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Volatile times are making an impact on the U.S. property insurance market. Both internal and external factors are affecting market dynamics and adding pressure to all segments of the insurance value chain.
The 2023 U.S. Property Market Outlook by Risk Placement Services (RPS) identified multiple challenges.
The four key concerns include drastic rate increases, growing underwriting losses, a difficult reinsurance renewal period and reduced capacity. Additionally, the report provided insight into considerations for agents to help clients traverse the renewal period for the remainder of 2023 and beyond.
Here’s a breakdown of what the study revealed.
Significant premium rise is identified as the greatest burden affecting underwriters when direct insurers are already facing severe cost pressures.
“The average insurance carrier that deploys catastrophe business is looking at 30 to 80% increases in its reinsurance costs,” said Wes Robinson, national property president at RPS.
Reflecting on recent volatility, RPS area president David Novak added, “We’ve been in a hardening market for four or five years now, but increases across 2023 are expected to come at an accelerated rate. This is driven primarily by poor underwriting results, increased cost of reinsurance and shrinking of capital in the insurance marketplace.”
Then there are the non-property-related issues influencing rates, including war in Ukraine, the COVID-19 pandemic, a supply chain crisis and labor shortages.
“When reinsurers face these increasingly large losses across a variety of different classes and geographies, they sometimes respond by increasing rates across the board, and that is what we are seeing in the property market this year,” said Christa Nadler, area executive vice president for property, RPS.
Climate-related catastrophic events have challenged the industry in recent years, resulting in substantial underwriting losses. Shortages have increased in frequency and severity, and are estimated to be $360 billion globally in 2022.
Recent climate-related losses in the U.S. include California wildfires, flooding, and the giant freeze that hit Texas in 2021.
As a result, the U.S. property and casualty insurance market reported net underwriting losses of $24.3 billion over the first nine months of 2022, nearly four times the losses reported during that same period in 2021.
Hurricane Ian, which occurred in the fourth quarter of 2022, is estimated to add $55 billion of insured losses and a total economic loss of $112 billion. Hurricane Ian was the second-costliest catastrophe, behind Hurricane Katrina in 2005, and resulted in nearly $100 billion in insured losses, adjusted for inflation.
The frequency and scale of catastrophes and supply chain pressures have resulted in a demand surge and a shortage of materials and labor.
Furthermore, manufacturing is under increased scrutiny from insurers at a level not seen in five to 10 years. Risk management recommendations, previously considered advisory measures, are now being mandated in order for cover to be accepted.
“The market has gotten to a point where they are saying ‘Enough is enough,’ and they are no longer willing to accept the increased risk associated with not complying with recommendations,” said Nadler.
Therefore, companies that invest in risk management, including “best-in-class” properties built to withstand natural catastrophes, could benefit from lower rates than other market areas.
Unanticipated losses are causing insurers to add sublimits, reduce sublimits and tighten up coverage language.
“We’ve seen this a lot when it comes to things like limits for miscellaneous unnamed locations, and even civil commotion or riot events,” Nadler said. (For more information on civil commotion and riots, see the recent Risk & Insurance article 5 Factors Stoking the Fires of Global Unrest, According to a Recent Report by Allianz.)
In response to underwriting losses, insurers are putting more emphasis on valuations, requiring policyholders to update the value of their portfolio for rising inflation and increased construction costs.
“You can look back across some accounts and see that valuations haven’t changed in the last eight to 10 years,” said Nadler. Combined with increased rates, it results in a “hefty year-over-year premium increase for an insured.”
Agents need to pay close attention to changes in policy wording. There has been a move toward scheduled limits and tighter wording to reduce the exposure facing insurers.
“While some of these exclusions may not seem to be a big issue for many of the risks being placed, there could in fact be a sizable level of exposure being excluded for certain segments of the market,” said RPS senior property broker Nicholas Cavaness.
Traditionally, the managing general agents (MGA) model wrote complex risks under one policy, making it easier and more affordable.
However, the MGA sector has experienced a reduced capacity due to the hardening market, leading to greater-than-average rate increases for middle-market business.
MGAs are faced with a choice between increasing premiums and increasing their risk tolerance.
