How will my property insurance renewal be impacted by two years of record setting disasters? - Neil Doherty

How will my property insurance renewal be impacted by two straight years of record setting disasters?
2018 was the fourth costliest year on record for insured losses - 2017 was the second costliest year. Combined, 2017 ($140 billion) and 2018 ($90 billion), represent the most insured losses for back-to-back years on record.

By the Numbers:
• 2018: Elevated, yet manageable catastrophe loss year.

• Economic cost of all natural disasters in 2018 $225 billion.

• Insured cost of natural disasters in 2018 (4th costliest year on record) $90 billion (40% of total).

• Economic cost of weather disasters in 2018 $215 billion.

• Insured cost of weather disasters in 2018 (4th costliest year on record) $89 billion (41% of total).

• 2017 & 2018: Costliest back-to-back years for weather disasters on record $653 billion

Why may the current market be a more sustained cycle?
The insurance industry remains prepared to withstand global catastrophic losses with all-time high policyholder insurance surplus of over $740 billion. But consistently poor underwriting profit within commercial property insurance following a prolonged soft market of 17 quarters is creating the possibility of some insurance carries being unprofitable.

Property Market as of 4Q 2018
Fourth quarter 2018 experienced the fifth consecutive quarter of rate increases. 

Large and more complex property owners witnessed an average rate increase for the 4Q 2018 of 4.5%, with nearly 84% of property owners seeing flat to increasing rates. This is trending down from the 2Q 2018 average rate increases of 11%. 

Property owners with significant catastrophe (CAT) exposure, saw a 4.52% average increase. 

2018 loss trends
Property owners with losses emanating from 2017 and 2018 and who have a loss ratio more than 100% are seeing closer to a range of 18 to 20% in rate increase. 

What can be expected in terms of property capacity following 2017 and 2018?
Despite the record losses insurance companies have money in the bank. 2017 and 2018 losses are still viewed as earnings events for the insurance and reinsurance industry. This means the insurance carrier did not need to take funds from their policyholder surplus but took the impact on their overall earning profitability.

How can I continue to best position my account for upcoming 2019 renewals?
The property market is experiencing pressure from a variety of internal and external sources to offer the prospect of profitability to investors and stakeholders. This pressure is not, completely, reflected in benchmarking figures, with market dynamics impacting some carriers disproportionately. While many carriers are experiencing significant catastrophic losses for “non-modeled” events like wildfires, convective storm (e.g., tornados and hail), flooding and exposures that stress aggregate catastrophe exposure management. Loss development from events in 2017 and 2018 are also stress testing profitability assumptions and pushing many carriers to reevaluate business plans, move from higher layer capacity plays to smaller working lines to manage surprise losses, exit certain industry subsectors or retreat from primary lines to excess lines. 

All of these market forces breed uncertainty for buyers. The best hedge against this uncertainty is preparation, well in advance of renewal, active underwriter dialogue and assessing all options in terms of carriers. In particular, if your company is loss exposed to the events of 2017 and 2018, understand your particular loss circumstances and be prepared to address them at renewal. This market uncertainty also calls for flexibility in retentions, structures and carrier selection, including alternative risk transfer options. 

Upward rate pressure will likely mean little in the way of capacity withdrawal from the record amount of capacity in the marketplace and current efforts by carriers to correct problem aspects of their portfolio will still require them to write business to support business plans. Long-term, this will be to the benefit of insureds as record capacity will begin to stabilize the market.

Neil Doherty is senior vice president at Aon Risk Solutions, Boston, Mass.