2018 State of the Market - Property

Winds of change are driving the property market in a new direction. Nature had been kind for more than a decade, sparing the U.S. from major hurricanes and earthquakes. At the same time, record-low interest rates lured tens of billions of dollars in alternative capital into insurance markets offering returns well above the rock-bottom rates available on more standard investments. The combination of new capital and relative calm combined to push insurance rates lower year after year — until now.

The calm ended in August as one of the most destructive Atlantic hurricane seasons ever got underway in earnest. When Harvey stormed ashore as a Category 4 hurricane in Texas on Aug. 25, it became the first major hurricane to strike the U.S. mainland since Wilma followed Rita and Katrina in 2005. Roughly two weeks after Harvey, Irma struck the Florida Keys — marking the first time two Category 4 Atlantic storms had made landfall in the U.S. in the same year — and then punished Florida’s West Coast.1 After Irma, Hurricane Maria slammed into Puerto Rico as a Category 4 storm and demolished large parts of the island. A pair of major earthquakes in Mexico and widespread wildfires in California added to the damages.

Insurers are still adding up their losses, which could exceed $100 billion for the catastrophes in late summer and fall. Those losses came on top of a sharp decline in profits in the first half of 2017 for the U.S. property/casualty industry, which after years of price cuts had already been seeking to reemphasize underwriting discipline. The hurricane losses sparked forecasts of higher prices ahead and potentially significant hikes for catastrophe-exposed accounts.

As the year ahead shapes up to be a harder and more challenging market, experienced brokers can prove their worth by putting their market knowledge and relationships to work for clients.


Before the hurricanes, clouds were gathering in the first half of the year as property/ casualty profits dropped sharply, and the industry’s combined ratio slipped to 100.7% from 99.7% in the first half of 2016, ISO reported. After the disasters, Swiss Re estimated that the combined ratio for U.S. property/casualty insurers would rise to 109% for 2017 from 101% in 2016, and to about 115% for the global reinsurance industry from 92% in 2016. Losses from the hurricanes were being counted in the billions of dollars by insurers and reinsurers. Lloyds, for instance, estimated claims for Harvey, Irma and Maria at $4.8 billion.

The disaster losses came after a decade in which alternative capital had flowed into the insurance industry. In the calm between Hurricane Wilma in 2005 and Harvey in 2017, the proportion of capital provided by alternative sources in the reinsurance market rose sharply. Alternative capital accounted for less than 5% of global reinsurance capital in 2006, and nearly 15% at mid-year 2017. The investors behind that alternative capital are being put to the test by 2017’s devastating storm season. Using an estimate of $90 billion for insured losses from the hurricanes and earthquakes, A.M. Best estimated losses for alternative capital at $20 billion to $25 billion, mostly in the form of collateralized reinsurance, and losses for reinsurance companies at the same level.

The disasters may spark increased demand for reinsurance as insurers look to protect their capital position, particularly as some markets had been under pressure to reduce reinsurance spending to boost profits as the soft market continued year after year. Higher demand for reinsurance, and the increased prices for it, however, may also attract more alternative capital. However, as reinsurance prices increase, insurers may simply provide less capacity as a way to reduce their accumulated portfolio risk.

How the managers of the alternative capital, and their investors, react to the losses stemming from the hurricanes and earthquakes is likely to strongly influence the strength of the rebound in pricing in 2018 as well as the duration of the hardening market. Some alternative investors may become more cautious, but the prospects of higher returns uncorrelated with stocks and bonds may be irresistible enough to draw in sufficient capital to moderate the market’s rise.

Many insurers, reinsurers, and intermediaries are saying they expect the catastrophe losses to drive price increases. Swiss Re forecast global non-life premiums to rise by at least 3% annually in real terms in 2018 and 2019.8 Willis Towers Watson said commercial insurance buyers should be prepared for rate increases of 10 to 20% for catastrophe-exposed accounts and more for those with recent losses.

While the industry was coming to terms with the full extent of the losses, some underwriters remained a bit at sea. While many underwriters were being pressured to push price increases of 10 to 15%; some markets were taking the opportunity to put more business on the books in the typically slower fourth quarter. Still others were waiting for more concrete confirmation that a hard market was indeed coming. The arrival of that hard market signal could hinge on the reinsurance renewals at the turn of the year. Still as fall turned into winter, momentum was shifting to hard as markets showed more pricing discipline.

