Recent moves by several large personal lines insurers to stop writing new residential property insurance policies in California and Florida due to rising catastrophe exposures could lead to capital being redeployed in the commercial property insurance market, some brokers say.
While the effect on the market is not yet clear, catastrophe aggregates previously deployed to homeowners insurance portfolios could be deployed elsewhere, several sources said.
Insurers active in both commercial and personal lines must decide where to invest their capital and surplus, said Mike Chapman, Charleston, South Carolina-based national director of commercial markets at Hub International Ltd.
“With the pressure on claims, litigation, and rates in personal lines in difficult states like California and Florida, carriers are forced to choose where to invest. In many cases, they are making the difficult choice to invest in commercial lines and pull back heavily in non-profitable personal lines,” he said.
Insurers have greater flexibility in determining rates for catastrophe-exposed commercial properties and can focus on risk mitigation, Mr. Chapman said.
There’s an opportunity for those insurers that are deploying cat aggregates in California or in Florida to their homeowners portfolios to deploy them towards commercial risks, another broking source said. “But we’ll have to see how that one plays out,” the source said.
Kathy Bettencourt, New York-based Northeast property broking leader at Willis Towers Watson PLC, said it’s too early to determine what the effect on the market will be.
“From a financial institution perspective, for mortgage impairment-type coverages, I believe we will see those portfolios shift and change and purchase coverage differently,” she said.
Whether those personal lines insurers with a commercial arm will want to expand commercial capacity, will be an interesting dynamic, Ms. Bettencourt said.
Last week, Farmers Insurance Group Inc., a unit of Zurich Insurance Group A.G., said it would stop writing home, auto and umbrella policies issued by its exclusive agents in Florida. The decision was “necessary to effectively manage risk exposure,” according to Farmers’ statement. Farmers had said the previous week it would limit new homeowners insurance policies in California, effective July 3.
Also last week, AAA Insurance said it will not renew auto and homeowners insurance policies for some policyholders in Florida.
“The catastrophic 2022 hurricane season drastically raised operational costs for providers. As a result, we made the difficult decision to not renew a very small percentage of higher exposure homeowner’s policies,” AAA said in a statement. The insurer said it continues to write new home and auto insurance policies.
In May, several other insurers, including State Farm Mutual Automobile Insurance Co. and Allstate Insurance Co., said they will stop writing new business in the California property insurance market due in part to elevated wildfire losses.
The pullback by insurers from certain states is more of a personal lines phenomenon than an issue for commercial policyholders, said Rick Miller, Boston-based U.S. property leader for Aon PLC’s commercial risk solutions business.
The homeowners market is tightly controlled and regulated at the state level, and in those states where insurers have exited there is both an admitted and an excess and surplus lines market for commercial property, Mr. Miller said.
In many commercial property insurance markets capacity hasn’t changed, but insurers have reduced the limits they offer, he said.
“Maybe if they wrote 10% of a line last year in a particular layer, they may still be willing to support the account, but are taking 5% to 7.5%,” Mr. Miller said.
Any time new markets are introduced on a placement that usually comes “at a pretty steep price tag, or a so-called new catastrophic aggregate,” he said.
DBRS Morningstar analysts said in a research note issued last week that restricting new business or exiting lines of business could hit insurers’ revenue growth potential.
“These considerations have to be assessed against potentially favorable underwriting and risk profile implications that result in an uncertain impact on the final credit rating,” Morningstar said.
U.S. property/casualty insurers are responding to higher inflation and natural catastrophe losses with rate increases when possible and exits when not, Swiss Re Ltd. said in a recent report.
Halts to new business and non-renewals in certain lines were among the steps insurers took as they retrenched from catastrophe-prone markets such as California, Florida and Louisiana, in the first half of this year, Swiss Re said.
Underwriting actions have extended to commercial property and personal auto lines even while the focus is on homeowners insurance, according to Swiss Re Institute’s June U.S. Property-Casualty Outlook.
