Number of factors pressuring the property insurance market: ALIRT

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A “triple-threat” which consists of more frequent and severe weather-related losses, a protracted inflationary environment, as well as surging reinsurance costs has the property insurance market under “substantial pressure”, according to ALIRT Insurance Research.

ALIRT states that while insurance carriers are consistently working to counteract these trends through more focused underwriting and risk selection, higher rates, tightened terms and conditions, and market exits, there are likely more insurer casualties yet to come.

To counteract this concern, ALIRT noted that there are number of factors that distributors can focus on to help anticipate potential downgrades, as well as severe financial deterioration.

This includes:

  • Geographical and by-line concentrations of risk,
  • Implicit parental strength (how large a holding group structure stands behind an insurer)
  • The trend of quarter-to-quarter underwriting metrics, such as reported and accident year loss ratios
  •  Reserve development and especially increasing additions to prior year reserve positions over time
  •  Operating earnings – especially if operating losses begin to widen
  •  Risk-Based Capital Ratios, especially those that are nearing regulatory action levels

In addition, according to ALIRT, one trend that is always of concern to insurance credit analysts, and one that should be closely monitored is rapid premium growth at an insurer that is already facing substantial balance sheet erosion.

There can be a tendency by such insurers to try to cash-flow underwrite themselves out of current financial woes, but as ALIRT warns, this method almost always ends poorly.

Moreover, ALIRT highlighted the recent substantial downgrades of Texas property insurer Germania Farm Mutual Insurance Association (GFMIA) followed closely by the liquidation of Kansas-based MutualAid eXchange (MAX).

In mid-August global ratings agency AM Best downgraded GFMIA’s financial strength rating from A- to B, a three peg drop reflecting “significant erosion in the group’s policyholder surplus” on “sizeable underwriting losses in the second quarter of 2023 due to sharply higher-than normal catastrophic losses.”

Elsewhere, MAX’s Best rating was downgraded from A- to B++ (5th highest) in 2009. In 2013, the rating was then further downgraded to B+, before being removed at management’s request in 2019.

ALIRT highlighted that in 2021, GFMIA’s accident year combined ratio rose fifteen points to 110% (and equaling
212% in the first half of 2023), while MAX’s rose five points to 104% before topping out at 123% in 2022.

However, these accident year underwriting metrics do not take into account any prior year reserve actions, which
were not a factor in either company’s poor underwriting performance until H123, when prior years were boosted substantially at both companies.

ALIRT stated that this factor along with their shorttail portfolio of risks, seems to indicate that both companies’ financial troubles are tied to loss conditions in more recent accident years. These large and growing underwriting losses resulted in several years of operating losses, as well as an accelerating decline in both insurers’ capital position.

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