Triple threat pressures property insurers (losses, inflation, reinsurance costs)

Property insurance markets are facing a “triple threat” from more frequent and severe weather-related losses, rising inflation and higher reinsurance costs, ALIRT Insurance Research has said.

The insurance research company fears that insurance markets will see more casualties before the triple threat is under control and warns against signs of carriers trying to “cash-flow underwrite” out of their financial woes.

ALIRT notes issues that have emerged at some smaller and more regional carriers, saying that, “We feel their troubles may signal the need for greater vigilance on the part of distributors as regards their regional property insurer partners.

“In short, they may reflect proverbial canaries in the coalmine.”

These issues have emerged at the same time we have been seeing major nationwide insurance carriers pulling-back from certain regions, such as California and Florida.

Signalling an understanding at some of the largest insurance firms that they need to control their exposure to more volatile weather and catastrophe losses, while some of the smaller players are already concentrated and have little room for adjusting business models.

ALIRT Insurance Research explains, “The triple-threat of more frequent/severe weather-related losses, a protracted inflationary environment, and surging reinsurance costs has the property insurance market under substantial pressure.

“While insurance carriers seek to counteract these trends through more focused underwriting/risk selection, higher rates, tightened terms and conditions, and market exits, we fear that there are likely more insurer casualties to come.”

Of particular concern are signs of “rapid premium growth at an insurer that is already facing substantial balance sheet erosion.”

ALIRT explains, “There can be a tendency by such insurers to try to “cash-flow underwrite” themselves out of current financial woes. This ploy almost always ends poorly as these entities can end up doubling down on risks that got them into trouble in the first place.”

The research company urges distributors to be wary and to watch the financial and growth metrics of smaller insurers in this environment.

The same advice could be directed to reinsurance and insurance-linked securities (ILS) players, in selecting ceding companies to deploy capacity to.

ALIRT summarises, “In this somewhat unprecedented property market environment, by the time rating agencies react it may be too late for an insurer to survive the extreme financial hardship caused by surging losses – especially for smaller regional specialists. But keeping an eye on some basic financial metrics can allow one to be proactive instead of reactive.

“As credit analysts, we are always hyper-sensitive to when the canaries start to chirp. You should be as well.”