As we near the end of 2023, let’s discuss three emerging macroeconomic trends that have created turbulent market conditions over the past year in the property casualty insurance market: (i) a challenging homeowners market, (ii) economic inflation, and (iii) a hard reinsurance market. In this environment, brokers should continue to think long-term and focus on loss mitigation and risk management.
Emerging Trend #1: Challenging Homeowners Market:
As of June 2023, without a single catastrophic event of note, catastrophe losses amounted to 37.5 billion compared to 50 billion in the entire year of 2022. Compounded over previous years of losses because of ‘cat’ events, insurers have become forced to leave ‘cat-prone’ areas like Florida, which impacts the high net-worth homeowners space.
Emerging Trend #2: Economic Inflation:
With increased catastrophe losses over the past few years, it has become evident that the market has not gotten insurance to value right, highlighting some of challenges in the (re)insurance models. In parallel, we are seeing economic inflation resulting in enormous material inflation, supply chain shortage, a demand surge, and exacerbated post-cat events. For example, tornadoes are hitting more states now, not just Oklahoma, Texas, Kansas, or Nebraska – they appear to be hitting more eastern parts of the United States, such as Tennessee, Illinois, and Indiana. Because of economic inflation and more costly damages in more cities than had been expected, insurance values lag replacement costs by approximately 15%, and labor costs are up about 40% for materials. Industry leaders recommend brokers make sure their clients understand these economic facts and focus on trying to get insurance to value right.
Emerging Trend #3: Hard Reinsurance Market:
Pricing will continue to increase to meet the cost of reinsurance, especially in critical catastrophe areas. The catastrophe simulation models severely underestimated damages. Also, once thought to be not as damaging or widespread as primary perils – hurricanes and earthquakes, secondary perils and events are increasing in frequency and causing billions in damages. A secondary peril consists of tornadoes, wildfires, and convective storms – this means that brokers must focus on mitigation and loss control.
Conclusion: Current market conditions will remain until capital returns to homeowners’ markets like Florida. Insurance professionals can counter these facts by understanding that we all do not sell just insurance alone, but also risk management and loss control.
The insurance industry is interconnected, and global markets are seeing increased regulatory oversight of brokers. Financial intermediaries and carriers must substantially increase their risk management efforts. Furthermore, not much capital is coming back into the market, unlike after the 9/11 attack and post-hurricane Katrina. During economic hardship, industry leaders recommend one dives down on expertise and advisory skills.
