State of the Insurance Market

Taking a look at 2020 trends and beyond.

By BRADEN GRIFFITH, Higginbotham

Think about this: COVID-19 will have the same effect on the market as three catastrophic natural disasters. While the world and the media are focused on the present impacts of COVID-19, the financial strain of this pandemic will have lingering effects for years to come.

The insurance market is the hardest it has been in nearly a decade. Almost all markets and lines have been affected with the habitational industry facing the brunt of it all. First, it makes sense to explain what exactly a “hard market” is in insurance. A hard insurance market is the opposite of a soft insurance market. During a soft market, rates are lower, high limits are available and insurers are eager to write more policies. During a hard market, rates are increased, high limits are harder to find and insurers are hesitant to write more insurance policies. In a hard market, underwriting becomes stricter and coverage may be limited. In partnership with AmWins, a specialty distributor of property, casualty and professional lines insurance products, here is some data that describes what is happening and why.

COVID-19

Let’s start with the most pressing and time sensitive factor: COVID-19. • In May, Lloyd’s, an insurance and reinsurance market located in London, United Kingdom, reported it will pay at least $3B and as much as $4.3B as a result of the far-reaching impacts of COVID-19. In comparison, this amount is approximately equal to losses incurred due to 9/11, or the combined losses due to Hurricane Harvey, Hurricane Irma and Hurricane Maria. • Insurers are also concerned about the long-term impact of the pandemic on claim activity that was not accounted for in their rate development or policy wording. • Though communicable disease exclusions and other policy form modifications are being added to policies in almost every

The National Centers for Environmental Information said that 2019 was the fifth consecutive year in which the United States experienced 10 or more natural disasters causing at least $1 billion in losses. This is unusual. In the last 40 years, only four other years had 10 or more natural disasters with $1 billion or more in losses. In 2019, there were 14 such events, including three floods, two tropical cyclones, eight severe storms and one wildfire.

segment, there are lawsuits and legislative measures proposed that provide coverage to anyone who purchased business income insurance regardless of policy language.

Think about this: COVID-19 will have the same effect on the market as three catastrophic natural disasters. While the world and the media are focused on the present impacts of COVID-19, the financial strain of this pandemic will have lingering effects for years to come. Although the market was starting to see some stability after the spikes seen in Q3 and Q4 of 2019 and Q1 of 2020, it appears that the curve will not flatten as quickly as we had hoped or expected.

Property Market – Natural Disasters to Blame

The state of the insurance market typically goes in cycles, and many factors contribute to the hardening or softening of the market, however, natural disasters appear to be a key element in the current market conditions.

The National Centers for Environmental Information said that 2019 was the fifth consecutive year in which the United States experienced 10 or more natural disasters causing at least $1 billion in losses. This is unusual. In the last 40 years, only four other years had 10 or more natural disasters with $1 billion or more in losses. In 2019, there were 14 such events, including three floods, two tropical cyclones, eight severe storms and one wildfire.

These natural disasters have a significant impact on insurers. Particularly in high-risk areas, insurers are offering less coverage, raising rates and canceling some policies. The multifamily and habitational industry has felt this impact more than others. Apartment properties and management companies are currently among the most challenging to place in the property sector, with the impacts of COVID-19 further complicating such placements.

“Throughout 2019, we experienced carriers requiring a combination of rate and deductible improvements in an effort to achieve underwriting profitability in this class,” Bob Black, the executive vice president and a national real estate practice leader for AmWINS, said.

With all of this said, the importance of good data is key – the better the narrative to the market, the better the renewal an account should see. The primary points of data that carry the heaviest burden are previous loss history, age and construction of the property as well as any implemented updates and security measures. As to the kind of renewals that should be expected, please see the excerpt below from Black.

“For multifamily accounts with a relatively clean loss history, appropriate valuation and a stable carrier panel, a rate increase between 15% and 22.5% is a common outcome currently,” Black said. “To the extent an account has meaningful losses during the policy year, a string of problematic years of loss history, important incumbent markets exiting the program and/or undervaluation, a rate increase between 25% to 40%+ is a common outcome currently.” In response to COVID19, “As a part of carrier renewal offers, many Property carriers are meaningfully reducing or eliminating coverage for anything that doesn’t have a direct physical damage trigger associated with it,” Black shared.

In an effort to deliver some good news, insurance buyers can, barring anything unforeseen, find some consolation in the fact that rates may level out toward Q4 2020.

Casualty Market Joins the Party

Aside from the property market, the liability/casualty market has also taken a turn. Due to events such as the wildfires in California and the shooting in Las Vegas, the insurance market has paid north of $1B in losses over the past few years.

“In the casualty space, capacity restrictions within the excess sector are the most prominent,” Tom Dillon, a national casualty practice leader for AmWINS, said. “The trend of reduced capacity and increased rate started prior to the COVID-19 outbreak, but effects of the pandemic have added additional pressure to not only rate but the terms carriers are willing to offer.”

In regard to general liability, due to an increase in claims severity and frequency, standard carriers and programs are no longer writing risks with losses or those in undesirable classes, such as senior living, Section 8 or student housing. “These accounts, which two or three years ago would have been written guaranteed cost, are now in the [surplus] market having to take large [self-insured retentions (SIRs)],” Jack Reid, senior vice president with AmWINS Brokerage in Los Angeles, CA, said. “Insurance agents should prepare their insureds that they may have to accept larger SIRs between $50,000 and $500,000. On the excess liability (umbrella) side, standard markets and programs are losing their [appetite] or drastically cutting back capacity. Historically, these accounts … were severely underpriced, making the new, more realistic pricing a difficult pill to swallow for insureds.”

Although this article has been chocked full of doom and gloom, it stresses the importance of internal and external risk management to help mitigate the uncertain financial impact the necessary evil of insurance has for

the multifamily industry. These impacts apply regardless of function, whether you’re involved in ownership, development or prop- erty management. For my friends in the sup- plier community, it’s important to under- stand what issues your clients are currently facing and how you can best serve them mov- ing forward. Stay safe out there, and cheers to another year of membership in the best apartment association in the United States.

Braden Griffith is an asso- ciate for Higginbotham, a single source for insurance, risk management and finan- cial services. Griffith is a commercial insurance broker, focusing his practice and managing risk within the commercial real estate, habitational and private equity worlds. Primarily focused on working with firms with portfolios in Texas. Their team is experienced with clients in excess of $4B in assets and understands development (new and existing), construction, management and acquisition/exits. Higginbotham provides access to commercial and personal prop- erty/casualty coverage, employee bene- fits, retirement plans, life insurance and executive compensation plans. Their inhouse consultants also deliver custom loss control and benefit plan administra- tion solutions. Higginbotham's breadth ensures that clients of every scope and size have competitive options without engaging multiple brokers. Feel free to reach out to Griffith with any questions at bgriffith@higginbotham.net.

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