm seasons of 2017 and 2018, less capital is flowing
into the ILS market, which had been providing additional
Underwriters, many of whom have never experienced
reinsurance support to insurers and reinsurers. Some
a firm market before, are under significant pressure to
investors also are reserving capital to pay unresolved
restore profitability to the property insurance market,
claims from these years rather than reinvesting in next
especially for those lines of business located in regions
year’s ILS placements.
of the country exposed to hurricanes, tornadoes, hail,
flooding and wildfires. There also is more scrutiny being
placed on property valuations since replacement costs
have been outpacing insured values across the country for
Less capital is flowing
several years.
into the ILS market,
The lack of competitively priced reinsurance also is
affecting carriers’ appetite for taking on property risks
which had been
in catastrophe-prone areas. Insurers in California, for
example, paid 100% of wildfire losses because they fell
providing additional
within their cat reinsurance treaty limits. Most insurers reinsurance support to
also have assumed flood losses net of any reinsurance.
Although some carriers are obtaining facultative insurers and reinsurers.
reinsurance to back up their cat exposures, this added
cost must be passed along to the consumer in the form of
additional rate increases.
The general location of the 14 weather and climate disasters to have caused at least $1 billion dollars in direct damages during 2019.
Map by NOAA NCEI; Climate.gov.
3
MORE BUSINESS FLOWING INTO E&S MARKET
Although the third quarter of any year is typically when Following rate increases averaging 5% to 15% in the
the excess & surplus (E&S) lines market experiences a beginning of 2019, price increases on new submissions to
slowdown, the rate of new submissions actually picked the E&S market began to accelerate by midyear, growing
up in the third quarter of 2019, continuing a trend that from 20% to as much as 50% by year-end.
began in 2018, as conditions continued to tighten in the
“Rates are climbing for everybody, even the good
standard property insurance market.
accounts,” observed David Novak, San Francisco-based
Area President at RPS. Meanwhile, “the standard markets
Although the third no longer have as broad an appetite for more challenging
classes of business, including hospitality, habitational and
quarter of any year is those that are loss-challenged.” After they enter the E&S
market, attractive accounts are seeing rate increases of
typically when the E&S anywhere from 10% to 25%, Novak said, while challenged
market experiences a
accounts—those with adverse loss histories—are seeing
50% rate hikes.
slowdown, the rate of Additional capacity that typically comes from managing
new submissions actually
general agents also is drying up. Several programs that
provided coverage to the hospitality and habitational real
picked up in the third estate industries are no longer in business.
quarter of 2019.
As a result, accounts that had been in programs that are
no longer available are seeing rate increases anywhere
from 50% to 100% when they buy coverage on their own.
“MGAs that started with hope and promise got their
Now after record storm losses in 2017 and 2018, the wings clipped right away,” said Robinson. “They can’t get
standard market is pulling back on capacity and adjusting their line slips filled. A lot of that capacity usually comes
terms and conditions, affecting rates. The pace is expected from Lloyd’s, but Lloyd’s had to shrink its premium.”
to continue for the first and second quarters of 2020 until
the carriers return to profitability and more competition
is introduced.
U.S. SURPLUS LINES DIRECT PREMIUMS WRITTEN ($ MILLIONS)
Total P/C Industry Total Surplus Lines
Year DPW Annual % Change DPW Annual % Change
2013 545,760 4.3 37,719 8.4
2014 570,187 4.5 40,243 6.7
2015 591,186 3.7 41,259 2.5
2016 612,906 3.7 42,425 2.8
2017 642,127 4.8 44,879 5.8
2018 678,029 5.6 49,890 11.2
© A.M. Best — used with permission.
4
STACKING LIMITS
In many cases, single-carrier placements are no longer
available as insurers shy away from taking on large limits,
so placements are being made on a subscription basis
with multiple insurers sharing the risk. For example, an
insurer that had been providing $10 million in capacity
might decide to cut it in half, requiring the broker to find
another insurer—or perhaps several other insurers—to
provide the additional coverage in multiple layers.
In other cases, property owners are being forced to
assume higher retentions. For example, windstorm
deductibles are doubling from 1% to 2% of insured
property values.
Meanwhile, hailstorm deductibles are averaging 3%
nationally, compared to 2% previously, while in some
pockets of Texas, Oklahoma and Colorado they could go
as high as 5%.
Hailstorm deductibles
are averaging 3%
nationally, compared to
2% previously
“There was very little warning for some of these buyers,”
said Robinson. “The market outpaced the advice. What
we predicted in March would happen to a June account
was obsolete a week or two later. There are two things
they can do to save premium dollars: buy lower limits or
increase their deductibles.”
5
VALUATIONS, LOSS CONTROL ARE KEY
Having good data on property values and implementing Francisco, for example, because of the demand for labor
effective loss control to prevent or minimize damage associated with the large amount of construction taking
could make the difference between getting coverage at a place in those metro areas,” noted James Rozzi, executive
reasonable price or not. vice president at RPS in San Francisco.
