The pace of rate hardening in the U.S. property insurance marketplace has accelerated and this firming trend is expected to continue, with the availability of capacity from the ILS market seen as one factor influencing it, according to AmWINS.
As the overall property insurance rate hardening continues, there are noticeable changes in pricing, deductibles, coverage and capacity from quarter to quarter, AmWins Group Inc., the global distributor and servicer of specialty insurance solutions, explained in a recent report.
While the influence of major players is evident in the marketplace, so to is the influence of alternative capital and its availability following the recent catastrophe loss years and the fact so much capital remains trapped in the insurance-linked securities (ILS) fund sector.
Harry Tucker, AmWINS National Property Practice Leader, explained the state of the market, saying, “This market change was anticipated and inevitable based on poor attritional loss experience, back-to-back years of heavy storm activity, and a prolonged soft rating environment.
“It has been exacerbated by restructuring at AIG and FM, resulting in a change that has come more quickly and is more severe than we anticipated early in the first quarter of 2019. We’ve seen market change on an almost weekly basis.”
Rates continued to firm in commercial property through the second-quarter of the year, with the Council of Insurance Agents & Brokers (CIAB) citing an 8.5% quarterly rise.
Tightening across catastrophe exposed property as well as non-renewals, widely reported in particular for wildfire exposure in the mainstream press, has driven some of the rate acceleration in Q2.
A push to regain profitability in property underwriting books is part of the driver of rates, as most markets continue to tighten significantly or reduce their exposure to a number of classes of business.
This leads AmWINS to suggest that the firming will continue, even if this years catastrophe losses are relatively benign.
However, if the results of insurers are favourable through the wind season, it could lead to a slowing of the rate increases, although they would still be expected to firm somewhat.
AmWINS points to the continued firming of treaty reinsurance at the mid-year renewals in June and July, which of course means property insurers are paying more for their protection and as a result this helps to increase upwards rate pressure.
Discussing the influence of alternative capital on the property insurance market, Tucker said, “The combined effects of adverse loss development from the past two years of CAT events and a decrease in ILS capacity as investors wait for trapped capital to be released, along with fundamental changes at Lloyd’s, AIG and FM, will continue to drive the market.
“CAT perils aside, the market has experience increased frequency and severity of attritional losses, resulting in multiple years of non-profitable books.”
AmWINS sees the most challenging areas for the property market as: California wildfire as carriers are adjusting guidelines to account for their heavy losses, or exiting the space completely; Convective storm, as increased severity and frequency is affecting underwriters views of the risk; and Flood, as claims are still accelerating from the recent Midwest flood event and the long-term effect of this remains to be seen.
The excess and surplus (E&S) property segment is retrenching and in some cases pulling back from certain types of business, AmWINS said, which has also resulted in delays in the quoting and processing of submissions.
“While it’s challenging, capacity can still be found in the marketplace, and our brokers are working incredibly hard to optimize each placement,” Tucker continued.
“Adding that, “Some markets have pulled out, while others have already reached or are approaching premium caps set by reinsurers. This is happening much earlier in the year than anticipated, and unless markets can replenish that reinsurance, there will be a further constriction of the market.”
Reinsurance capacity, its price and availability, remains a key driver for the U.S. property insurance market, particularly in E&S or large single risk towers.
ILS capacity therefore influences this further as well.
But of course, for some ILS fund players, the rising property rates in these classes of often catastrophe exposed business present an opportunity, for anyone trying to originate risk from closer to the source.
By partnering with true risk originators, ILS funds and investors can access these higher property rates before the main reinsurance market gets their slice, offering an opportunity to create alpha through sourcing an original and more unique fund portfolio.
Despite the market being so turbulent, AmWINS said it has been able to ensure continuity for clients, adding additional capacity to it’s in-house MGA (SRU), which can only be accessed via an AmWINS broker.
“Several Lloyd’s syndicates have refiled their 2019 business plans to allow additional premium writings,” Tucker explained. “Although we anticipate that a number of these syndicates may have more capacity in the third and fourth quarters, pricing for that capacity will be at a premium.”