Catastrophe losses may raise rates, reduce homeowner protection: S&P

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As insured catastrophe losses surge, potentially leading to higher rates and diminished homeowner protection, S&P Global Ratings, a provider of credit ratings and research, examines the challenges facing property/casualty insurers.

s&p-logo-newIn their recent report, S&P highlight how recent data shows that insured catastrophe losses in the US have soared to over $40 billion annually on average in the past seven years, compared to $22 billion annually from 2010-2015.

This spike is largely due to more frequent hurricanes, wildfires, and severe storms. As a result, insurers have significantly raised rates and adjusted their underwriting practices to limit exposure to these frequent loss events, potentially leading to higher premiums and less coverage for homeowners.

P/C insurers face several key risks and trends. Extreme weather volatility remains a very high risk with no expected change.

Regulatory hurdles affecting personal line insurers’ rate adequacy are elevated but improving. Higher-for-longer interest rates present a moderate risk with an improving outlook.

Heightened cyberattacks pose a high risk with no anticipated change. Persistent inflationary pressures create reserve uncertainty and more expensive claims. Accelerated technology transformation requires new regulatory and insurance approaches. The hard reinsurance market, impacting primary insurers’ risk transfer, is improving.

Geopolitical tension and challenges in the commercial real estate market remain moderate to elevated risks. Rising investments in private credit and illiquid assets lead to liquidity concerns. These factors suggest a challenging landscape for P/C insurers, requiring ongoing adjustments to navigate effectively.

In the past 18 months, reinsurers have been reducing coverage for lower layers of natural catastrophe protection. Consequently, primary insurers are retaining more risk and paying more for coverage, particularly in personal lines, which are more exposed to property risk.

This pullback is driving a negative outlook for the P/C insurance sector, with weakening balance sheets and deteriorating underwriting margins in personal lines (both auto and homeowners).

Despite these challenges, P/C insurers can adjust their strategies as most property policies renew annually. While regulation and product/geographic concentration may slow this adjustment, the sector is expected to maintain high credit quality, with a median rating of ‘A+’.

Insurers are likely to charge higher rates for homeowners’ policies and reduce coverage in areas prone to natural catastrophes, especially where regulatory limits prevent rate increases. This will result in homeowners retaining more risk and paying more for less protection.

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