Driven by record inflation and several years of catastrophic losses, property reinsurance has entered a hard market. Reinsurance — insurance for insurers — is designed to protect primary insurers in the event of a catastrophic loss. Over the past few years, however, losses hitting the reinsured layers have grown exponentially, creating a market where reinsurance carriers plan to reduce or non-renew their capacity in the treaty space and decline to support primary insurers on tough facultative deals.
In other words, going into 2023, business owners could be stuck deciding between higher premiums or reduced limits.
In a September Insurance Journal article titled “Property Catastrophe Reinsurance Entering a True Hard Market,” Fitch Ratings’ Robert Mazzuoli and Brian C. Schneider forecasted: “As managing the reinsurance business will become more and more demanding, we expect to see a growing divergence in strategies and a wider dispersion of results.”
Similar to their business-owner customers, primary insurers will be forced to decide whether to purchase more expensive reinsurance capacity or take the additional non-reinsured risk onto their balance sheets. Each primary insurer will have a decision, and we expect to see a wide array of strategies used across the insurer spectrum.
While Hurricane Ian’s results are not fully known, ratings and regulatory agencies have been keeping close watch on the reinsurance space. The Insurer noted in September that two additional top insurance ratings firms, AM Best and Moody’s, offered forecasts similar to Fitch’s. Quoting AM Best in its story “Property in transition as some reinsurers become scaredy-cats,” The Insurer reported:
“Rate increases in many of the reinsurance lines are expected in 2023, although they will vary by line of business and territory. However, growth could be countered by reductions in property cat [catastrophe] reinsurance premium, as many companies have begun to withdraw or substantially reduce their participation in that market.”
Overall, the result for property coverage in both the primary and reinsurance markets is reduced availability and policy limits (aka capacity), along with restricted coverage terms.
Given the variation in the property reinsurance market, making an informed choice of coverage will require time-consuming diligence by your broker, so it’s best to begin the renewal/application process early. Conversely, insurers are taking a deliberate approach to how market factors evolve before they review applications, forcing businesses into a sort of hurry-up-and-wait mode with some carriers not offering renewal terms until you are within 30 days of your renewal.
So what can you do now?
- Understand your portfolio replacement cost valuations and what effect they will have on what you pay for Property Insurance.
- Demonstrate that you have an effective risk management program. Insurance carriers are scrutinizing insureds who have not complied with risk control recommendations, at a much higher rate than prior cycles.
- Engage with your broker early and often. Brokers should be out in the market having early renewal discussions with carriers to understand how an individual renewal is viewed by their incumbent carrier.
How Reinsurance Works
As described by the Insurance Information Institute (III), reinsurance is a “way of transferring some of the financial risk insurance companies assume in insuring cars, homes and businesses to another insurance company, the reinsurer.”
Essentially, reinsurance provides a backstop to the primary insurer, preventing it from accumulating so much loss that it becomes insolvent.
There are two kinds of reinsurance: treaty and facultative. Treaty reinsurance is purchased by one insurance company from the reinsurer. With facultative reinsurance, the reinsurer underwrites some or all policies to be reinsured, covering a single risk or package of risks.
Treaty reinsurance is for annual renewals. Facultative reinsurance is where problems go. And with many reinsurers tightening both underwriting conditions and capacity for treaty policies, more property owners are finding themselves evaluating facultative coverage.
The Role of Valuation and Cost of Undervaluation
Because of fluctuations in real estate prices and economic factors such as the cost of building materials and shortages of skilled labor, the value of your property can vary from year to year. The combination of a global pandemic, unprecedented occurrence of catastrophic weather events and supply chain disruptions caused by events including the pandemic and the war in Ukraine have made property valuations especially volatile.
Carriers typically price policy renewals using a formula based on inflation rates, but they generally rely on their insureds to determine replacement valuation for their properties. And when a claim occurs with losses incompatible with the property valuation, there are consequences. Having your property undervalued can result in unexpected coinsurance costs — i.e., having to foot the bill yourself for losses exceeding your insurance coverage — as well as coinsurance penalties that may be imposed by your carrier.
Getting Started on Your Solution
Because finding the right insurer for your business may require an extensive search, it’s important to work with an agent or broker who has the ability to reach across multiple carriers, utilizing extensive resources and well-established relationships. An insurance professional who not only knows your business and industry but also can pick up the phone and quickly speak with multiple Excess Insurance carriers and reinsurers to assemble a package of policies is invaluable.
As members of a highly collaborative, national firm composed of more than 180 offices around the country, Alera Group agents have the additional advantage of being able to work with local partners in your region to arrive at a custom-designed solution. We can get started on your reinsurance solution today.
About the Author
Legacy Risk & Insurance Services, An Alera Group Company
As a partner at Legacy Risk & Insurance Services, an Alera Group Company, Drew Bolger's priorities are delivering outstanding services and solutions for clients, developing the firm’s teams, and growing the business. Collaborating closely with clients, he provides timely and effective counsel, striving for partnership and a deep understanding of their holistic business needs.
With experience across verticals, Drew has focused his career on serving customers in a range of industries including commercial real estate and development, life sciences, renewable energy, technology and more. Prior to joining Legacy, he spent about a decade at Arthur J. Gallagher and Wells Fargo Insurance.
A respected insurance industry leader, Drew has been recognized as one of Business Insurance magazine’s “40 under 40.” He holds a Bachelor of Science in Finance from Santa Clara University and is a former chapter president for its alumni association. Drew lives in the San Francisco Bay Area with his wife and kids — and spends most of his free time chasing said kids around to their sporting events.