Hard Market Impact on Construction & Real Estate

Have you ever seen the movie “The Perfect Storm”? Brave souls at sea are faced with turbulent weather fronts coming together at the exact same time. Not quite the same level of peril, but you may feel like you are in the middle of a storm when navigating your habitational property portfolio. The property insurance market is “hardening” – it’s extremely important to be proactive and understand what to expect.

If you purchase insurance in the habitational real estate space you may be wondering why you’re seeing overall premium increases of 15%-50%. More specifically, why are you seeing a demand for higher valuations, increased deductibles, decreased capacity, additional liability layering, or even a non-renewal when your portfolio has performed well?

We’ve seen a significant shift in the way insurance companies are pricing policies due to a variety of complex determinants – and we need to adapt accordingly in order to keep your business competitive in the market.

Why is the market hardening?

  • Increased catastrophic weather related events across the United States have caused significant losses (flooding, hurricanes, earthquakes, wildfires, tornados, wind, fires, hail)
  • Carrier profit margins have eroded due to property, auto, and umbrella losses
  • Negotiation of carrier reinsurance treaties have resulted in increased rate demands (multiple reinsurers are even closing their doors)
  • Conservative limit strategies implemented by carriers
  • Slowdown of alternative capital coming into the marketplace
  • Increased frequency and severity in overall claim activity

What to know about hard markets

History tells us that this isn’t the first time the property market has hardened – and that this isn’t a one-time rate increase. Since 1975, there have been three notable hard markets lasting about four years on average, according to Commercial Property/Casualty Market Index, released by The Council for Q3 2019. The average rate increase was around 25%.

Property Premium Trends Through 2019Q3

 

What should we expect in 2020?

The commercial property insurance market is continuing to tighten as we move into the second quarter of 2020. Underwriters see an opportunity to take additional rate and seek more advantageous terms – all while passing the costs down to the insured. We’ve seen these shifts in premium and terms extend to umbrella, excess liability, directors and officers (D&O), and autos lines as well.

According to RT Specialty, it doesn’t look like rate increases will slow down by Q4 2020 either. The firming trend is expected to escalate and the expectation is for rate increases to continue beyond year end.

Getting creative with your insurance program is a must – we recommend looking at alternative deductible options, exploring different specialized carriers, and potentially finding ways to get comfortable taking on more risk.

Key Takeaway

Whenever one faces uncertainty, it’s best to get out in front of it. The first step is communication – it’s essential for an agent to have conversations with underwriters throughout your policy term. In our Construction & Real Estate practice group, we are always asking questions. How can we leverage our best carrier relationships to better position the client? How can we help identify trends with loss history, data analytics, or CAT modeling? How do you benchmark compared to your peers in the industry?

If you aren’t having these conversations, it’s time to start. Reach out to your M3 Account Executive to hear more about strategizing for the hardening property market.

 

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Brad Winchester is an account executive and a director of M3’s construction & real estate practice. 

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