At midyear 2023, the insurance market is essentially split into two different markets, with many property insurance buyers facing the most challenging market in 20 years, while the casualty and liability insurance market was less challenging, according to Arthur J. Gallagher & Co.
In its Insurance Market Report June 2023, Gallagher notes that the hard reinsurance market remains a major factor driving capacity constraints in the property market.
“As anticipated, clients with coastal exposures and/or less desirable risk profiles (national/risk management size, tougher occupancies, outstanding recommendations, etc.) have experienced more difficult renewals,” the Gallagher report says. “They have taken what coverage they can get, where it is available, and have been ready to consider the alternatives.”
Inflation’s impact on valuation continues to ratchet up many of the market pressures, Gallagher says, while severe weather events during the first half of this year—following record claims from Hurricane Ian last year—are creating additional operational friction and loss cost pressures.
Catastrophic risks are pushing the property insurance into a much harder market than was anticipated, the report says, with losses from severe convective storms, hail, and tornadoes combining with traditional catastrophe perils to drive double-digit price increases in the first half of this year.
The report suggests that those factors challenging the property insurance business will likely continue through the remainder of this year and into 2024.
According to the Gallagher report, a lack of capacity from incumbent property markets is leading buyers to seek alternatives. The report says there has been a surge of business into excess and surplus (E&S) markets, as well as increased discussions of captive insurance solutions.
The report says that property insurance buyers are using all the tools at their disposal to minimize the hard market’s impact. Buyers are buying all the insurance they can this year, while demonstrating a willingness to consider all available alternatives, Gallagher says, including alternative risk transfer options through captives or parametric structures.
The report says property buyers are retaining more risk with either percentage deductibles, self-insurance, purchasing less catastrophe coverage, or, in some cases, insuring at limits below replacement cost.
“In the latter situations, underinsurance is a critical concern, leading to downstream issues with lenders over noncompliant loan covenants, and opening up the potential for claims disputes, lengthy periods of business interruption, and significant uninsured cost burdens should a loss arise,” the Gallagher report says.
Captive insurance company parents are continuing to make increased use of the alternative risk transfer vehicles, Gallagher says, and are benefiting from broader, more affordable coverage that is tailored to their risk profiles. They also are gaining more direct access to reinsurance markets at a time when those relationships are increasingly important, the report says. And those property buyers with captives are funding additional coverage layers throughout their property programs.
At the same time, the hard property market is prompting some non-captive owners to consider risk retention solutions for the first time, Gallagher says. That includes conducting due diligence on various captive domiciles and structures, and assessing the start-up costs and timing associated with forming a captive.
Buyers are looking at other alternative risk transfer options as well such as insurance-linked securities and parametric products to secure needed property catastrophe coverage, the report says.
“We are looking at parametric risk products, especially in cases where clients can’t purchase the limits they need. And we’re considering insurance-linked securities, where we’re working a lot closer with our Gallagher Re team,” Martha Bane, executive vice president, managing director in Gallagher’s Property Practice, said in the report. “Our clients are looking outside the traditional insurance market more than ever before. Those who don’t have captives are considering forming captives, but this is not a silver bullet.”
While the property market remains hard, the casualty market is showing signs of stabilizing, according to the Gallagher report. “We continue to see moderate rate increases across casualty lines, particularly within auto, general liability (GL), and lead umbrella business,” the report says.
A “more rational” casualty market is emerging, according to Gallagher, with competition and capacity returning to the market.
Gallagher notes, however, that social inflation and nuclear verdicts continue to have an impact on the casualty insurance market, driving rate increases. The report says Gallagher expects that trend to continue for several years. In addition, the uncertain economic environment could have an impact on claims trends.
At this point, casualty insurance price increases are consistently in the 5 percent to 7 percent range, Gallagher says, particularly in general liability, auto, umbrella, and excess coverage. Workers compensation buyers, meanwhile, are typically seeing rates remaining flat at renewals.
Gallagher says it expects insurers to move to exclude some emerging casualty exposures, such as so-called forever chemicals or biometric privacy issues.
Even as the casualty market is broadly stabilizing, some challenging areas remain, providing reasons for some buyers to consider the captive insurance option, the Gallagher report suggests.
“For those in tougher classes of business and distressed industry sectors, where harder market conditions prevail with no end in sight, it pays to consider selective self-insurance strategies via captives or other risk retention structures,” the Gallagher report says.