After so many quarters of rate increases, captive insurance likely remains a key component of any diversified property insurance programme in the US, amid a shifting climate
The hardening phase that has gripped the US property insurance market for almost seven years appears to finally be relenting. After some 28 quarters of often significant rate increases, property insurance rates declined one per cent in Q3 2024, compared to an increase of two per cent in the prior quarter, according to Marsh. This follows regular double-digit increases between Q4 2022 and Q4 2023.
As WTW summarised in a recent report: “The property marketplace’s transition into stabilisation persisted through the second quarter of 2024. Factors reinforcing this trend include increased insurer competition, favourable 2024 treaty reinsurance renewals, and a weaker-than-predicted Atlantic hurricane season to date.”
Expanding on this, Scott C. Pizzi, head of property broking in North America at WTW, says: “In Q4 2023, we started to see a little relief start to come back, with programmes getting a little bit more traction and interest. But it really was not until 1 January 2024 [that the softening began], because the treaty renewals that happened are really the catalyst by which the market started to ebb and flow at the beginning of the year. The January 2024 and even July 2024 cat treaties were completed very orderly. They were very benign, and a lot of capital came into play.
“We did not see the kind of swings we had seen after 2017 and Hurricanes Irma and Maria, which started this market on a big trajectory for a hardening phase. The result was that clients had to deal with rate increases for nearly seven years, or 28 consecutive quarters.
Enter 2024, and whether “just pricing, deductible, or coverage pressure,” brokers such as WTW expected there to be “a real sea change”.
He continues: “And that started to occur in March, when we finally started to see programmes become more overlined. There was a lot of capital, a lot of people chasing market share. When you are able to get into that overlined position in certain classes of business, clients really hold the upper hand. It became more of an arbitrage situation and with that more of a buyer’s market.”
Those in the retail and real estate classes with shared and layered programmes that buy a lot of cat protection were hit particularly hard during this seven-year period, according to Pizzi. At the same time, some considered their options in terms of retention and turned their attention to alternative risk transfer (ART), be it annual or multi-year, parametric and structured solutions, which started to become more prevalent in 2024.
He further explains: “ART has been something that everybody has talked about for years but now clients are starting to put up their balance sheets on certain programmes. They are able to take more risks themselves and are able to control the dynamic. It is a move from purchasing insurance or the risk transfer scenario, to more of a risk financing scenario.”
Despite their tragic nature, Hurricanes Helene and Milton did not significantly alter the market, contrary to what many had feared.
Pizzi says: “So we anticipate that this softening cycle will continue into the fourth quarter and into 2025. I think the rapid rate of deceleration that was starting to occur may start to wane a little bit, so we may see a deceleration of the reduction.
“We are still on a downward trend, but it may temper itself. We will see what 1 January 2025 brings. All indications point to a benign and positive outcome for clients purchasing in this marketplace.”
Adapting to a new normal
This prolonged hardening market has seen captive insurance emerge as an increasingly attractive alternative risk financing option.
Michael Serricchio, Americas captive consulting leader at Marsh Captive Solutions, says the firm has formed 500 captives in the last four years, mostly as a result of the hardening commercial insurance market following the Covid-19 pandemic.
This trend has included property, but also cyber, directors’ and officers’ liability, and other lines of business.
Serricchio continues: “It is good news that property is starting to turn, but it does not mean that clients are going to feel that immediately. There have been hurricanes and other cat events, but hopefully it is quietening down now, and they will have some relief soon.”
Given that this is just the start of potential relief, Marsh and other captive managers do not anticipate a collapse in the property-related captive insurance market.
Indeed, property remains the number one line of coverage for Marsh captives, with premium value increasing US$2.5 billion from 2022 to 2023. In 2023, captive premiums for property risks increased by 29 per cent.
Domiciles too are benefiting from this property boom, in the US, many of the islands, Europe and the Asia Pacific — and even Canada — are getting in on the game.
Serricchio says: “Across all regions and industries, the number one line in captive insurance is property.”
