RPS’ Robinson: No E&S property cat crunch despite capacity pullback

Capacity may have withdrawn from the catastrophe-exposed E&S market in the US, but there is not yet a crunch with coverage still on offer, albeit at a significantly higher price and with carriers having trimmed the limits they are willing to deploy on programs, Risk Placement Services (RPS) property specialist Wes Robinson has told The Insurer.

In its newly published 2022 US Property Market Outlook, Robinson, national property president at the Arthur J Gallagher-owned wholesaler, said the increased rates and tighter terms and conditions seen in recent years, as well as greater clarity around Covid-19’s impact, “should pay off in 2022 for the carriers”.

And while Robinson predicted many insureds will see the benefits of that with moderating property rates, that will not be the case for everyone, least of all those programs with cat exposure.

Cat losses spur carriers’ rate demands

Losses from Winter Storm Uri, Hurricane Ida, the various wildfires and tornado events have all hit insurers, and they are looking to increase pricing in response.

“If you’re in California, Louisiana, Texas or Florida, as an example, it’s not necessarily going to be the case [that rates should moderate],” Robinson said.

“There seems to be greater uncertainty around catastrophic events, and that leads insurers to be more conservative in their capital deployment,” Robinson highlighted in the report.

The continued impact of natural catastrophe losses means insurers are struggling with how to profitably write business in some regions. The fallout from that has seen a retrenchment of capacity in some cat-exposed regions of the US.

Despite the reduction in cat capacity, Robinson said there is not a crunch in the marketplace.

“What we’re seeing on pure cat-exposed accounts [is] there’s absolutely a pullback from a capacity standpoint from all the major players,” he stated.

But that is not the same as the capacity crunch that arose in the wake of Hurricane Katrina in 2005.

Despite the pullbacks and exits, capacity remains available in the market, but it is increasingly limited in some segments where Robinson noted, “the cost is so much that it might as well not be there”.

“If you’re a public entity account, as an example, you have a budget. And if the money’s not in the budget, then it doesn’t matter what it costs. If all the primary and the buffer layers take up the budget, then you have no choice but to buy less,” Robinson said.

“If you’re a for-profit account, you might be able to generate the money, but it might not be a good trade at that point,” he added.

Programs increasingly divided

For those carriers that continue to provide capacity, the manner in which they are prepared to deploy it has shifted considerably, with programs now requiring an increasing number of carriers and more layers of coverage, said Robinson.

“If we had a $5mn line on a deal, it’s probably $2.5mn now, or $1.5mn,” said Robinson.

“A $2.5mn line in the cat space at the moment is a piece of gold,” he stated.

Robinson said he has seen examples where a standard market deal may have just had one carrier, but now given the capacity reductions it has entered the shared and layered space and that same risk now has a program with 15 or 20 insurers on it.

And with claims growing in size, those carriers in the middle of programs – the buffer layers – are increasingly being impacted by losses.

“As carriers become more conservative about their limits, program layers are becoming thinner,” explained Robinson in the report.

“Losses are now going into layers that they’ve never reached before. And there’s not enough premium in those buffer layers to compensate for those losses,” he said.

As a result, Robinson predicts that it will be buffer layers on property E&S programs that will see greater rate rises than primary layers this year.

Wildfire-exposed programs facing further increases

According to RPS’ report, those property policyholders with wildfire exposure can expect to see their rates increase by at least 10-20 percent, if not more, in 2022.

“Material changes” in terms and conditions should also be expected, RPS said, and warned that E&S property capacity will likely contract in wildfire-prone markets in California.

“Wildfire activity has also increased in the Pacific Northwest and Colorado. Though the exposure may not be as severe as in California, large property owners and insurance companies that offer coverage in these regions see this as a growing and increasingly unpredictable concern,” said RPS.