2023 is shaping up to be a year of property and casualty insurance premium rate increases in tandem with additional coverage restrictions. This is led by a sharp rise in rates for cyber coverage (up 20%) and commercial property (9.3%) as well as high, single- digit boosts in other coverages. While higher premiums and decreased benefits are never welcome, it is important to understand what is driving premium increases and what this means for the immediate future. The answers can be found in the reinsurance marketplace – a marketplace that has been upended in recent years due to unprecedented global events.
To spread the risk of providing insurance coverages so that premium pricing is based on a wide swatch of insureds, and so that a single event causing a high volume of claims does not bankrupt an insurance company - insurers reinsure the risks they underwrite. A ‘front-line’ commercial insurance company takes some of the premiums clients pay, turns around and pays that premium to reinsurers who assume a large portion of the responsibility to come up with the capital to pay claims. As a result, the claims experience of the major reinsurers drive the price these reinsurers charge front-line insurance companies which, in turn, adjust their premiums charged to end clients accordingly.
A convergence of events led to the hardest property- casualty market in a generation, according to recent reports from institutional brokers Gallagher and Howden Re. The impact of COVID-19, Hurricane Ian and the war in Ukraine combined with 40-year high inflation, rising interest rates, market volatility and a challenging cyber market made 2022 not only a costly year for reinsurers, but left questions how to accurately price premiums from front-line insurers.
2023 is already shaping up to be equally challenging for reinsurers with the war in Ukraine continuing, devastating flooding in California and rare, January tornados in the middle of the U.S.
Unquestionably, property was the most difficult market. Some reinsurers even withdrew from reinsuring property risks in 2022 after needing some time to analyze how to reenter the space with appropriate pricing. Most have since done so but joined their peers in being late to the typical time-of- year to negotiate reinsurance treaties and set premiums. This trickled down to many front-line insurers not having treaties and pricing in place to communicate to brokers and their clients regarding annual renewals or, in some instance, for new coverages. “Clients may have found themselves in limbo as target dates for renewals came and went,” says Lisa Gelles, Executive Director, Private Risk, at Howard Insurance. “Fortunately, we were able to receive information regarding rates and coverage terms and conditions from insurers for most of our clients in time to secure renewals.”
There is no sugar-coating the result of last year’s ‘hard’ reinsurance market - premiums rose. According to a January 2023 report by MarketScout, here are the composite rate increases in Q4 of 2022 by coverage class:
Commercial property: up 9.3%
Business interruption: up 3.7%
Business owners’ policy: up 5%
Inland marine: up 3.7%
General liability: up 6.7%
Umbrella/excess: up 7.7%
Commercial auto: up 7%
Workers’ compensation: flat, 0%
Professional liability: up 5.3%
Directors’ and officers’ liability: up 6%
Employment practices liability: up 6.3%
Fiduciary: up 2.3%
Crime: up 2%
Surety: up 1.3%
Cyber: up 20%
Premium increases are not the only way reinsurers address cost increases and market uncertainty. Altering terms and conditions in treaties with front- line insurers also controls costs and is essentially a form of premium increase. By restricting conditions under which a claim can be paid, reinsurers can further mitigate losses. For instance, many treaties are now calling for coverage only for ‘named perils’. Named perils policies cover only the events listed in the policy. For example, a named perils policy that only covers floods won’t pay for damage to your home caused by a fire.
It is critical to take the time to understand policy terms and conditions to avoid unexpected liabilities.
Some Mixed News
Some good news - several factors soon may contribute to a positive financial environment for reinsurers. First, the expected inflation-driven increase in demand did not materialize as buyers generally did not seek coverage increases after conducting a cost/benefit analysis. By limiting increases, reinsurers are protected from the potential claims resulting from such additional coverages.
Next, it appears at the beginning of 2023 that reinsurers have a grip on pricing and what provisions to include in treaties to stabilize their operations. In combination with the extent of the stock market’s correction being identifiable, this signaled an opportunity for investors. Throughout the end of 2022, investors kept their capital out of many markets, including insurance. This recently changed with an increase in capital in-flows to the reinsurance market where investors see an opportunity for investment income.
While these developments are positive and could lead to the moderation of front-line insurance premium rate increases, rates are still expected to climb in the immediate future. Reinsurers will first need to stabilize their own financials so that shareholders are satisfied. This may not be an easy task as the war in Ukraine wages on and, as noted, a few property- related catastrophes are already on the books for 2023.
Howard Insurance is not an agent of a single insurance company. Our experienced team brokers the coverage needs of our clients to negotiate the best outcome. As volatility and uncertainty impacts the insurance market, we can be counted on to serve as advocates for our clients. For over 75 years, Howard Insurance has helped each of our select clients secure their assets, their ambitions, their businesses and, ultimately, their legacies. Leaders in private insurance advisory and risk management, we pair deep expertise with sincere attention to our clients’ needs to create unique solutions that benefit them best.