With the increasing impact of climate change, the property market is at a critical juncture. With migratory, economic, and regulatory trends amplifying the impact of natural catastrophes, the US has experienced significant increases in CAT risk exposures. Although daunting, this challenge presents a unique moment for insurers to leverage the current hard market, creating and strengthening robust partnerships.
Current challenges
From 2020 to 2023, the United States has seen four of the six most costly years for natural disasters since 1980, with 2023 setting a record of 28 billion-dollar events. As insureds have moved in droves to the wind, hail-exposed states of the south and named storm-exposed coastal regions, these events have become even costlier, and the insurance industry has felt mounting pressure. With increased construction and housing demands, a red-hot inflationary environment, and resultingly complex risk assessments, many re/insurers have struggled to adapt.
Market response and opportunities
As a response, a multitude of insurance carriers have limited their participation or entirely exited challenged markets, most namely Texas, Florida and California, leaving opportunity for others to selectively adopt preferred risks. Reinsurers have significantly reduced capacity deployment as well due to the excessive costs (up to 30% ROL on Jan 1, 2023, for US and European Cat reinsurers), pushing more risk retention onto carriers. However, as the market has adjusted to retracted capacity, new opportunities for profitability and growth have emerged. After years of moderate losses and inadequate pricing, the surge in catastrophe losses since 2015 has resulted in significant rate rise.
With amplified calls for an alternative to the inefficiencies of the admitted market, the Excess and Surplus (E&S) market has responded with innovative solutions and exploded as a result, growing 32.4% in 2022, with an additional 15.9% growth in just the first half of 2023. Commercial property rates have been rising for 26 consecutive quarters – the latter 14 quarters have reported a minimum average rate increase of 10.5% and a maximum of 20.4%. As of Q4 2023, commercial property continues to have the highest average reported rate increase of all lines of business, signaling a strong and potentially sustainable profitability trend if managed wisely.
Looking ahead
In this challenging environment, reinsurers and carriers must focus on balancing short-term gains with long-term strategies. Reinsurers have an opportunity to tap into a generational market characterized by all-time high pricing trends and restrictions of terms and conditions. At the same time, carriers can refine their operations, invest in improved risk modeling technologies, re-underwrite exposures, maintain adequate pricing, and strategically diversify their offerings. Those who preemptively positioned themselves as highly scalable and adaptable are now seeing the benefits of stable and profitable relationships.
As we move further into 2024, the market is approaching reasonable stability, supported by easing inflationary pressures and improved pricing. This opens opportunities for carriers and reinsurers alike to forge profitable, long-lasting partnerships that can weather future market fluctuations. The time to act is now, leveraging this evolved market landscape for sustained success.