Underwriters are being more cautious, trying to select Recognizing this, underwriters are asking for appraisals,
more attractive property risks that they think will turn a which can cost from several hundred to several thousand
profit for insurers. Less desirable risks will still be placed, dollars, depending on the property. Without an
but at a much higher price. appraisal, underwriters are limiting recovery amounts to
reported values.
Underwriters also have become skeptical of insured
loss projections calculated by the industry’s catastrophe Many are also asking specific questions about property
modeling firms, which use historical data to predict upgrades and improvements, such as when a roof was
property damage and business interruption costs last replaced and/or its composition, devaluing potential
from catastrophes. For example, none of those models recovery value if the roof is more than 10 years old or
projected the magnitude of flood damage that occurred made of a material that would render it more vulnerable
when Hurricane Harvey stalled over Houston. to fire, wind or hail damage.
Models also underestimated the cost of Hurricane To ensure that appropriate replacement cost estimates
Katrina by 80%. To account for another potential are obtained, buyers should hire an engineer to review
outlier storm, some underwriters have begun adjusting building characteristics to evaluate probable maximum
modeling projections when setting rates to ensure they loss scenarios for various perils including fire, wind, flood
will be adequate to cover losses. and earthquake.
In the past, underwriters relied on inflation adjustments Property owners in hurricane- and windstorm-prone areas
to value properties, but repair and replacement costs can may be able to obtain more favorable terms and pricing
vary for a variety of reasons, including the time of year from underwriters by documenting the installation of
a claim occurs or where the property is located, as well such improvements as window shutters that prevent water
as the replacement costs for technology now built in to infiltration and damage from flying debris.
insured property.
Additionally, creating a safety zone around a structure
If a loss occurs to a property in a boomtown, for instance, by replacing highly flammable vegetation with lower-
the repair and replacement costs will be higher than if it growing, less flammable species to protect against wildfire
occurs in a region of the country with slower growth. damage may persuade a reluctant underwriter that a
property in a fire-prone area is a safer bet.
“The average replacement cost is $100 per square foot for
wood frame in most of America, but not in Denver or San
Having good data on property values and
implementing effective loss control to prevent or
minimize damage could make the difference between
getting coverage at a reasonable price or not.
6
HABITATIONAL REAL ESTATE
Apartment buildings, especially those of wood-frame
construction, represent one of the toughest property
lines to place in today’s market. Rate increases average
between 20% and 30% for properties with no losses,
while most loss-affected businesses are experiencing rate
hikes in the 40% to 60% range.
Habitational real estate business operations also have
fewer insurance options available to them. While as many
as 20 carriers catered to the multifamily housing market
three or four years ago, fewer than eight underwrite that
line of business today.
While as many as 20
carriers catered to the
multifamily housing
market three or four
years ago, fewer than
eight underwrite that line
of business today.
In some cases, underwriters are inspecting properties
themselves if they suspect any sort of misrepresentation
on an application.
“Sometimes underwriters will charge an additional
premium or cancel coverage if they go out and inspect a
property and discover it doesn’t have sprinklers like the
property owner said it did. They also have warranties in
their policies so if a sprinkler system is not operational,
they have the right to deny a fire claim,” said Christa
Nadler, RPS executive vice president, Property
Brokerage, based in Chicago.
Senior living centers are also seeing a bit more upward
pressure on rates, especially for those built of lesser
construction quality. However, newer facilities are
getting better pricing from underwriters if they are
built to a higher construction standard with numerous
redundancies, backup power systems and hurricane-
grade windows, or at a higher elevation, making them
less vulnerable to flooding.
7
HOSPITALITY INDUSTRY SCHOOLS AND PUBLIC ENTITIES
Many hotels located in coastal areas are typically already Many public entities have been purchasing coverage via
are written in the E&S market because of their hurricane the E&S market for a while, so they aren’t experiencing
and windstorm exposures. But claims for repairs and lost the same volatility as a lot of other commercial property
income have been climbing, especially for island properties, insurance buyers. As a result, public sector accounts are
since it’s hard to get supplies to them after a storm. seeing rate hikes averaging between 5% and 12%.
Business income costs also have been higher than Still, hailstorms remain the scourge of most schools and
expected, so underwriters are raising deductibles, adding universities throughout the central region corridor,
time limits for recovering lost income and requiring more fueling rate hikes at the higher end of that range. For
documentation to support revenue projections. example, independent school districts in parts of Texas
were hit hard by massive hailstorm losses in 2019, while
Colorado led hail claim activity for this sector in 2018.
ANNUAL SEVERE WEATHER REPORT SUMMARY 2019: LARGE HAIL
Hail Reports, January 1, 2019—December 31, 2019. Map by NOAA/Storm Prediction Center; spc.noaa.gov.
8
Because of wind, hail and flood losses over the past
several years, there’s not an auto, truck or farm
equipment dealer in the country that won’t feel the pain
of renewing their dealers’ open lot coverage.
