Hurricane Ian Disrupted Move to Property-Casualty Market Stabilization

Palm Trees In Hurricane Through Window

December 14, 2022 |

Palm Trees In Hurricane Through Window

The property-casualty insurance market appeared to be moving toward stabilization until September's Hurricane Ian arrived as a major event for both insurers and reinsurers, a new report notes.

In a December Lockton Market Update, Property Challenges Largely Stable Market, the broker notes that this year's Atlantic hurricane season ultimately was the third most expensive on record, with $110 billion in total losses, $65 billion of which were insured, according to Munich Re.

"This has created a potential imbalance between supply and demand," Lockton says. "Cedents are seeking to lay off risk, while reinsurers are hyper-focused on returns."

The current situation leaves three major questions for the property-casualty insurance market, according to Lockton.

  • How will reinsurance and insurance capacity be deployed in 2023?
  • At what terms will capacity be deployed?
  • Will issues in the property reinsurance market impact other lines as well?

Despite the third quarter's catastrophe losses, the overall results for property-casualty insurers during the period were positive, continuing a trend that has existed over several quarters, Lockton says. Despite reinsurance market uncertainty, insurers are reporting both profitability and growth, as well as generally healthy combined ratios and growth in net premiums written.

At the same time, however, accumulating property catastrophe and automobile losses are problematic for the property-casualty industry, according to Lockton. The broker notes a recent A.M. Best report that said the property-casualty industry experienced a $24.3 billion loss over this year's first 9 months. "Insurers with the greatest exposure to personal lines and property saw the most significant impacts," the Lockton report says.

As 2022 ends, property remains the biggest story in an otherwise predictable insurance market, Lockton says. "Conditions across many major lines, including directors and officers liability, cyber, and umbrella/excess liability are better and more competitive than they have been in recent years," the report says. "Workers compensation also remains favorable to buyers and countercyclical to the broader market."

Lockton cites several trends to watch that it said will have both positive and negative implications for insurers and insurance buyers.

Rising costs are the first significant trend, according to Lockton. The broker notes that inflation, labor shortages, and supply chain disruptions are combining to increase the economic costs of goods and services, driving up replacement and repair costs, extending recovery times, and heightening the focus on valuations.

"Even as world governments take action to stem inflation—including raising interest rates—the ongoing crisis in Ukraine and disputes between the [United States] and China could lead to more disruptions and higher costs for fuel, semiconductors, and other critical goods," the report says. "And while labor conditions remain healthy for now, layoffs are accelerating in bellwether industries such as banking and technology."

Insurers' heightened scrutiny of valuations in the current climate is "functioning as a secondary rate increase," Lockton says, but a global recession could lead to a decline in insurable exposures, adding pressure to rates for insurance buyers.

Investment yields are a second trend to watch, according to Lockton. While rising interest rates are producing positive return momentum on insurers' new and rollover investments, some insurers are still reporting near-term losses due to declines in value of exiting bond portfolios and equity market volatility.

Reinsurance market pressures are the other significant trend to watch, the Lockton report suggests. Reinsurers' returns have suffered over the past decade as the frequency and severity of catastrophic property losses increased, Lockton says.

"Hurricane Ian will ultimately cost the insurance industry an estimated $50 billion to $65 billion, making it one of the largest disasters in US history," Lockton says. "It also exacerbated market conditions, setting the stage for difficult January 1, 2023, treaty renewals."

Insurers and property insurance buyers are keeping a close eye on three aspects of the reinsurance market, the Lockton report says.

  • Reinsurance capacity. "Not only is capacity expected to decline from 2022, it will also be deployed differently," Lockton says. "Some carriers may find it difficult to secure capacity at expiring structure, and prices will be sharply higher."
  • Retentions. As reinsurers look to reduce their loss frequency, they're expected to push for higher attachment points while being more selective about cedents.
  • Pricing. Even before Ian, it was generally acknowledged that reinsurance prices hadn't kept pace with increasing losses, Lockton says. Reinsurance prices are expected to increase significantly, with those increases ultimately being passed on to retail insurance buyers.

"As we enter 2023, both uncertainty and opportunity remain," Lockton says. "Absent CAT-exposed property risks, however, most insurers are still looking to grow and compete for attractive risks. This can be a net positive for organizations that plan strategically amid upcoming renewals."

Lockton offers several suggestions to insurance buyers as they move into 2023.

First, they should start early, recognizing that renewals—especially for property coverage—could take significantly longer than in the past, the report says. Building additional time into the renewal process can help buyers better address underwriters' questions and provide time to explore alternative risk transfer options.

Buyers should also use analytics in structuring their programs, working to understand their risks and the adequacy of their limits and policy minimums, according to the report.

They should also consider alternative risk transfer options such as captive insurance, parametric insurance policies, and structured risk products, Lockton suggests.

As they prepare for additional scrutiny from insurers with respect to collateral, buyers should look for ways to clean up their balance sheets and manage their credit, Lockton says in the report.

Buyers should focus on variable costs. Workers compensation is one of the largest controllable expenses for many employers, Lockton notes, and investing in identifying and eliminating cost drivers could help reduce overall expenses.

Finally, buyers also should consider total cost of risk, weighing possible capital expenditures such as engineering and structural controls that could reduce property risks amid a difficult property insurance market and the continuing impact of climate change.

December 14, 2022