The Residential Property market has experienced severe volatility over the past several years, including pronounced rate increases and capacity limitations in California and other western states impacted by wildfires.
As weather-related catastrophic (CAT) events and wildfires have become more frequent, many insurance carriers have adjusted their risk appetite. An increase in claims activity has forced carriers to limit capacity, resulting in increased rates, more exclusions, and changes in terms and conditions.
Key Takeaways
- The Residential Property market is coming closer to achieving rate adequacy but is still struggling to manage risk aggregation and capacity limitations.
- The Excess & Surplus (E&S) market is expanding rapidly due to its flexibility in addressing the admitted markets appetite reduction, capacity shortages and its continued ability to place high-risk properties
- Non-traditional events like freezing, wildfires and convective storms have joined hurricanes as drivers of rate increases and reduced carrier appetite.
- Hardening market conditions have spurred demand for layered policies and coverages such as flood, earthquake, and deductible buybacks to address coverage gaps.
- California’s FAIR Plan policies have more than doubled, highlighting the need for creative strategies to meet demand.
- Carriers increasingly leverage third-party data and scoring systems to assess high-risk properties more effectively.
For many years, the Residential Property market was most impacted by hurricane activity. However, over the last decade, carriers have had to manage losses from increasingly frequent weather occurrences such as windstorms, freezing conditions, wildfires, and other non-traditional CAT events.
These changes have prompted the market to rely more heavily on layering, while using all available capacity from a Homeowners policy. Coverages for floods, earthquakes and deductible buybacks also are increasingly in demand because of the increase in severe weather events and the hardening Residential Property market.
California market dynamics
The wildfires in California during 2017 and 2018 were the catalyst in identifying rate adequacy, fire mitigation, and other market trends. The Camp Fire, in particular, was a market changer as it alone became a $16 billion event and displaced more than 50,000 people.
Since then, most carriers have stopped or significantly reduced their wildfire coverage. Currently, the 12 largest carriers comprise about 85 percent of the Residential Property market in California. The California FAIR Plan, the state’s insurer of last resort, now has around 450,00 policies, more than doubling in the last few years, and it recently surpassed $1.2 billion in written premiums.
Similar to other sectors, E&S has stepped in to fill the void left by admitted insurers in the Residential Property space. Homeowners are increasingly relying on the California FAIR Plan, surplus lines and brokers and agents who can creatively develop policies to meet coverage demand.
Record surplus growth
With these market dynamics, the E&S market is experiencing record growth in the Residential Property space. This adjustment is necessary as CAT claims can occur anywhere, despite higher concentrations along the coasts. Since 1980, there have been 400 separate weather events that have cost the insurance industry at least $1 billion, which equals nearly nine annual events. The frequency of these billion-dollar events has surged in the last few years, reaching 22 per year from 2021-2023. While inflation plays a role in these statistics, the impact on carriers remains significant.
Admitted carriers are getting pummeled by severe weather, jury awards, inflation, and other factors that limit profitability. They prefer providing capacity to insureds with newly constructed homes that have implemented risk management devices and strategies. Even with the growth in E&S, adequate capacity is not guaranteed. A growing number of surplus carriers require more information from insureds so they can make more informed policy decisions, often relying on third-party data and insurance scoring to help offset the impact of high-risk properties.
For these reasons and others, the E&S market is better positioned to manage these challenges given their ability to utilize freedom of rate and form. Carriers are using a strategy known as concentration management to effectively support their portfolios and limit their exposure in any given area. Additionally, carriers are reducing the amount of exposure they have on risks that do not have preferred characteristics by using actual cash value roof payment schedules, increasing deductibles, and limiting terms to be able to provide solutions despite the increased challenges facing the insurance marketplace.
Risk management strategies
One of the most effective ways to combat capacity issues with Residential Property policies is through risk management. Homeowners should consider taking proactive measures such as:
- Ensuring all fire alarms and smoke detectors are working properly and tested regularly
- Installing automatic water shutoff devices
- Implementing a temperature monitoring system
- Formalizing a residential maintenance plan for large homes, and sharing that plan with underwriters
- Scheduling periodic plumbing and electrical home reviews with experienced and licensed professionals
For wildfire-prone regions, especially for insureds who wish to maintain fire coverage, the following risk reduction actions also are recommended:
- Considering optional wildfire deductibles
- Closing all eaves
- Implementing fire resistant venting
- Removing brush and maintaining fire-smart landscaping
- Using a third-party wildfire defense service
Burns & Wilcox has a partnership with Wildfire Defense Systems (WDS), a private company specializing in wildfire loss prevention and mitigation. As part of the relationship, Burns & Wilcox provides qualified WDS wildfire resources and personnel to insureds of its retail insurance clients in 12 states.
Note that excluding fire coverage is not an option for California residents.
Power of relationships
Too many brokers and agents take a “shotgun approach” and shop Residential Property policies to multiple wholesalers. This strategy can hinder the opportunity to collaborate with a wholesaler to present a risk in the most favorable light, including a narrative that provides the necessary context to allow underwriters to make an informed coverage decision. Brokers and agents also should find out if their clients are approaching multiple retailers for quotes, which could also jeopardize their chances of securing adequate coverage.
Simply put, volume shopping can do more harm than good. By leveraging an existing relationship with a wholesaler, the retail agent has a better chance to partner with a wholesaler and present the client’s insurability to market underwriters. This type of open and transparent communication helps to confirm what the client truly needs, rather than relying on past history, which may be outdated or not appropriate for current needs.
Developing and nurturing this relationship between retailers and wholesalers can also help confirm what brokers should ask for, especially with the E&S market. If you do not have the right “ask,” it is less likely that you will get the coverage you need at the desired rate.
Tips for brokers and agents
One of the best ways to increase the chances of securing adequate Residential Property coverage is to help make an underwriter’s job easier by proactively eliminating concerns.
- Submit clear and complete submissions. Address every detail about the property, including potential risks such as business activities or rental use.
- Highlight preventative measures. From wildfire mitigation and flood preparation to formal maintenance plans and regular plumbing and electrical reviews, documented risk management efforts can make a property more attractive to underwriters.
- “Pre-underwrite” risks. Address potential red flags before submission. Provide context for any past claims or issues to help underwriters view the risk more favorably. Communicate what steps were taken to mitigate the risk from future losses.
- Manage client expectations. Set realistic expectations with clients about the current market challenges, such as higher rates and reduced capacity.
- Communicate clearly and often. Provide ongoing updates and educate clients about the benefits of difference in condition policies or additional coverages like earthquake, flood, and deductible buybacks.
- Build strong relationships with wholesalers. Avoid the “shotgun approach” of shopping policies to multiple wholesalers. Instead, focus on building a strong relationship with a trusted wholesaler, so you can be in a position to negotiate favorable terms with carriers.
Contributors: Bill Gatewood, Corporate Senior Vice President, National Personal Insurance Practice Leader, Burns & Wilcox; Heather Posner, Vice President, National Product Leader, Private Client, Burns & Wilcox; Albert Reed, Manager, Personal Insurance, Senior Underwriter, Personal Insurance, Burns & Wilcox; Virginia Mathurin, Director, Property Underwriting, Personal Lines, Markel Specialty