Some carriers are reducing their capacity by as much as half, resulting in increased costs due to having more insurers on a policy. “Whereas a deal might’ve had 10 carriers involved to cover a risk last year, we are now seeing that number rise to 20, because capacity has been cut so drastically,” said Cavaness.
Compiling an increased number of carriers on a deal will result in delays and a longer and later renewal cycle, which can strain both the insured and agents.
RPS advises agents to proactively provide insureds with the reasons behind the increasing premiums and to set realistic expectations.
“These conversations need to be started early — as early as possible, really — because renewals are becoming a much more complicated process,” Robins said.
When you move beyond the transactional role and enter into a meaningful partnership, agents can provide insureds with the advice they need when facing these increased pressures.
Cavaness added, “Here at RPS, we firmly believe brokers are there to educate their customers and ensure that they are fully aware of the risks they are facing and how that can be mitigated against.” &
Though a potential global recession looms on the horizon, there is still much risk management teams can do to chart a course forward.
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Broadly speaking, commercial insurance is experiencing what some experts see as a significantly transitioning market. Threats of recession, increasingly frequent and severe weather, supply chain problems, and labor market fluctuations are just some of the factors altering the appetites of insurance carriers and creating disparities in terms, pricing, and conditions.
“The [commercial insurance] industry’s traditionally been a bit cyclical,” said Kevin Smith, president, Global Risk Solutions (GRS) North America, Liberty Mutual. “When you’re in a hard market — which traditionally is tightening terms, higher pricing — you generally have a pretty high degree of consistency with markets.”
“In a soft market cycle, carriers tend to get a little more competitive — pricing gets softer, terms open up.”
As the current insurance market overall finds itself at the tail end of a firm market and enters a transitioning market, buyers may encounter more disparity across coverages and insurers, with marked differences in individual lines, appetite, and capacity.
It’s a complex situation, but buyers and brokers can find ways to navigate these inconsistent markets. By understanding the main drivers and key lines affected and partnering closely with their insurance carriers and brokers, businesses can develop appropriate risk mitigation strategies that help manage potential exposures and bridge pricing and capacity gaps.
Kevin Smith, President, Global Risk Solutions (GRS) North America, Liberty Mutual
Property coverage is a prime example of where the disparities in the market are very evident. “It’s a moving target that everybody’s trying to grapple with,” Smith said. “There’s still a lot of pressure in property for a whole host of reasons; the increased frequency and severity of severe weather being a major factor. So, there’s a compression taking place.”
And then there’s reduced capital in the property arena. “So, you’ve got an issue around capital coming in [and] around coverage. Reinsurance markets are pulling back on the perils that they’re covering to some degree, and the capacity they do put up, they’re charging more for.”
In addition to weather exposure, there are other factors impacting the property market. “You’ve [also] got the inflationary dynamics coming into play, some of the supply chain issues, and just the general cost,” Smith added. “If you are going to rebuild now, the cost of materials and everything else is going up as well.”
These factors are a key reason why having accurate property valuations is so critical.
“If property valuations are not assessed regularly, an organization’s property could be improperly insured and the coverage may be less than sufficient in the case of damage or disaster,” said Smith. “By maintaining accurate valuations, companies can better avoid gaps in coverage and financial hardship.”
Yet even with these challenges, carriers can help insureds put property risks into the proper context when they effectively utilize the historical claims data in their vaults, tap into predictive modeling resources, and apply their boots-on-the-ground experience to better understand the value of their customers’ businesses, help them avoid business interruptions, and manage rising costs.
Cyber is another key line in transition since many carriers and insureds have been stung by the ongoing barrage of ransomware attacks and other cyber breaches.
“The industry saw double- and triple-digit price increases over the last year and a half to two years,” Smith said. “Now that’s more or less flat. So, that’s a pretty big change in the cyber market.”
Even with this adjustment in pricing, cybersecurity continues to grow more complicated — and risky —for businesses.
In 2022, the U.S. saw a 57% overall increase in cyberattacks, as compared to 2021, when global cyberattacks increased by 38%. And health care organizations were especially vulnerable: More cyberattacks breached their safeguards in 2022 than in all other industries.
