Commercial property underwriters are adjusting to a market defined by rising catastrophe losses and dwindling profits. From increasing rates and higher deductibles to fewer classes of business and stricter underwriting, even the best in class properties are feeling the heat.
Overall, commercial property rates have risen several percentage points even for buyers not facing catastrophe risks, according to Willis Towers Watson. For those with significant cat exposures or adverse losses, the rate hikes are in the double digits in the aggregate for the first time in several years.
Commercial property insurance renewals generated rate increases between 5% to 10% for the best accounts, while some property programs saw increases of upwards of 50% or more in 2019, according to Woodruff Sawyer, an Insurance Journal Top 100 Agency.
Casey Soares, senior vice president, property specialist at Woodruff Sawyer, says that while there's plenty of capacity available in the market, carriers are scrutinizing every piece of business and re-underwriting commercial properties, in particular.
The heightened attention is part of an effort to turn the market around following the surge of single risk losses during the past few years, she said. The 2017 Atlantic hurricane season was one of the costliest seasons on record with combined insured losses of more than $200 billion from Hurricanes Harvey, Irma and Maria. Then in 2018, California experienced its most destructive wildfire season ever with insurance claims surpassing $12 billion.
"These events are what spurred this market turn," Soares said. "That's causing carriers to look at each account and make sure they're making smart decisions and actuarially sound rates and coverage." It's been an "across-the-board dedication" to transform the market.
While the adjustment has been good for the insurance industry, it's a challenge for commercial property owners who are facing insurance costs based on a "true reflection of risk," she says, noting that's a difficult adjustment for any insured.
Agents say habitational is the most challenging commercial property risk today. "Anything frame construction, especially frame builder's risk," Soares said. "Habitational is truly a hard market where there is a lack of capacity."
Accounts with a high loss potential such as those in manufacturing, with a hazardous or combustible risk profile, can also be tough in today's market, she says.
Despite the re-evaluations going on, even in the toughest classes of business, there's some carrier willing to write the property coverage. Barry Whitton, managing director for Burns & Wilcox Brokerage, contends market capacity is not an issue, although more stringent requirements on that capacity are.
"I think there's been an uptick of companies underwriting more, restricting their capacity usage more," he said. "There is less of a willingness to use that capacity for a cheap price."
Even the standard commercial property market is experiencing rising rates, albeit at a slower pace, Soares said.
It was tough year for property in 2019, and 2020 is not likely to be better, says Alex Silva, vice president, commercial lines, RIC Insurance General Agency, a division of Worldwide Facilities.
For Silva, who sees some of the most challenging commercial properties in California, rates were up as high as 50% to 100%. Every day he sees carriers writing property accounts with more restrictions and some pulling out of certain geographies all together.
"I'm constantly getting non-renewals on properties that may be seen as now too close to brush, or too close to water." Underwriting is much tighter, too. Older properties, even those that have been fully upgraded, are considered undesirable, he says. Tenant occupancy is sometimes an issue, as well.
Properties that have been great risks, with no claims history but are too close to the Malibu region are getting nonrenewed because of location, he added.
For the higher risk properties, like those in Malibu, there just isn't much property owners can do that would make their building a favorable risk right now to carriers, Silva added. But agents can play a huge role when it comes to education, he said. "Just providing information to their insureds on why these changes are happening in the insurance market, helps," he said. "The insured may not like the reason, but at least they know why it's happening."
And if they aren't happy, then let them shop the coverage, Silva says. "Shopping will just validate what you are already telling them."
The good news: the market is pushing insureds to take better control over their property programs, which is a good place to encourage this because most risks are controllable, according to Soares.
'I think there's been an uptick of companies underwriting more, restricting their capacity usage more.'
"With property we can really help clients put together long-term plans and see where it makes sense to make investments in their overall risk," she said. Of course, she advises her clients to not only earmark additional money for the rising cost of premium, but to also consider making investments toward risk improvements and funding higher deductibles for the long term.
"I think that's the only way people are going to get through this hard market ... if they feel like they have some control over it and clients feel like it's not just happening to them, then they can take an active role and put together thoughtful plans over the long term," Soares said.
Today's hardening commercial property market puts more emphasis on the loss prevention and the risk management services an agent provides to clients, says Alan Goodrich, commercial insurance advisor/shareholder, with HMK Insurance, an Alera Group company.
HMK Insurance added its own risk management department two years ago. Most insurance carriers will offer some type of risk management and loss prevention services to policyholders, but Goodrich says it's more reactionary. "If you ask for pre-inspection of a property for prospective clients, for example," he said.
Goodrich says clients' response to having access to in-house risk management resources has been "phenomenal." Middle market accounts, or those doing $10 million to $40 million in sales, don't typically have in-house risk management and must rely on insurers and their and agents for the help. "They love having that additional resource from a safety and loss control standpoint," he said.
Goodrich hasn't witnessed the dramatic commercial property rate hikes seen in other more cat-exposed regions; he is seeing low single digit increases. "Here in Pennsylvania, we are seeing very modest rate increases," he said. "But industry-wide and in different pockets of the country based on vulnerability to natural catastrophes and other types of perils, double digit increases are not uncommon."
Being an advisor is likely the most important role agents can play today, Woodruff Sawyer's Soares says. "Honestly, I think that's our only role. We have to be that trusted advisor and participate in giving risk management advice."
Woodruff Sawyer has in-house engineers as part of its client team to help agents and their clients put together risk improvement plans. "Then we look at different coverage options and price where the client retains risk, and where they allocate dollars," she said.
Catastrophe risk management is one area where clients look for the most help, she said.
Simply giving insureds the information isn't enough, Soares said.
Agents must be able to advise insureds about actual loss scenarios and be able to discuss how those losses could affect them, including evaluating catastrophe models that produce property loss scenarios. "You get these numbers and say, 'Oh, you're one in two 50-year event is X. Would you like to buy some earthquake coverage?'" That's where clients really rely on their agent or broker partners to explain.
"For example, if a client is seeing that their catastrophe charge, whether it's in their property policy or if they buy a standalone earthquake policy, if that pricing is doubling, they're obviously going to want to take a harder look at what is the value that that coverage is bringing them. Is it worth it? Should I keep buying the same amount? What's my true exposure? What's this going to look like after an event?" she said. That "number" handed back from the catastrophe software modeling firm isn't always helpful without an agent's interpretation, she says.
Catastrophe modeling companies such as Risk Management Solutions (RMS) and AIR Worldwide build software that simulates hundreds of thousands of events with varying probabilities across a portfolio. The output (Probable Maximum Loss figures or PMLs) has become a key component for pricing catastrophe-exposed insureds.
Today, clients need the context provided by an agent or broker more than ever, telling them, "Let's talk about your individual business, how it's going to be affected, where disruptions will happen ... because the computer output just doesn't give you much value in a vacuum," Soares said.
Soares advises her property clients that in today's market, properly managing loss control and mitigating property exposures can make the most difference in total cost. "It's where they can have the most impact," she said.