Catastrophic weather events are adding to the myriad other challenges facing the commercial property insurance market.
The U.S. commercial property insurance market continues to feel the impact of catastrophic weather events that have become more frequent, more severe and harder to predict, according to the 2022 U.S. Property Market Outlook by Risk Placement Services (RPS).
Winter Storm Uri in Texas and tornadoes across the central and southern U.S. are among a litany of severe and unanticipated catastrophic weather events that have caused billions of dollars of damage. Catastrophic weather events are adding to the myriad other challenges facing the commercial property insurance market, including inflation, underreporting of property values, limited capacity and rising rates.
In 2022, “expect the unexpected" could be the market's mantra. “We are operating in unprecedented times. Many of the losses that we've seen are ones that we never could have predicted," said Christa Nadler, executive vice president at RPS. “It's hard to anticipate what the next thing is going to be."
In a quest for profitability, excess & surplus carriers have been shedding unattractive risks, raising rates, lowering coverage limits and adjusting policy terms, the Market Outlook notes.
"Many insurance companies are hoping that those moves will pay off in 2022, but the E&S property market is complex and dynamic," says Wes Robinson, national property president at RPS. "The uncertainty around catastrophic events means that most will be extremely cautious about how they approach this market."
However, while Robinson believes many insureds will see their rates moderate in 2022—AM Best revised its outlook from negative to stable for the U.S. commercial property market in late November 2021—there will be plenty of exceptions, especially around catastrophe-exposed risks and loss-affected accounts.
“Climate change is now a strategic concern for many reinsurers as well as commercial property owners," Robinson observed. While 2022 may or may not prove to be more severe than 2021 in terms of catastrophes, insurers' general expectation is that the warming trend, which is driving the frequency and severity of these events, will continue.
Even in non-CAT-affected areas, 2022 will provide a “bumpy road back," the report said, with the effects of the COVID-19 pandemic still being felt. The omicron variant made many companies change their plans to bring employees back to the office, canceling in-person conferences and events, which impacted occupancy.
And even though the civil unrest and riots of 2020 didn't repeat last year, concerns about those occurrences linger. As a result, these ongoing underwriter concerns are now reflected in commercial property coverage terms, the report said. For an increasing number of insureds, especially those with property in urban, downtown locations, their policy now excludes damages related to strikes, riots and civil commotions.
Further, rising prices for building materials, notably lumber; supply chain issues; and labor shortages have made it more expensive to repair and rebuild properties, which has put additional pressure on the undervaluation issues that already plagued the commercial property market.
As property insurance rates rise, agents will continue to have tough conversations with clients, particularly those with properties in the growing number of areas prone to damage from convective storms, hurricanes and wildfires, the report says.
Robinson suggests that those agents work with a wholesale broker who is experienced with challenging property exposures and has deep relationships with E&S insurers. "It is vitally important to start the renewal process early to be prepared for the unexpected with a backup plan," he advises.
Will Jones is IA editor-in-chief.
Read the full 2022 U.S. Property Market Outlook by RPS, including an overview of commercial property risk by sector.