Today’s hard U.S. commercial property insurance market — one that is the longest and toughest seen during the careers of even the most seasoned industry veterans — is likely here to stay for a while.

“This is the hardest property market we’ve seen in 20 years,” said Scott Purviance, chief executive officer of Amwins.

“I’ve never seen anything like this hard market,” added Nancy Woode, head of the U.S. property team at McGill and Partners.

Not uncommon for the marketplace to be shaped at least in part by natural catastrophes, this time it has been weathering a storm of a different kind — a convergence of factors including reinsurance, inflation, valuation adjustments, claims costs, and weather loss — has left the market in rebuild mode, still wary of reversing an upward trend in insurance rates that has lasted for five or six years.

The loss environment over the last five years has seen “huge volatility,” not just from hurricanes and tornadoes, but from severe convective storms, winter freezes, flooding, wildfires, mud slides, straight-line winds, and man-made losses (fires, water damage, civil commotion), added Derek Talbott, Chubb Group division president for North America property and specialty lines.

“All these factors in terms of creating a loss environment has been very challenging for insurers so rates continue to rise” as the industry chases profitability with adequate pricing to match increases in losses and exposure, he said.

From 2012 to 2017 there was one catastrophe loss of $10 billion or more. In the next five years there were nine such losses, explained Purviance.

In years past, events would temporarily jar the commercial property insurance marketplace but there were always new entrants — new capital — to keep a buyer-friendly market intact even after an event such as 2012’s Superstorm Sandy, according to Mark McEvoy, property practice leader at Woodruff Sawyer. Then the 2017 hurricane season churned up destructive storms Harvey, Irma and Maria (often referred to together as a market event called “HIM”).

“This was a catalyst,” said McEvoy. Insurers realized they were not earning enough to pay losses and turn a profit.

Some high-profile insurers disappeared from certain classes or started to reduce limits. There was no influx of new capital. Carriers began increasing rates.

“Because some carriers were re-underwriting their portfolios and retracting limits, many large property programs needed to be restructured, causing a shift from single-carrier placements to quota-share or shared and layered programs,” McEvoy said of the time.

Emerging in the meantime was a still often-repeated word or phrase: valuation and insurance-to-value (ITV). Leading up to 2017, there was pressure among carriers to grow portfolios in softer market conditions, and the emphasis on valuations was lost, or at least brushed aside. Carriers have recently realized ITV was off 30% or more, according to market reports. Deficiencies became much more apparent as losses came in at multiples more per square foot than had been expected.

“There has been a pretty big difference between what was on the schedule and what the actual loss is,” Talbott said.

Supply chain and limited availability of building materials following the pandemic, as well as inflation, exacerbated the problem. Accurate ITV figures were maintained by some clients but ignored by others.

“In a benign inflationary environment, maybe that was okay, and it was tough for an insurer to say it was wrong — there was not a lot of traction on that,” said Talbott, recalling different market conditions.

He added that clients and brokers have “done a good job pushing the importance” of ITV recently.

ITV is “the driver by which everything starts — probabilistic models, attachments points, pricing,” said Scott Pizzi, WTW’s head of property broking for North America. “If you get that wrong from the beginning, all the outputs will be incorrect, too.”

Insurers are “much, much more focused” on valuations today, said Purviance. The ITV focus, which reached another gear about a year ago, is “not going away any time soon,” added Michael Rouse, U.S. property practice leader at Marsh.

“There’s not a renewal we go into where there is not a discussion on valuation — how the client is determining the value of buildings, contents, equipment, inventory and business interruption,” Rouse said of current conditions. In today’s market, most carriers have a process to help clients validate replacement costs, he added.

In cases without a wealth of information, “carriers will often think the worst and err on the side of caution,” Rouse said.

The thought going into 2020 was that the market could potentially stabilize, according to McEvoy, but then COVID struck, and that year’s hurricane season set a record as the most active for named storms.

COVID claims, many dealing with whether physical damage occurred, were filed in droves.

Shutdowns of the court system lengthened claims resolutions.

