The 2023 property and casualty insurance market including personal lines continues to face significant challenges. Pricing appears to have moderated, becoming more predictable following a multi-year period of rate tightening and underwriting correction. Global economic conditions impacting these lines of coverage include rising inflation and interest rates, legal financing, large settlements and jury verdicts. While pandemic conditions have eased, backlogged U.S. court systems have accelerated claim activity. Our conversations with insurance companies indicate serious concern over rising claims inflation. This inflation is taking many forms (economic, social, and medical) leading to increased severity and settlement costs.
We expect that insurer CAT capacity deployment will continue to constrict and be tightly controlled. We are seeing loss driven accounts and risks with the highest catastrophic exposures experiencing the most significant pricing increases for property coverages.
Several recent catastrophic weather events have played a major role in shaping the insurance marketplace. Major hurricanes have made landfall in the U.S. five out of the last six years. A major winter storm and cold blast hit in December 2022 bringing snow and freezing conditions as far south as Texas. A series of storms in California and subsequent flooding produced damage estimates exceeding $31 billion. Eight million residents remained under flood watches for a period of 17 days. The increase of severe convective storms continues to heavily impact the southern U.S. such as Florida, Texas, and Louisiana. Several insurers have now mandated higher percentage deductibles for named storm, wind, and hail perils. Finally, wildfires engulfed hundreds of thousands of acres in the U.S. over the last several years. In 2022, there were a total of 7,621 recorded wildfires in California for a total area of 363,917 acres.
Many carriers have confirmed that the reinsurance marketplace across property and casualty lines have increased rates and changed terms in 2023. January 1 reinsurance treaty renewals reflected a significant upward trend in pricing over the prior period, and this trend is expected to continue in mid-year negotiations. These changes are likely to affect binding authority and brokerage business as reinsurance plays a significant role in carrier capacity deployment in all segments.
For the past several years, primary insurance carriers (cedents) have reported much better results than their reinsurer partners creating a need for a better balance. A prolonged soft market cycle in reinsurance stemmed from a previous period of excess reinsurance capital which is no longer the case. A.M. Best has noted there was an estimated $40 billion reduction (-8.4% decline) in traditional reinsurance capital at year-end 2022.
Potential reasons for the erosion of reinsurance capital:
- Consecutive annual catastrophic loss events starting in 2017
- Higher-than-expected frequency and severity of overall storm activity
- COVID pandemic impacts including riots
- Wildfire activity
Our view is that the reinsurance market is re-calibrating the economic value of underlying exposures and expected loss costs (frequency & severity). Further, we have seen other forms of reinsurance capital (retro capacity) significantly tightened. Primary carriers have reported an increase in net retentions with reinsurers unwilling to support lower attachment layers of Cat Excess towers. Carriers have also reported that this has contributed to a substantial firming of rates, tighter policy language, reduced occurrence limits, and tighter reinstatement provisions. According to a recently issued Gallagher Re report, property catastrophe reinsurance rates for many insureds have jumped between 45% and 100%. The consensus is that new capital in-flows will not begin in a meaningful way until reinsurance markets demonstrate healthy returns in the coming quarters.
We have observed the following trends with regards to property placements:
- Policy coverage restrictions for property placements are increasing while carrier appetites for higher hazard business is decreasing.
- Property underwriting concerns remain reinforcing the importance of insured’s estimating proper insurance to value (ITV). Estimating proper ITV is top of mind for carriers, wholesale brokers, and retail agents alike.
In 2023, carriers appear to be maintaining a disciplined approach targeting rate adequacy and profitability. Insureds with difficult classes and / or poor loss histories may face challenging renewals. Primary insurers in our view are getting closer, but reinsurers have taken major action potentially prolonging the hard market cycle.
McKinsey Global Insurance Report 2023
NOAA National Centers for Environmental Information
A.M. Best- Global Reinsurance and Guy Carpenter
Bitner Henry - The Importance of Correct Property Valuations for Commercial Coverage
RT Specialty – Property Insurance Review
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