“The business world has evolved from the thought being ‘We will never have a breach’ to the reality being that one, anybody can get breached, and two, the probability is pretty high,” Smith said. “At some point, your organization is likely to experience a breach.”
It’s easy for any organization struggling to balance its labor shortage, operational costs, and other competing priorities to become lax about cyber hygiene. And as businesses look to increase efficiency and cut costs, they are relying more on cloud and other third-party service providers — which reduces their ability to manage all aspects of their cyber footprint and can lead to increased risk.
But proactive cyber risk management planning can make a difference in reducing related risks. Smith said companies should make sure they have solid “blocking and tackling” cybersecurity protocols and offer regular employee refreshers on how to protect data and guard against phishing and other cyber schemes. Doing due diligence to properly vet third-party vendors is also critical.
“In our cyber offering, we can provide pre-breach and post-breach services,” Smith said, “whether it’s multifactor authentication or end-of-life systems, where you’ve got antiquated technology that’s susceptible to a breach — there are fundamental things we can advise on and help businesses implement to better protect themselves and help reduce their cyber exposure.”
“Given this transitioning market and challenging risk landscape, it has never been more important for buyers to partner with an insurer that can help identify the exposures they face and develop wholistic solutions to mitigate those risks.”
— Kevin Smith, President, Global Risk Solutions, North America, Liberty Mutual
Of course, property and cyber are just two among a growing number of risks insureds are striving to keep an eye on in today’s market. “There’s really tangential points across all lines,” Smith said. “Given this transitioning market and challenging risk landscape, it has never been more important for buyers to partner with an insurer that can help identify the exposures they face and develop wholistic solutions to mitigate those risks.”
However, with so many risks to consider — from the ripple effects of geopolitical tensions to rising inflation —risk management teams may feel like they have to come up with complicated risk management solutions that are all encompassing and cover a myriad of potential exposures, said Smith.
“Surely, we’ve got to think big, but so much of success in this market is about understanding and prioritizing risk, and the day-to-day combat of mitigating evolving exposures by focusing on the fundamentals.”
From casualty to property, Smith said, his team helps insureds identify the specific risks they face and develop strategic plans for mitigating those exposures. “We’re strong proponents of risk control and risk engineering — going out and doing risk assessments to make sure there’s fundamental and adequate controls in place to help prevent the events that spark claims,” Smith said.
“And this applies to all lines: ergonomic work, doing slip-and-fall reviews, evaluating fire controls – these are important actions to take to help mitigate risk and claims.”
Then they verify that insureds understand their total cost of risk.
“If an insured is going to build a new factory or a manufacturing plant,” Smith shared, as an example, “where do you want to put that factory or that manufacturing plant? Are there things that can be thought of in terms of a property exposure? Do you want to build it in an area that’s more prone to catastrophes or can you think about maybe building that in other areas?”
These are all questions Smith said are vital to helping insureds succeed in their efforts to chart the steadiest course forward in today’s heightened risk environment.
“So, working with them as they navigate those particular exposures — coming at it through an insurance lens — because it’s not just making their risk better, but how do we overall aid them in managing and controlling their total cost of risk?” Smith said.
There’s also thinking beyond exposures, Smith said. “How can we also help them become more ‘risk-aware,’ as opposed to ‘risk-averse’? So how do we become a problem-solver and work closely with our insureds to identify exposures and jointly come up with potential solutions?”
Whether it’s underwriting, client service, or risk control, the partnership between insureds and their carriers is a joint effort. “If we can help them be a better risk, it’s better for us — [there’s] lower probability of loss for us and less disruption to them.
“If you go through a cyber breach,” for example, Smith said, “it’s incredibly disruptive. A fire loss or a loss in a storm on the property side is very disruptive; litigation can be very disruptive. So, anything we can do to mitigate that aggregate risk, we all win. That’s how we like to think through things — not only through an underwriting lens but through a risk control lens as well.”
To learn more, visit: https://business.libertymutual.com/ 
This article was produced by the R&I Brand Studio, a unit of the advertising department of Risk & Insurance, in collaboration with Liberty Mutual Insurance. The editorial staff of Risk & Insurance had no role in its preparation.
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