2020 is changing the landscape of the insurance world, and the effects of this shift are most obvious in the hardening market conditions for surplus lines property & casualty, as well as personal lines coverage.
The cause of this shift is complex, and while a small part has been influenced by the COVID-19 pandemic, there’s more to the story than just the global pandemic. Understanding the direction of the market is critical for carriers, agents, and insureds.
Here is a breakdown of the current situation.
1. The surplus lines property and casualty market is hardening, and homeowners insurance is no exception.
Rising economic uncertainty, the global pandemic, increasing losses and an election season are major drivers of this shift. With fewer options, buyers face a seller’s market for insurance, resulting in higher rates and tighter underwriting.
2. Concerns have decreased insurer capacity in the marketplace.
Carriers are reducing limits and terms they are willing to offer, or not writing for classes of business that were previously covered. With fewer options, carriers are pivoting their business. The trend is one of increasing risk-aversion as rates rise and insurers pull back on coverage.
3. Major players like Lloyd’s of London syndicates (which represents nearly a quarter of the surplus lines market) have limited their writings, stopped writing domestically or altogether.
Those still in the marketplace are tightening their underwriting guidelines, limiting their appetites, and raising rates on both new and renewal business. It’s a drastic change for a traditional leader in the surplus lines homeowners market.
4. Lexington insurance is realigning itself and moving away from lower value homeowners as well as avoiding sensitive areas or risk profiles.
Lexington is raising rates, limiting its distribution, and bringing its focus more in line with their admitted private client product offering. The goal is to reduce volatility and increase discipline in underwriting.
This is not necessarily a bad sign. The unproven nature of many surplus lines results in the abandonment of unprofitable business ventures. Such changes over time create a stronger, more stable market, avoidant of excessive risks.
Lexington reports it has already seen vastly improved submission flow and tighter limits.
5. Major rate increases are expected for key lines.
Market forecasts project double-digit increases for surplus lines property and casualty homeowners markets.
Predictions for non-catastrophic-exposed properties range from 10-25%, while catastrophic-exposed properties may see increases between 20-40% depending on market conditions.
This fluctuation follows several years of increasing attritional (non-catastrophic) losses, and an unusual frequency of catastrophes that have hurt the market.
6. Trends in specific states have exacerbated these challenges.
In CAT Prone states such as Florida & California, carriers are raising rates dramatically, reducing their exposures, targeting premier business only, or just not writing at all.
In California, restrictions on the market’s ability to levy rate increases limit the capacity of traditional insurers. Some carriers are leaving the market altogether due to this challenge.
The E&S market has stepped in to serve this gap having more freedom of rate and form to move in and out of markets. The results of this trend are rising rates and reduced capacity in the marketplace compared to preceding years.
In Florida, market losses from the increase in catastrophic events are exacerbated by rampant litigation. Insurers are facing increased first-party lawsuits from roofing and water damage claims. With more claims increasing losses, insurer capacity is shrinking and rates are increasing steadily.
The surplus lines homeowners market is facing challenges, but it is one of the most innovative sectors in the insurance space. Reduced risk appetites, lower capacity, and higher rates are a natural response to current trends and should not be viewed as a sign of pending disaster. As some coverage avenues and markets become less viable, other enterprises will rise to fill the market need.
The E&S market remains critically important, and insurers will find ways to provide coverage which are financially viable.
As the market fortifies against current obstacles, it also demonstrates its resilience. Stability will return to the market as insurers, carriers, and insureds pivot to find solutions which work in the new landscape.