The year 2020 set a record for 19 events that exceeded $1 billion in losses in the U.S.1 Seventeen of these billion dollar plus events occurred in the first three quarters, including riots and civil commotion losses, along with tropical storms and hurricanes that tapped both the English and Greek alphabets. COVID-19 claims impacted Workers' Compensation and the litigation surrounding coverage for COVID-19 related business interruption continues to wend its way through the courts, while social inflation, widespread financial uncertainty and a constriction of capacity have driven up Umbrella and Directors and Officers Liability (D&O) pricing. So what does the future bring?
Gallagher is pleased to provide a real estate and hospitality market review focused on region, line of coverage and asset class. The information is derived from client metrics as well as public data.
We hope this resource provides valuable insight into the current state of the market to help you face the future with confidence.
Current marketplace by line of insurance coverage and asset class
Real estate professionals are all too familiar with the cyclical nature of business, however a global pandemic really packs a punch. The biggest factors impacting Management Liability renewals are the real or perceived threats of Litigation, Defaults or Bankruptcy. As we have seen since the onset of the pandemic, poor historical underwriting profitably has caused simultaneous capacity reduction, rising retentions, and premium increase – even for clients who have no losses.
COVID-19 did not elicit a uniform response from all asset classes. Single family residential, industrial flex, and data warehouses outperformed expectations. Conversely, indoor malls and hospitality were hit disproportionate hardships. Multifamily and commercial office received mixed results, depending on vacancy percentages and liquidity.
Short and long term debt liquidity, as well as debt maturity schedules, quickly came into focus for asset managers and D&O underwriters alike. Providing proof of liquidity and balance sheet flexibility has become critical for insurance renewals.
Large commercial office – Property insurance
Commercial office has always been a desirable asset class for underwriters. Even during the pandemic, the office segment has preserved tenants at high occupancy levels and performed well with solid rent collection rates. Following two cycles of meaningful upward rate adjustments, many markets will seek more modest rate increases in the range of 7-12% on office asset portfolios.
However, this does not apply to insureds who are transitioning from single carrier placements to shared/layered program structures. These clients will continue to see rate spikes upwards of 20-25% coupled with tightening terms & conditions.
Amplification of both frequency and severity of water damage claims is a driving factor for underwriter scrutiny. Insureds who can maintain stable occupancy and continue to spend budgeted Capital Expenditure (Capex), may want to turn their attention to water shut-off valves and water leak detection equipment. Taking on higher deductibles and engaging in this type of risk mitigation could merit premium relief.
Single family homes – Property insurance
The year 2020 and the ongoing global pandemic has highlighted the increased demand for single family homes. In a market where the demand for housing already exceeded supply, we are now faced with escalated migration away from crowded city centers and into suburbia. The desire to access outdoor recreation and community based amenities has driven up home values and inflated the need for single family home rentals.
Depending on portfolio size and exposure to catastrophic loss, the typical renewal rate increases fall between 10 and 15%. Domestic U.S. and London-based insurers are authorizing renewal rate changes below their book averages and deploying new capacity for single family home portfolios with limited attritional losses. As investment in this asset class grows, we expect to competitive renewals to be the trend.
Insureds in the hospitality sector will continues to face significant challenges. Carrier guidance issued for Q2 2021 property renewals is indicative of 10-20% rate increases, even for portfolios with clean loss history.
General Liability renewal rate increases are expected to range from 15 to 25% and renewal rates for the primary layer of Excess Liability could move as high as 30%. The number of markets willing to entertain this asset class has downsized significantly.
Terms and conditions will remain areas of focus for underwriters. Sexual Abuse and Molestation (SAM) exclusions abound among hospitality carriers. An insured will be required to provide in-depth detail regarding Sex, Drug, and Labor Trafficking protocols in order to combat these exclusions. Increased scrutiny further extends to terrorism and lone shooter protocols as liability carriers clamp down on areas they feel exposed to large losses. Finally, insureds can expect Communicable Disease, Fungus, and Bacteria exclusions to be commonplace going forward.
For those with residential exposures, the liability market conditions continue to constrict. Large court settlements and increases in habitability claims compounded by the 24/7 exposure and "stay safe at home" directives have continued to challenge Primary Liability carriers. Many carriers have exited the insurance market for Primary Liability for residential exposures or have quoted with very restrictive terms such as: Habitability exclusions, Sexual Abuse and Molestation exclusion, Assault and Battery exclusions and Animal exclusions. In addition, many carriers do not want to entertain residential risks without a significant deductible or retention.
Umbrella and Excess liability placements have been greatly impacted by several underlying factors.
The rising inflation in claims costs associated with Commercial Automobile coupled with an increase in wage costs, medical costs, cost of goods/services and social inflation are the primary forces driving the drastic changes we are seeing in the marketplace. Many carriers have reduced their capacity from $50 million to $25 million and lower. A recurring message from the market involves capacity management. Carriers want to limit their exposure to higher attachments and lower limits. $25 million Umbrellas are rare. Lead Umbrella limits have switched to $10 million and $15 million, yet premiums are not being reduced.