OTHER AFFECTED INDUSTRIES
Drastic renewal rate increases, some as much as 500%, Many are now seeking coverage from the E&S market since
have been demonstrating the standard market carriers’ their traditional sources of coverage are declining to renew.
diminishing appetite for property exposures in the But because E&S underwriters have less experience with
manufacturing industry. these lines of business, these accounts are taking longer to
place. The pricing also is considerably higher than what
Many of these accounts enjoyed significant rate reductions
buyers had been used to paying. In general, engineered
over the past several years. At the same time, carriers
accounts are seeing 100% to 300% rate increases when they
weren’t emphasizing loss control as much as they did
are placed in the E&S market.
historically. As a result, many of these businesses became
vulnerable to fires and explosions, incurring sizable losses. Because of wind, hail and flood losses over the past
several years, there’s not an auto, truck or farm
Similarly, the food products industry is seeing across-
equipment dealer in the country that won’t feel the pain
the-board rate tightening as standard market insurers
of renewing their dealers’ open lot coverage. More and
withdraw from this class of business. Often, produce
more of this business is being driven into the E&S market,
growers with greenhouse exposures are forgoing crop
where premiums are considerably higher than in the
insurance altogether because of rate increases as high as
standard market.
300%, opting to just cover their facilities.
Foundries involved in metal casting and recycling
businesses—two operations susceptible to fires and
explosions—historically were insured by standard market
insurers with engineering expertise.
9
TRIA IMPORTANCE OF RELATIONSHIPS
Premiums paid for terrorism coverage under the Because of the sudden market turn, many E&S
Terrorism Risk Insurance Act (TRIA) program are underwriters have been overwhelmed by this influx of
significantly higher in the E&S market than in the new business. In some cases, it takes several calls and
standard market, further adding to the cost of commercial emails to elicit a response.
property coverage. For example, the surcharge for TRIA
To better navigate the E&S market, retail brokers should
coverage is 1% of premium in the standard market versus
partner with a wholesale broker who has a solid track
5% of premium in the E&S market.
record and longtime relationships with underwriters who
Thus far, no claims have been made against the federal have experienced the market’s historical ups and downs.
terrorism reinsurance program. For the act’s provisions to Seasoned wholesale brokers know how to negotiate with
take effect, an attack has to be certified as a terrorist event underwriters to restructure placements to make them
by the secretary of homeland security, the U.S. attorney more affordable. They also have a better understanding
general and the secretary of the treasury. The amount of how to assemble a layered or quota-share program, if
of insured damages required for an attack to be deemed necessary, to obtain desired coverage limits.
covered has risen to $200 million from the original
“Our last tough market conditions came after the
$5 million, and could go higher if the act is reauthorized.
2004 and 2005 hurricane events. That’s 14 years ago,”
To save money and obtain more comprehensive observed Raul ‘Rep’ Plasencia, executive vice president,
protection for acts that do not meet the threshold of Property Brokerage at RPS, based in West Palm Beach,
the federal terrorism reinsurance program, buyers are Florida. “If you entered the market after that, you’ve
advised to decline TRIA and instead purchase stand-alone never really been through such a market, so it’s important
terrorism insurance coverage. for those newer agents and brokers to reach out to their
carrier partners and experts early so they can understand
In addition to offering attractive limits and premiums
the market impacts well before the renewal and make the
below that of the TRIA surcharge, underwriters have
process as smooth as possible for their clients.”
begun to offer coverage for nontraditional terrorist
exposures, such as those presented by an active shooter,
or nuclear, biological and chemical exposures, which are
generally excluded on a property policy.
The loss of income exposure that is associated with these
types of events can be tremendous, and securing stand-
alone coverage can help ensure proper coverage in the
event of a covered event.
10It’s important for agents and brokers to
reach out to their carrier partners and
experts early so they can understand the
market impacts well before the renewal
and make the process as smooth as
possible for their clients.
11CONTRIBUTORS: Wes Robinson, President, National Property Practice Christa Nadler, Executive Vice President, Property Brokerage David Novak, Area President Raul ‘Rep’ Plasencia, Executive Vice President, Property Brokerage James Rozzi, Executive Vice President ABOUT RISK PLACEMENT SERVICES: Risk Placement Services (RPS) is one of the nation’s largest specialty insurance products distributors, offering valuable solutions in wholesale brokerage, binding authority, programs, and standard lines, plus specialized auto through its Pronto Insurance brand. Headquartered in Rolling Meadows, Illinois, RPS has more than 80 offices nationwide. For more information, visit RPSins.com. The information contained herein is offered as insurance Industry guidance and provided as an overview of current market risks and available coverages and is intended for discussion purposes only. This publication is not intended to offer legal advice or client-specific risk management advice. Any description of insurance coverages is not meant to interpret specific coverages that your company may already have in place or that may be generally available. General insurance descriptions contained herein do not include complete Insurance policy definitions, terms, and/or conditions, and should not be relied on for coverage interpretation. Actual insurance policies must always be consulted for full coverage details and analysis. Copyright © 2020 Risk Placement Services, Inc. 12
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