U.S. catastrophe exposed property rates to rise significantly in 2020: WTW

Catastrophe exposed property insurance rates in the United States are forecast to rise significantly in 2020, with underwriters of both loss free and loss impacted accounts likely to see rate increases of at least 10% and 30%, or even higher, in some cases.

This is according to the latest data and outlook from insurance and reinsurance broker Willis Towers Watson, who says that North American commercial insurance buyers can expect rate increases across more of the market than seen for a number of years, while in many cases these rate increases will be sizeable.

Following the impacts of catastrophe losses over consecutive years and the additional inflation from social factors and loss creep, the U.S. property insurance market is seeing rates respond.

The pace of this response may not be seen as fast or significant enough by some, but for many the prospect of rate increases of more than 10% signals opportunities to deploy more capital in the year ahead.

Encouragingly though, Willis Towers Watson reports that while there is capacity available in all but the most challenged lines, the broker believes that underwriters are showing unprecedented discipline in deploying it, which suggests rate increases could be stickier than in previous years.

Buyers and “sitting squarely in a seller’s market” the insurance and reinsurance broker notes, with 19 lines of business expected to see price increases in 2020, according to WTW’s latest data report.

“We’re seeing the biggest upward price shift in years. We expect rate hikes and capacity constrictions will continue throughout 2020 and likely into 2021, but a more orderly market to emerge by mid-2020,” said Joe Peiser, global head of Broking, Willis Towers Watson.

“Nevertheless, as the market seeks equilibrium, there are reasons for optimism: The alternative capital market is showing renewed enthusiasm for reinsurance; the overall industry has more capital than ever; insolvencies are a rarity; InsurTech is working with market participants to improve the client experience, and the laws of supply and demand still apply. This challenging market won’t last forever,” Peiser continued.

Encouragingly for third-party reinsurance capital players and in particular the insurance-linked securities (ILS) funds that access primary insurance risks through MGA’s, partnerships and other sources, catastrophe exposed property rates are expected to be some of the biggest moves in 2020.

The reasons for the accelerating hardening of rates are many, with factors related to profitability key but encompassing such varied issues as loss experience and loss costs, the low-yield investment environment and also accumulating attritional losses that are impacting insurers results.

Across commercial property lines of business, WTW said that, “extreme catastrophic weather and wildfires since 2017 have had a direct impact on pricing, prompting conditions to harden with sustained escalation in rates.”

Non-catastrophe exposed property lines of business are expected to see increases as well, with rates expected to be up +5% to +15% in 2020.

Catastrophe exposed, but loss free, property accounts are expected to see rate increases ranging from +10% to +20% in 2020, the broker expects.

But it is the catastrophe loss affected accounts and areas of property insurance that are likely to see the most significant rises, with rate firming of +15%, to +30% and even higher in some cases.

In fact, WTW said that above it’s baseline property insurance rate pricing predictions, it expects to see a U.S. micro-hard market for challenged accounts and occupancies that have experienced particularly poor losses and/or risk control deficiencies, which may result in rate increases of 50% to 100% and even as much as 400%, the broker predicts.

These increases are particularly significant and will have to move reinsurance pricing as well, as reinsurers will expect insurers to pay more for their protection, as they are expected to make progress in recouping loss costs on the front-end of their businesses in 2020.

For the ILS funds that have more direct access to catastrophe exposed property insurance risks, or that provide large chunks of capacity to back pools of primary exposure, benefiting from these rate increases may happen more rapidly than those just writing reinsurance achieve.

Similarly, those supporting property insurers quota share reinsurance arrangements may also benefit faster, as the reinsurance renewal cycle may mean benefits flow more slowly, while capital will also be a factor in just how much of this hardening actually makes its way into the reinsurance world.

So this is another signal that firming may persist for longer, or at least be more pronounced, than had perhaps been anticipated just a few months back.

However, these rates may not last for long, if ILS capital and reinsurers make efforts to deploy more capacity to take advantage of increases. Making for a potentially fascinating set of renewals coming up, as it will be interesting to see if reinsurance keeps pace with this acceleration.