However, the “straw that broke the camel’s back,” said Purviance, came with Hurricane Ian last year, just several months before the January 1 reinsurance renewals. Treaty renewals were the most challenging in decades as capacity tightened and rates and retentions increased.

Ian “enabled reinsurers to come into January 1 and extract some material rate and term changes,” Purviance said.

In the years leading up to Ian, the reinsurance market “had not been pushing for rate to the same extent as the primary insurance market,” added McEvoy.

The result has been beleaguered brokers and distressed buyers as insurers pass some of the increased reinsurance costs to insureds. Insurance programs have needed heavy restructuring.

“We’ve been delivering a lot of tough messaging,” Woode said. “Every renewal is different — every market.”

Capacity at renewal is down for Woode’s clients from $5 million to $1.5 million-$2 million, for example. Purviance said carriers that once offered a layer of coverage at $25 million limit are now down to $5 million-$10 million, even $2.5 million.

“You have to shop the market with every account,” Purviance said, adding that the market has become somewhat bifurcated — catastrophe-exposed and non-cat; good and bad risk; admitted vs. non-admitted. He said well-built risks with a good history in a non-cat zone are not seeing the 20%-30% increases the cat-exposed accounts are seeing.

Clients with a lack of loss history — attritional or severity — are seeing “a better result in this market,” at least in comparison to the opposite account, which may be facing significant rate increases, sometimes multiples of their expiring premiums, said Marsh’s Rouse. Even clients with a good loss history but have issues with ITV and have predominate exposure in a cat-exposed area could see “a reset on what the cost of capital is.”

Pizzi of WTW reported benign accounts with accurate ITV, a low cat footprint, and good engineering could still see increases of 10%-20%. A client of contrast is staring at increases of possibly 25%-100%.

Brokers said some clients are forced to buy less limit and retain risk with higher retentions, reinsuring portions out, using captives, self-insurance, co-insurance of certain layers, or higher deductibles.

“Almost everyone is taking more exposure,” Purviance said.

All brokers said many more carriers are generally involved on a program. For instance, Pizzi said one large account went from 45 to 67 insurers on the program, with no change to the insured’s limits. Excess or buffer layers between primary and excess are the most problematic to place, they said.

“It’s an opportunistic write, especially on challenging accounts,” Woode said. “A lot of times it’s out of the underwriters hands.” The observation was shared by Pizzi, “It’s a premium game rather than an underwriting game.”

Carriers will propose higher rates and will move on to the next account if they do not get it.

Pizzi said the buyer-carrier partnership needs to improve. There is some level of profit returning to market players but, to get to this point, some clients were forced to think about risk transfer in a different way, with the concern being that some good risk will leave.

“It’s not about buying insurance; it’s about financing risk,” he said. The market needs to get to a place of +/- 5% increases for a partnership — “to improve the perception of return on equity,” he added.

“You have to give [clients] a trade-off” for having a sound methodology and loss-prevention strategy.

Talbott said that within the broad range of properties in various classes it insures, Chubb looks for clients that understand their business and are committed to managing and mitigating risk — and values a partnership, including the importance of stability, from a long-term perspective.

Broadly speaking, he said there is more interest among clients to control costs — not only by increasing deductibles and retentions but also by managing risk, becoming more resilient.

Clients need to “figure out ways to look as attractive to the market as possible” to create competition, Woode said.

“The questions that carriers often bring up are ‘How has your risk improved since last year?’ and ‘Why are you a better risk than the next submission?'” said McEvoy of Woodruff Sawyer. “You can’t control the market, but you can improve your risk and foster relationships.”

This may be the most prudent strategy to improve the insurance-buying experience because rates will likely remain hard through 2023.

Purviance said specialty carriers that renew cat treaties at May 1 are bracing for material increases. Otherwise, a quick turnaround may be dependent on quiet weather.

“The issue is not lack of capital,” Rouse explained. “Capital levels are at all-time highs. The issue is profitability for the broader property market.”

The upward trajectory of rate increases is reversed when either catastrophes slow down or insurers collect premium and offer coverage that can sustain significant loss activity, he said.