New capacity is increasing competition on property E&S deals: RPS

The challenging E&S property market conditions for insureds will likely continue into early 2022 despite increased competition coming in from new capacity, RPS has reported.

In an update on the E&S property market, Arthur J Gallagher’s wholesale platform RPS reported that most carriers are averaging rate increases “well north of 15 percent to 20 percent” irrelevant of asset type but that combined ratios are still not where carriers want them to be.

“Current expectations are that the trading environment will remain status quo without any material change through 2021 and likely into early 2022,” the update said.

It added: “Record wildfires, record numbers of hurricanes, construction losses, and convective storm losses continue to hurt carrier balance sheets and trim margins despite what has been close to two full years of double digit rate increases.”

Recent hurricanes Sally and Laura were not big events for the market but will erode margins further, the update said.

Carriers remain cautious despite new capital coming into the market.

“On the carrier side, we are seeing increased competition on deals as new capacity starts to trickle into the market, which means there is some expectation that rate increases will level off in time,” the update said.

This new capacity is being deployed in a very disciplined manner, RPS said, “so while the increased capacity will soften some increases and make it easier to fill holes in programmes, it certainly does not allow us to see the start of a soft market cycle”.

RPS said that carriers will continue to push rate in very distressed asset classes like multi-family, brush zone/wildfire business and hospitality until the renewal retentions drop.

“Carriers are enjoying some of the highest renewal retention levels they have seen in years and that is on top of the fact that they are looking to trim their books down on some of the exposure types they deem to be less desirable,” the update said. “Carriers are also dealing with a difficult reinsurance market because the retro reinsurance market is stagnant.”

RPS commented that multi-family business is going to remain challenging and “wildfire business is getting close to uninsurable”. While excess hospitality business will continue to be of concern, the wholesale broker said that primary business is starting to get easier because margin and deductibles have returned to those layers.

In addition, the update noted: “The uncertainty around continued social unrest and riots around this year’s election and a potential new Supreme Court justice will likely have carriers concerned about the growing number of vandalism claims that are working their way into the market at staggering loss levels.”

RPS’s comments about the impact of new capacity on the property segment echo comments about the E&S market more generally from AmWINS president James Drinkwater last month.

Speaking on an AM Best webinar, Drinkwater said his wholesale broking firm was encouraged by the new entrants.

“But it does not seem like there’s an enormous amount coming in and I don’t think the market environment is going to change as a result of new capital coming into the market this time,” he commented.

The E&S segment has seen heightened interest, with start-ups and scale-ups targeting what are seen as once in a generation hard market opportunities.