Brokers and insureds are wondering what impact the devastation left by Hurricanes Harvey, Irma, Maria and Nate will have on property insurance rates, capacity and coverage terms. Short term, there will likely be an immediate increase in rates followed by higher deductibles and limitations on coverage in the longer term. In addition, USI Insurance Services anticipates property insurance carriers will deploy capacity more strategically across their portfolios, and in particular catastrophe-exposed regions.
Due to the significant capacity already in the property insurance market, we do not expect 2017 catastrophe losses to create a capacity shortage. The industry is flush with capacity largely from alternative capital sources such as private and public pension funds, hedge funds and private equity firms, which have entered the market in recent years via investment vehicles like catastrophe bonds and sidecars. The alternative capital, which is concentrated in the catastrophe business, has kept insurance prices low by protecting insurers against losses from hurricanes, earthquake and other disasters.
Market Response to Recent Events
With ultimate claim payouts many months out, various sources estimate total insured losses from the storms, combined with the Mexico earthquakes, in the range of $80 billion to $160 billion. These totals do not include the staggering property losses from wildfires in Northern California, which destroyed more than 5,700 homes and businesses in October.
As reinsurers brace for earnings decline and, in some cases, capital deterioration, USI expects reinsurance prices to harden during treaty renewals later in the year and early 2018. Direct carriers will push to pass rate hikes to insureds as they seek to improve their own deductible and coverage positions. For portfolios with exposures to coastal natural catastrophe (CAT), particularly those dealing with pending claims, double-digit percentage rate increases are likely. Portfolios exposed to earthquake and severe thunderstorms (tornado and hail) face rate increases in the mid to single-digit range due to the Mexico earthquakes and general market commotion.
In addition to rate increases, U.S. direct carriers are likely to tighten underwriting and policy terms and conditions. For example, for hail-exposed properties, the leading carriers are adding policy language naming Zone 1 and 2 High Hazard Hail counties to policies, and including percentage deductibles to hail damage. Depending on the zone and previous loss experience, the deductible could range from 1 percent to 5 percent. Also, in some cases, deductible caps have been removed if they were previously in place. Public entity accounts, large real estate portfolios and properties with large roof areas such as schools or malls can expect to be impacted by these changes.
USI expects a retooling of catastrophe models used by insurers and reinsurers in response to some of the unusual attributes of the 2017 hurricanes — namely, high wind speeds, significant rainfall and storm surge. The expected model changes may impact some important risk exposure numbers for certain clients.
The London Market
Prior to the 2017 storms, the London market was already running “hot” from weather-related attritional losses.
The attritional losses stemmed from severe thunderstorms producing sizable tornadoes and hail damage across multiple U.S. states, year over year. Texas, Kansas, Nebraska, South Dakota and Oklahoma have experienced the highest frequency in hail events since 2010, with Texas recording the highest severity every year since 2000.
Lloyd’s had taken the position that other than loss-free, non-CAT exposed portfolios, renewal reductions are no longer commonplace. The string of hurricane losses will further harden Lloyd’s position on rates, with Harvey having the biggest impact.
In all, London underwriters are anticipating 20-to-25 percent increases on their treaty renewals this year, which they intend to pass along to CAT-exposed clients not directly impacted by 2017 events. Businesses that have sustained direct CAT losses should anticipate rate increases above 20 percent.
An experienced broker with both depth and breadth of resources can assist businesses with navigating the challenging market conditions resulting from the numerous 2017 catastrophe events. For businesses renewing Jan. 1, 2018, it is important to begin the process early to avoid any surprises such as form and coverage restrictions, and potential deductible or premium increases.