Peter Johnson, chief property and casualty actuary at Spring Consulting Group, is largely seeing new entrants to captive insurance and experienced players deploy structural techniques to manage their property risks.
He explains: “Some new entrants are increasing their deductibles in the commercial market and implementing what’s known as a deductible reimbursement policy within their captive programmes. Alternatively, if the insured requires A-rated paper with a small deductible, or if the market prefers a fronted solution, they may structure the programme with a fronting carrier while retaining a portion of the commercially insured risk layer as the reinsurer.
“Generally, even for large insureds, the commercial or reinsurance market covers higher, catastrophic risk layers. However, captives can also participate through a quota share reinsurance arrangement, ensuring a percentage of a specific risk layer.
“There are various ways to structure a captive programme depending on contractual requirements for A-rated paper, market availability, and other factors. There are many moving pieces to consider.”
Johnson continues: “The most common structures include a fronted programme, where the captive acts as the reinsurer for a specific risk layer, or a deductible reimbursement programme, where the insured increases their deductible in the commercial insurance market and directly insures the risk layer up to the commercial deductible within their captive.”
For existing captive owners looking to expand into property coverage, programme structure is critical.
He explains: “Most will start with one of the two common structures mentioned or may insure a portion of the tower structure, sitting above their primary carrier or captive. This can be arranged as a quota share structure or by insuring 100 per cent of a specific risk layer, such as US$5 million excess of US$20 million.
“In some cases, they might take on a very large risk layer. For instance, we work with a large multinational company that retains a US$25 million excess of a US$100 million risk layer within their captive. Over the past decade, they have built sufficient captive capital to absorb this risk, making the financial reward worth it.”
Amid the softening property insurance market and, despite the two most recent hurricanes in the US failing to spook (re)insurers, a new normal appears to be emerging.
The definition of what underwriters once considered to be ‘catastrophic’ weather events has shifted from earthquakes, windstorm and flooding, to also include convective storms, wildfires and freezes.
Pizzi says: “The new normal has shifted. The severe convective storm activity that plagues the US is unparalleled. We are having tornadoes pop up here in New Jersey where I live, they are not just happening in Tornado Alley; they are happening all around the country in various regions, which makes it a little more concerning for underwriters to adequately price their products, understand where true exposure exists, and get the right capital for their deployment.
“The bucket is getting filled with things that maybe people did not concern themselves with in the past. And I think Hurricane Helene will put a little more focus on storms having the ability to not only breach landfall on the coasts but also move themselves upwards internally and inland to a degree.
Serricchio thinks unpredictability, severity and high frequency define the ‘new normal’ for weather events in the US. But, he argues, the insurance, reinsurance and captive insurance markets are doing what they have been doing for the past 20 years: analysing and assessing the situation. What has certainly changed for all three is the ability to use data analytics and AI to “see when and where they should roll the dice”.
He continues: “We have designed innovative solutions to help, but clients should always carry out their research before building something.
“They can directly insure via their captive when they can or use a front and act as a reinsurer. They can also look at parametric insurance for wildfire or sharing limits across years. It’s about being smarter and buying differently.”
Johnson is less certain about framing the increased frequency of severe weather events in the US as the ‘new normal’.
He notes: “We have seen an increasing number of hurricanes over the last few decades, but this is also due to improved meteorological tracking, media and communication outlets, and technology.
“Additionally, the migration of US residents to coastal areas prone to hurricanes has driven up home values, further impacting insurance costs.
“These factors, combined with inflation and rising construction costs, are pushing the commercial market to adjust pricing accordingly.
“We are unlikely to see a return to rates from even five years ago. Some might consider this the new normal. With ongoing shifts in coastal populations and sustained inflationary pressures, these elevated costs will likely persist.
“If rates in the commercial market stabilise at low single digits, captive interest might decrease slightly, but captives will remain instrumental for many commercial property insurance programmes. They continue to reduce long-term insurance costs and improve risk diversification within captive portfolios.”