ARE YOUR PROPERTY CLIENTS LOOKING AT A REPEAT OF 2005?
A series of disparate factors may be conspiring to harden the market
By Joseph S. Harrington, CPCU
No one can accuse Harry Tucker of seeing the glass half-empty. Over the past few years, the property practice leader for AmWINS, a global distributor of specialty insurance, has vouched on several occasions for the stable, strong capacity available for underwriting property risk.
So, when Tucker sees tough times ahead for property insurance, agents, brokers, and buyers are well advised to sit up, take notice, and take steps.
As Tucker sees it, the property insurance market in mid-2022 resembles the market he recalls from 2005. Back then, following years of “fairly benign” market conditions, a surge of hurricanes and other natural hazards, compounded by a weakening economy, abruptly led to an increase in losses and a decrease in capacity.
“Today,” he says, “economic weakness and uncertainty are exacerbating conditions in an already hardening market. In particular, inflation is driving significant increases in loss adjustment expenses.”
So, apart from widely publicized catastrophe losses and liability verdicts, Tucker says commercial insurers are detecting “loss creep”—persistent in-creases in loss frequency and severity—across their books of business. In response, insurance carriers are lowering the limits they’re prepared to offer, increasing deductibles, and taking other steps to reduce the level of risk on their own balance sheets.
In addition, Tucker finds that several states are addressing the role of public adjusters, with reforms enacted during Florida’s recent special legislative session as a prime example.
While conditions may resemble those experienced in 2005, the response from agents and brokers doesn’t have to be, Tucker says. Thanks to developments in technology, producers have new capabilities for helping their clients optimize the return on their premium dollars.
In 2005, access to online information about individual structures and hazards was in its infancy, and software vendors and service bureaus had barely begun to tap the potential for advanced data analytics.
Today, says Tucker, agents, brokers, and risk managers have rich and varied data resources for identifying strengths and vulnerabilities of a risk, allowing for more targeted purchases and compelling submissions.
“With advances in data analytics, there’s a lot of third-party vendor data available,” he says. “This includes overhead imagery and details on building additions and improvements, as well as information on weather and demographics.”
Given the benefits of all this information, Tucker says, “We’re gathering as much detailed information on a risk as we can get, helping insureds tell their story to the markets.”
Producers selling property coverage also have more options for structuring appropriate coverage than they did in 2005, Tucker adds. Most notably, parametric risk contracts have emerged as mainstream components of large scale property risk programs.
Under parametric risk contracts, an insurer agrees to pay the insured a sum if a loss event reaches a certain magnitude (“parameter”) without necessarily requiring evidence of specific losses. Thus, a parametric contract might make a payment if, for example, a hurricane attained a certain level on the Saffir-Simpson scale or an earthquake reached a certain magnitude on the Richter scale.
According to Tucker, parametric contracts are being used to provide excess layers of coverage to supplement indemnity policies with reduced limits, and to mitigate the impact of deductibles for very severe events.
As Tucker sees it, market conditions resembling those of 2005, combined with advanced methods of risk assessment and risk management, create a renewed opportunity for agents and brokers to engage clients in a consultative role.
One area in which consultation is key is in regards to the valuation of property at risk. In light of widespread reports of inadequate replacement cost limits in the wake of natural disasters, Tucker says agents and brokers play a vital role as the bridge between buyers seeking adequate protection and carriers seeking adequate premium.
“Property valuation was too low before the pandemic, and now the problem is compounded by inflation and supply chain disruptions,” he says. “As carriers seek to increase their valuation, retail brokers need to partner with their wholesale brokers and clients to find the best solution.”
“Today, economic weakness and uncertainty are exacerbating conditions in an already hardening market. In particular, inflation is driving significant increases in loss adjustment expenses.”
Property Practice Leader
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Joseph S. Harrington, CPCU, is an independent business writer specializing in property and casualty insurance coverages and operations. For 21 years, Joe was the communications director for the American Association of Insurance Services (AAIS), a P-C advisory organization. Prior to that, Joe worked in journalism and as a reporter and editor in financial services.