The primary and excess property insurance market has been impacted by catastrophic weather events that are occurring with greater frequency and severity. This has challenged existing underwriting models, pricing, and capacity. Secondary perils such as hailstorms, freezes, tornadoes, floods, and wildfires are also happening more frequently and not only cutting into carrier profits but also causing reinsurers concern as massive losses combined with investment volatility have led to a reduction in capital.
As a result, we’re seeing reinsurers scale back capacity, which is poised to continue with January 1, 2023 property renewals, particularly in light of Hurricane Ian’s destruction in Florida. A recent article in The Wall Street Journal, in fact, highlighted negotiations taking place between insurers and reinsurers who are expecting to raise rates by 10% to 30%.
Looking for Solutions
As insurance brokers face a challenging primary and excess property market with increased rates, tighter underwriting guidelines, and limited capacity, more accounts are moving into the Excess & Surplus Lines (E&S) market. The E&S market can look outside the box of risk characteristics on individual accounts. For example, an admitted market might not choose to write habitational risks, whereas the E&S market will provide a home for such risks. Non-admitted insurers also review the totality of an account, not just one factor which may fall outside of their appetite.
On the excess insurance side, an E&S property carrier will typically provide a layer of coverage on the account. For example, at Seneca Insurance Companies, in addition to providing primary property insurance, we can also write the top excess property layer for certain business classes.
With layered coverage, long-term pricing fluctuations and potential coverage gaps can be averted. In addition, layered coverage eliminates the need to replace the entire insurance program in the event of a loss and allows high-risk properties to restructure only the affected portion of the policy. In a layered program, the E&S carrier will use either the primary carrier’s policy form or its own policy form while recognizing the primary policy’s loss limit as a deductible.
Getting Proper Coverage
It’s critical to provide an underwriter with accurate data on the property to establish limits, buy reinsurance, and price the account properly. This includes:
- The year the property was built and any dates and details regarding any property updates, construction, or occupancy
- An up-to-date building valuation inclusive of accurate square footage
The age of the building and any updates made to properties are important due to changing, more robust building codes over the years and a building’s resiliency during a severe weather event. For example, Hurricane Charley destroyed Punta Gorda, Florida, in 2004. In the aftermath of the storm, the city rebuilt its homes and buildings in accordance with modern, updated building codes that incorporated stringent requirements, including the use of impact-resistant windows and hurricane shutters. When Ian brought torrential rains and winds of up to 130 miles per hour to Punta Gorda, homes and buildings were mainly undamaged this time around.
Underwriters have always been concerned about property values related to insurance-to-value (ITV) and undervaluation. Today’s high inflation, labor shortages, supply-chain disruptions, and cost-of-construction increases are impacting ITV. Underwriters are diligently examining values as property claims are being impacted by inaccurate ITVs. Underwriters need accurate values to establish limits, buy reinsurance, and price programs adequately. Failure to correct ITVs may result in higher rate increases and the inclusion of coinsurance clauses and penalties.
Seneca Insurance Companies provide primary property coverage, including catastrophe perils based on location and risk characteristics. We also provide excess layers for certain low-hazard occupancies, including habitational, LRO, office, mercantile schedules, and hotels/motels.