A hard market “anomaly” as capital withdraws: Amwins

Insurance origination and distribution specialist Amwins has highlighted how unusual the hard market in property risks is at this time, especially for catastrophe exposed properties, as rather than a lack of capital driving rates higher, it is risk aversion that is driving harder rates.

Amwins explained in a pricing outlook for early 2022 that the catastrophe exposed property segment of U.S. insurance markets is set to continue seeing prices rise.

“Overall, property rates are on target with our estimates, and we expect a controlled rate increase into 2022. Challenged classes and perils will continue to see more increases while accounts with better risk characteristics should experience flat to moderate increases,” the company explained in its update.

Property losses are once again set to be high in 2021, thanks to catastrophe loss activity that has continued into December with the Quad-state tornado.

In addition, Amwins noted that attritional losses to property have not abated and remain at record highs.

On top of this, reconstruction costs and claim quantum have been rising due to inflationary and pandemic related effects, which will continue for a time until the supply chain can catch up and inflationary pressures ease.

Catastrophe focused capacity is one driver of market hardening and Amwins notes that the current hard market is a bit of an “anomaly” compared to previous periods of hardening rates.

“Typically, we would see tight capital priced accordingly. In the current situation, however, there is capital to be deployed but it’s not realizing adequate returns for investors,” Amwins explained.

Adding that, “To control this, carriers are reducing the amount of limit deployed in high hazard classes, locations and perils, as well as simply exiting classes of business.”

Catastrophe line sizes are dropping as well as capacity withdrawing, meaning even more challenges for large insurance buyers are possible in 2022.

“This presents a significant challenge to accounts that now need to find additional players to replace any reduced (lost) capacity experienced with current carriers,” Amwins said.

While Amwins also noted that, alongside capacity issues, “A further constricting of underwriting guidelines and terms and conditions will adversely affect our clients in 2022.”

In particular, Amwins is forecasting some significant challenges for high-value and catastrophe exposed property owners, as the capacity becomes less available and prices continue to escalate.

“PML Heavy Tier 1 & 2 CAT Exposed Accounts are likely to experience substantial rate increases as MGAs and certain carriers reduce line size or move from a full limit approach to either a quota share or primary layer approach,” the company said.

“Additionally, some carriers and MGAs could decide to no longer quote TIVs above a certain threshold or they could decline to quote select geographies altogether. Some accounts will receive 35%+ rate increases along with an increase in named storm deductible.”

Stand alone earthquake covers could rise by 5% to 7.5%+, while placements for large PML Heavy Accounts could see rate increases of between 10% and 15%+, the company continued.

In California wildfire exposed regions things are expected to be about as challenging as they can get, with rate increases of “50% to 100%+ and, in some cases, much higher” anticipated by Amwins.

“Accounts which have been nonrenewed by the standard market are likely to experience the greatest rate change, sometimes five to ten times expiring or more. Wildfire deductible levels are increasing simultaneously. Full limit programs are many times unavailable or cost prohibitive, and in select instances, only small loss limits will be available, or an account may possibly be uninsurable,” Amwins further explained.

Ways that clients can try to manage the challenges that harder pricing pose to them, includes looking to new and competitive capacity sources, Amwins believes.

Which does suggest that there could be more opportunity here for ILS or alternative reinsurance capital sources to get behind respected underwriters of catastrophe exposed property risk and try to provide some capacity to areas of the market that are currently less well-served.

Of course, that’s only going to happen where rates are adequate already, so in those cat exposed property zones that aren’t yet delivering risk commensurate rates, it seems we can expect the hardening to continue well into 2022, perhaps beyond.

Of course, a similar withdrawal and pull-back of capacity has been seen in reinsurance and retrocession markets in advance of the key January 2022 renewal season.

That may also have a knock-on effect on the primary property insurance markets into 2022, as carriers will need to adjust their risk appetites to match the availability and appetite of reinsurance and ILS capacity through the coming months and perhaps years.