Insurers measure the health of the industry by the combined ratio, basically their cost of doing business (losses and expenses) divided by the premiums they collect. Any number under 100 indicates a profit; over 100 connotes a loss. The Insurance Information Institute (III) estimates that the combined ratio for commercial lines insurers in 2021 will be 109%. For every dollar they took in they paid out $1.09.
After years of paying out more than they take in, insurance companies are making tough choices
The National Association of Insurance Commissioners (NAIC) reported that Commercial Multi-peril (coverage for wind, fire, etc.) has been “unprofitable for five consecutive years and eight out of the last 10 years.” “An industry that pays out more than what they take in, year after year, faces tough choices, choices that affect contractors, manufacturers and building owners.” To return to profitability, insurers have a number of tools at their disposal: raising rates, increasing deductibles or discontinuing coverage.
The insurance industry calls this a hard market. Premiums rise, underwriting standards become stricter, and there may be reduced availability of some products lines in certain locations. The reasons for this include the economic downturn caused by COVID-19, the increase in the numbers and costs of catastrophes, low interest rates on investments, increased litigation and insurer’s concerns about the unknown future impacts of climate change. Price escalation due to higher labor costs and material shortage are also factors insurers take into consideration.
In 2021, there were 20 billion-dollar disasters and an estimated $120 billion in insured losses, which was slightly less than the record-shattering year of 2020.
Property and Casualty (P&C) insurance consists of numerous product lines, one of which is Builders Risk. The prediction for 2021-22 is for a continuation of rate increases, the removal or reduction of certain coverages and increases in deductibles. Insureds and specific projects will be more heavily scrutinized by an insurer before being granted coverage. In some locations, and for some building types, such as large multistory wood-frame residential structures, coverage may be unavailable. Several insurers have even stopped offering Builders Risk insurance.
The lack of the ability to predict and plan for large losses creates volatility in the property insurance industry. In 2020, there were 22 separate billion-dollar weather and climate disasters across the United States, shattering the previous annual record of 16 events, which occurred in 2017 and 2011. The total cost of the 2020 disasters was $96.4 billion, more than double the 2019 amount of $46.1 billion. In 2021, there were 20 billion-dollar disasters and an estimated $120 billion in insured losses.
In areas of the Western U.S., property insurance in wildfire areas may be impossible to find or unaffordable. In Louisiana, the insurer of last resort (Louisiana Citizens Property Insurance) had to increase the coverage limits for its commercial clients since they were unable to find adequate coverage from private insurers.
Six of the years with the greatest frequency of billion-dollar disaster have occurred between 2011 and 2021.
While this focus has been on U.S., these insurers rely on capital from the global reinsurance industry. Therefore, international disasters should be considered when looking at the future state of the industry. Just as in the U.S., disasters in other nations are also increasing in frequency and intensity leading to record losses.
The expectation is that increased rates and deductibles, as well as limits on availability, will be instituted by insurers to ensure a profitable and stable P&C insurance market in 2022. Designers and builders who work with an insurer before construction to create a resilient structure will be able to offer the best position for the owner.
Rose Grant, AIA, CPCU, is the president of Rose Grant Architectural Services Inc. and is a licensed architect in the state of Illinois. She has earned the insurance industry’s Chartered Property and Casualty Underwriter (CPCU) designation, an advanced certification obtained by only 4% of the professionals in the insurance industry.