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Inflation, not rates, driving property premium pain – WTW

23rd June 2022 - Author: Daniel Jackson

WTW’s Insurance Marketplace Realities Spring Update reports that property insurance premiums will continue to rise throughout 2022, but these increases will mostly be driven by inflation raising insurable values, as opposed to rate increases.

WTW - Willis Towers Watson logoDouble-digit rate increases are however likely for challenged occupancies such as forest products, metals, waste management, food and beverage, and insureds with losses, protection challenges or cat exposures, as underwriters continue a highly discriminating approach to risk selection and pricing.

Insured natural catastrophe losses for 2021 are estimated at between $105 billion and $120 billion, according to several sources, making it the third highest natural catastrophe loss year since 2011.

No single event caused this upswing, but rather an accumulation of catastrophes, which included hurricanes, floods, tornados and freezes, well exceeded the $70 billion average annual loss since 2011. Secondary perils contributed significantly to the industry loss record yet again. These perils include flood, tornados, hail, extreme temperatures, winter storms and wildfires. The frequency and magnitude of these loss events are an increasing component of loss costs that must be priced for.

Valuation of assets used to produce a schedule of values will be the marquee issue for property insurance buyers this year. Without proper valuation, insureds may find themselves underfunded for retained risk, not properly purchasing adequate catastrophe cover or setting sublimits improperly for key coverage elements.

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The report finds that the “new normal” of more frequent climate change-related natural disasters could render current catastrophe modelling out of date. Other factors include the severe supply chain issues brought about by the pandemic, from availability/price of materials, a shocking shortage of skilled workers in the labour market and longer-duration business interruptions.

Given the frequency of severe convective storms in the southern US along with wildfire in the west, carriers will continue to scrutinise these exposures and exert greater pressure to implement tornado/SCS/hail and wildfire percentage deductibles, though they have yet to be mandated.

The single greatest factor in determining replacement costs is inflation. According to a recent report, four leading construction cost indices saw double digit upswings for the US as of January 2022:

  • Marshall & Swift: +16% to +24.53%
  • RS Means: +15.83%
  • FM Global: +18.4%
  • ENR: +13.94%

For buyers perceived by the market as presenting inaccurate or out-of-date values, underwriters will push for the imposition of potentially claim-limiting clauses, such as the occurrence limit of liability clause, which restricts recovery to no more than 100% of the values reported for each location.

Though there are still hundreds of cases winding their way through the courts, and final outcomes are still years out, thus far COVID claims related to business interruption losses have been substantially decided in favour of insurers. As insurers appear well-reserved for these potential claims, and infectious disease exclusions in property policies are now universal (like cyber exclusions), any further direct pricing impacts from COVID-related issues on property policies appear to be in the rear-view mirror.

What can insureds do to prepare for upcoming renewals? The simple answer, according to WTW, is that the need to differentiate risk has never been greater. They recommend:

  • Starting early and taking control of the renewal with a commitment to broad data collection and data quality.
  • Increased information will help buyers more accurately model any changes (e.g., reduction in limit or increased retention) and help assure that risk management strategies reflect organisational risk appetite or corporate philosophy.
  • Insureds should also consider alternative structures, such as parametric programs, to complement a traditional insurance plan.
  • Buyers need to distinguish themselves from their peers, especially in challenged occupancies. Risk managers must help tell this story and provide the necessary data to satisfy underwriters’ insistence on robust underwriting information.
  • Underwriter meetings are encouraged; telling a story of mitigation efforts, improved loss control measures and disaster recovery/business interruption plans remains critical in differentiating a buyer’s risk. Risk managers need to manage stakeholder expectations as rate increases continue; they should consider creative solutions and alternative structures to mitigate the total cost of risk.
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