What We Saw in Q1
As we moved from the last quarter of 2019 into the first quarter of 2020, the property market was on a steady firming trend that began in February of 2019. Underwriters were capturing rate as they moved pricing, terms and conditions closer to what their “technical underwriting” standards dictated.
2019 brought a return to underwriting profitability following the horrendous catastrophe loss years of 2017 and 2018; the worst and third worst respectively, in history. Entering 2020, underwriters worked to maintain the firming momentum and first quarter property renewals saw average rate increases in the following categories:
- No Losses and not Cat exposed: 5%-20%
- Cat exposed: 10% – 40%
- Losses and Cat exposed: 20% – 50+%
The Impact of the Pandemic
Nearly 5 months into 2020, things have changed like never before. COVID-19 has jolted the way we work, brought into question how property policies should respond to “black swan” events and impacted how underwriters are approaching renewals and new business. What was already an increasingly difficult market, has quickly accelerated from a “firming” market to a “hard” market.
While it may take months, or years, to determine how property policies will respond to physical damage and business interruption claims resulting from COVID-19, the impact of the pandemic is already manifest in the renewals underway now.
The specific coverage changes in property policies directly related to Coronavirus have essentially been a tightening of contamination exclusions, adding specific exclusions for communicable disease, or a significant lowering of limits for those policies that do provide some coverage.
A more significant direct impact has been on the underwriting process. With underwriters and their modelers working from home, the process and flow of renewals have slowed dramatically. On-site risk control visits to provide underwriters with information they need to assess risks have been suspended. Face-to-face meetings and site visits with underwriters have been replaced with video conferences and conference calls. Underwriter referral processes are backlogged. Everything takes more time now.
What We Are Seeing Now
The hardening conditions that have accelerated in the second quarter of the year are not intrinsically tied to the pandemic itself but are no doubt a symptom of the natural retrenchment that develops in times of uncertainty. Conservatism is ruling the day.
Many carriers are cutting back significantly on capacity being offered at renewal. Some carriers have pulled out of the property market completely. Others are exiting industry classes and/or occupancy types. The lowering of line sizes in shared and layered programs creates gaps that need to be filled with new capacity. This cutback in capacity directly impacts renewal pricing, as the days of plentiful capacity to use as a leverage tool to blunt rate increases from incumbent carriers are gone.
Some underwriters are non-renewing accounts within particular industries, including food, wineries, high-tech, school districts, waste and recycling, frame habitational, auto dealerships and chemical risks. These industries are seeing the most severe restrictions in carrier capacity, deductible increases and rate hikes.
Coverages, Terms & Conditions
There has been a significant cutback by many carriers on the first party cyber coverage that gradually made its way into property forms over the last decade. Contingent Time Element coverage continues to draw increased scrutiny and restriction as does coverage for convective storms and, as mentioned, communicable disease.
Pressure exists to increase deductibles across most classes of business. Some carriers are imposing minimum deductibles in certain classes and converting flat dollar Time Element deductibles to a number-of-days multiplied by a daily Time Element value. Underwriters are also looking to increase deductibles to eliminate attritional losses, such as water damage, especially in the real estate sector. High hazard wind and flood percentage of value deductibles, which were reduced during softer market conditions, are now being tested as well. Convective wind deductibles for events like tornadoes and hail are being looked at with percentage deductibles similar to named storms, as is wildfire.
Whether loss-free, or not, accounts are experiencing rate increases across the board. Rate increases have accelerated in the second quarter of the year. A contributing factor to this is the capacity cutbacks noted above. Carriers looking at new business are approaching it with technical, modeled pricing and not with aggressive competitive terms and premiums to gain market share. Profitability is now the mantra and overshadows new business growth goals. What was too expensive capacity in the past is now often needed to complete a program, driving up the overall price.
While no one knows how the insurance market will ultimately respond to the situation we are now facing, what we do know is that things are different now and may be forever. It is important to set realistic expectations for the various stakeholders and start renewal discussions early. The process will take longer, and time and thorough preparation will be needed for a successful marketing effort. If a rate increase was experienced at last renewal, it’s important to understand where that put the program relative to the carrier’s overall pricing and capacity goals for the upcoming renewal. Identify new potential players and get in front of them early. Be open to options, including increased retentions, reducing sublimited coverages and/or alternative terms and conditions.
EPIC’s Property Practice is comprised of industry veterans. Our team’s brokers, loss control engineers, modelers and claims professionals can set, enable and execute a strategy to guide our clients through the most adverse market conditions. We’ve collectively seen just about everything, and we stand ready to assist in any way.
For more of EPIC’s coronavirus coverage, visit epicbrokers.com/coronavirus