If this sounds a bit chaotic, it’s because it is. Still, it’s not unfamiliar territory for experienced brokers. Previous market changes also sent strong cross currents that disrupted the industry status quo. Those rippling effects included changes to internal processes, such as limiting underwriting authority to a select few, moves to increase efficiencies, as well as adjustments to risk appetites, standards and available capacity. All of that added friction to those markets, but knowledgeable brokers are able to develop creative ways to navigate the chaos for their clients.

Market Reaction & Placement Considerations

Underwriting discipline is making a comeback as markets, led by London, seek to push prices higher. While that effort may still take some time to bear fruit, underwriters were not as quick to return with quotes after the hurricanes. In late fall, markets were still sending mixed signals, with many underwriters seeking rate increases and others showing a willingness to beat an existing price to get new business. While underwriters are not offering rate reductions as they have for several years, rate reductions were still possible in properly restructured programs.

In addition, tax laws are going to have a negative impact on global national carriers, likely lowering their expected profits. This may increase the pressure on these carriers to adjust prices to accommodate. Insurance companies who are building deferred tax assets into their plan combined ratios may need to rewind this arrangement and seek to make up the difference through underwriting returns and expense management. This impact on pricing, however, may differ between larger and regional companies based on their tax strategy.

Additional Thoughts

  • While it’s clear that change is brewing, starting the renewal process early makes it possible to take all steps to insulate the customer from dramatic market rate increases. Performing due diligence and applying the basics of risk analysis, program structure and capacity deployment are critical.
  • Customers may want to brace for rate increases from 5% to 20% and higher, depending on the risk.
  • For some late fall renewals, insurers offered lower limits and showed interest in smaller pieces of large programs, particularly for Flood Zone A coverage.
  • Along with lower limits, carriers are seeking minimum prices per million for their capacity and minimum premiums.
  • While reluctant to offer larger limits, some carriers are showing more flexibility on deals involving smaller limits.
  • Insurers are seeking to reinstate percentage deductibles for hail and wind, for instance, moving back up to 5% from the lower percentage experienced in the softer years. Carriers have adopted an overnight underwriting discipline for such coverages like CAT and AOP buy-downs. Instead there is a broad attempt to raise AOP deductibles.

Habitational — Rates for catastrophe-exposed and frame habitational accounts were already firming before the hurricanes. The habitational market had been trying to correct itself because of attritional losses from fire and hail and in reaction to successive years of price declines. Frame builders risks are seeing sharp increases with most carriers only offering shared limits.

Municipalities — In the municipalities market, a clear picture on pricing may not emerge for atleast six months because renewals are concentrated from March to September. Ultimate lossesin those accounts may have to wait for the determinations of public claims adjusters, who have assessed losses at higher-than-expected levels for past hurricanes. It’s worth noting that in some hurricane damaged areas along the Texas Gulf Coast, many municipal buildings may no longer exist.

Earthquake — Changes in the California earthquake market are being driven more by a revised model rather than catastrophes. RMS, which announced the release of the new model in June, says the model captures the potential for larger and more correlated seismic events in California as well as new views of risk across the country.10 While the RMS model revisions were suggesting earthquake prices 10 to 15% higher in the Bay area of California, this is not necessarily translating into quoted premium increases of the same due to the abundance and availability of capital. Generally speaking, California renewals have remained most flat. The earthquake market, which remains profitable despite soft pricing and low deductibles, may be slower to react to pricing pressures with much of the capacity in the hands of MGAs, but catastrophe losses elsewhere are likely to at least push up earthquake deductibles.

Flood (NFIP) — Despite the rising risks of floods, the exposure remains difficult for insurers to quantify, and many underwriters have been blindsided by unexpected losses. The industry’s unease is reflected in the fact that flood pricing has held steady despite the overabundance of capital in the rest of the property market. As a stand-alone peril, flood is generally more expensive than clients anticipate. For that reason, it’s often wrapped into an all-risk policy. Domestic surplus lines carriers are showing a willingness to include flood with their all-risk quotes, which can provide some leverage in price negotiations. As respects flood, the House of Representatives voted to extend the National Flood Insurance Program, but the bill still was still awaiting Senate approval in mid-December.11


Buyers who had grown accustomed to year-over-year declines in price and deductibles, should be prepared for a reversal in both. In addition, markets are showing much smaller appetites, meaning that deals are likely to require the expertise to bring multiple carriers into a layered program. In a chaotic and changeable market, experience makes the difference. Brokers that understand both soft and hard markets, and have the knowledge and ability to put together more complex programs, can help clients reach their goals in a challenging market.