Lloyd’s alone expects to pay out up to $4.3bn in coronavirus claims – one of the market’s largest-ever payouts – with a third of those losses falling within property lines
Before the COVID-crisis, US property insurance rates were already on an upward trajectory after a sustained soft market. The combined effect of major catastrophe losses – including Hurricanes Harvey, Irma and Maria in 2017 – and Lloyd’s Decile 10 performance review had begun to firm up pricing.
Therefore at AFL we see COVID-19 as an accelerator rather than a game-changer. Just as 9/11 resulted in the last truly hard insurance market, it is likely that COVID claims will prove to spark a faster market correction than other recent loss events.
Lloyd’s alone expects to pay out up to US$4.3 billion in coronavirus claims – one of the market’s largest ever payouts – with a third of those losses falling within property lines of business.
What would have been rating increases of five to ten percent on US property accounts before the pandemic, has become hikes of 20% to 25% on average and higher on loss-affected accounts, as insurance companies have begun to factor in the likely impact of COVID-19 to combined ratios and future increases in the cost of capital.
Initially, there was an expectation that most claims relating to the lockdown would be automatically excluded, but it has since become clear that some carrier’s overconfidence in their wordings was not quite founded.
The market is still waiting to see the result of some of the litigation that is ongoing in the US and elsewhere. It is hoped these test cases will indicate what portion of losses are likely to be covered under property business interruption insurance (BI) policies, and how exclusions for pandemic and communicable disease will respond when tested.
The suggestion that some states may introduce retroactive measures to force insurers to payout for pandemic-related BI losses thankfully appears to have lost some of its initial zeal.
However, it is now clear some carriers had offered writebacks for communicable disease and there are potentially ambiguous wordings within other BI contracts. In the UK, the outcome arbitration claim launched by the Hiscox Action Group and UK court test case brought by the Financial Conduction Authority (FCA) will offer further clarity.
From a capacity perspective, the fallout from Decile 10 review continued into 2019 with carriers withdrawing from underperforming classes. This impact continues to be felt. At one point last year AFL counted 26 Lloyd’s property underwriters who had lost their positions as a result of syndicates scaling down operations or putting books of business into run-off. The contraction of capacity at Lloyd’s has also impacted the binder marketplace, with coverholders struggling to renew business.
Some syndicates folded entirely, Vibe Syndicate Management being one example. After a challenging 12 months, with the decision to exit A&H and property D&F lines in September, its business plan was signed off by Lloyd’s. But then its investors withdrew their support two months later and CEO Joe England acknowledged the business did “not have the right scale to thrive”, indicative of the challenges within the market.
The good news for AFL is that across the Atlantic we continue to see key capacity providers reduce positions and pull out of particular classes altogether leading to London having opportunities on risks that have never previously left the US market place.
Dynamics within the reinsurance market have further exacerbated pricing trends. Loss creep from hurricanes in 2017 took some investors in insurance-linked securities (ILS) by surprise, while issues with trapped collateral dampened their appetite for ILS. Even on the direct side we have seen rating movement connected to pressures in the ILS sector with, for instance, Nephila’s Velocity Risk Underwriters MGA seeking approval in Florida for an average rate increase of 28% on its homeowners insurance.
The high-profile collapse of Markel CatCo in July 2019 saw the exit of a significant amount of capacity on the retrocession side of the business with further knock-on effects within the US property market. It has left US insureds desperate for capacity and caused rates to spike considerably. At AFL we expect these trends to continue, particularly as the true impact of the global pandemic continues to unfold.
From a natural catastrophe perspective, a number of carriers are reassessing their exposure to extreme weather events. The impact of hurricanes in 2017 and 2018 has pushed up rates in coastal states, while the Caribbean market has never quite recovered from the shedding of aggregates in those areas by some insurers following the losses. Combined insurance losses following HIM in 2017 were $92 billion, according to sigma, making it the second costliest year for North Atlantic hurricanes since 2005 and Hurricanes Katrina, Rita and Wilma.
For primary insurers, severe convective storms (SCS) are causing attritional pain and in recent years, aggregate losses from SCS have rivalled those of an average hurricane season.
So far in 2020, there have been 602 tornadoes compared to 932 in 2019, according to the NOAA. With the tendency to fall within insurer retentions, these extremely localised, high frequency events are impacting overall profitability and driving up loss ratios, with carriers showing more appetite for aggregate protections as a result.
At present there is a lack of data needed to assess why losses from SCS and other extreme weather events are rising and whether this is the result of a changing climate, rapid development in areas exposed to extreme weather or a combination of both.
Vendor catastrophe modelling agencies, such as RMS and AIR, have released high resolution models but it remains extremely difficult to determine which locations across the US midwest are most vulnerable. This is having an impact on pricing, with property within the midwest area generally struggling to receive anything below 10% rate on line.
As the US property sector enters its first proper hard market in over a decade, there is an opportunity for independent brokers like AFL to really demonstrate their value. While it has been pared back, capacity remains available in the Lloyd’s and Company Market and the onus is on intermediaries to engage with their clients to foster a greater understanding of the market conditions, while developing a long-term strategy to secure access to affordable coverage and offer all-important risk mitigation insight and advice.
Before the COVID-crisis Lloyd’s was becoming very “large broker” centric, but we are now finding underwriters have more time to spend with us and we are getting better and quicker responses, due to our specialist knowledge and experience.
It is an altogether more harmonious experience. From a service perspective, being a more boutique broker means our systems are streamlined and agile, and are able to adapt to the conditions created by lockdown. We have been very efficient in our dealings with Lloyd’s and it is clear this is a trend that is likely to favour the smaller boutique broker as the market embraces remote working as part of a longer-term shift, supported by a robust digital infrastructure.
Chris Cavani is Director of Property at AFL Insurance Brokers.
With thanks to Insurance Day for permission to publish this article – https://insuranceday.maritimeintelligence.informa.com/ID1131717/Viewpoint–Pandemic-claims-are-fuelling-the-surge-in-US-property-rates