Aon’s Miller: Re-acceleration of tough property market conditions “definitely occurring”

Aon’s head of retail property broking in North America Rick Miller said a “re-acceleration” of firming property conditions is “definitely occurring”, as he spoke to The Insurer live from the broker’s first in-person property symposium since 2019.

“It’s definitely a tough environment, we started feeling it in Q4 on some of our larger, cat-driven deals,” Miller told The Insurer in an interview on Wednesday from the event in Orlando, Florida.

Miller’s comments come at a time when challenging property market conditions have arguably been the dominant industry theme – exacerbated by the potential $50bn+ industry loss from Hurricane Ian in September.

The executive said rate increases fell through the first three quarters last year – a trend that reversed in Q4 2022 as pricing jumped around 9 percent, compared to the 5-6 percent gains Aon observed in the third quarter.

“I hate to use that term ‘bifurcated market’, we use that term too much, but I think it’s going to be a ‘cat’ and a ‘non-cat’ market,” Miller said.

He added that clean accounts with “modest cat” exposure should be prepared for rate increases between 10 percent and 20 percent this year, before adding that cat-exposed accounts were “definitely” looking at price rises of more than 25 percent.

“If you're non-cat, there's going to be some pressure,” Miller said. “I think [even on] the desirable accounts underwriters will look to get rate everywhere because the cost of doing business is up and on the better business with more competition, they'll have a harder time doing that.”

“Significant progress” on improving submitted values

Scrutiny of insureds’ submitted property values has been a major market theme in recent years, and Miller said “significant progress” had been made in updating client values, while warning that the failure to do so could lead to adverse placement outcomes.

“I think every account is seeing pressure, even the best accounts. The ones who are on the less desirable end of the spectrum – either from a class standpoint or a loss activity standpoint – could be seeing significant rate [increases],” Miller explained.

Miller made the point that the scrutiny on values was being driven by the fact that a lot of underwriters have been “surprised” by the size of some losses, and that underwriting discipline on the matter has increased.

“I think over the last handful of years there have been a lot of losses that have really surprised a lot of underwriters and that discipline is growing. Let's face it, in a more difficult market, like we've been in, underwriters are going to have the power to bring about that change.”

Miller said underwriters have introduced margin clauses and occurrence limit of liability endorsements to manage potentially outsized exposures for accounts where they may lack confidence in the submitted values.

“I think if an underwriter sees a schedule that they believe the values are right on, the underwriter’s going to be that much more willing to be reasonable than where they had concerns about valuations,” Miller said.

He added that Aon clients increased their values by 15 percent on average in 2022, and said while underwriter opinions on the topic will vary, there is broad recognition that more work on the issue is needed.

Losses drive different outcomes in property vs public D&O

Miller was asked to compare current property market dynamics to other segments such as public D&O, where significant capacity has come in and the market has begun to give back some of the enormous rate gains made in recent years.

“If the losses weren’t there, we wouldn’t be in the market that we’re in,” Miller said of property market conditions. “And the reinsurers, candidly, wouldn’t be pushing. It all comes back to losses.”

Miller said the lack of confidence in values had been a key factor driving pressure from reinsurers and had become enmeshed with the issue of higher loss frequency and severity, though he added that he expects higher reinsurance cost increases to be passed on to insureds.

“If all the parties that take risk – insurers, reinsurers – felt comfortable around what they were exposed to and the risk they were taking, we’d have a lot less of this issue, because I think they would understand what the risk is.”

Rising losses from secondary perils such as wildfire, severe convective storm and even winter freeze have made those risks increasingly difficult to model and price, Miller acknowledged.

“Cat now has got a broader definition than it used to have when it was primarily wind and quake,” Miller said, adding that for the first time in his career, underwriters proactively evaluate accounts for the risk of freeze, after the shock industry loss from 2021’s Winter Storm Uri.

Still, Miller said 1.1 reinsurance renewal outcomes “weren’t quite as bad” as some markets might have anticipated, but would be a key factor shaping property conditions in the year ahead.

“I think the sense is it maybe wasn't quite as bad as I think some people expected,” Miller said of the possible “trickle down” impact of reinsurance costs on primary rates.

Less limit bought

Miller said he’d seen some “fairly significant drops in limit purchased” as clients sought to strike a balance between having enough coverage in place while also maximising the economic efficiency of their spend.

“I think that's definitely going to continue,” Miller said of the limit reductions, adding that there’s been a growing drive among insurers – especially for Southeast-based risks – to increase deductibles and other forms of retention.

But so far, the shift to percentage wind deductibles hasn’t had “much traction” in the large account space, according to Miller.

“You’ll see more of that in small commercial, maybe homeowners, or the E&S space,” he said.

Miller noted that the E&S market “took a beating” in 2022 and added that in 2023 he expects E&S property to remain “extremely challenged”.

“I think the mainline carriers probably made a buck or two – even on their property books – but the majority of them are facing severe increases in cost. What you'll see in the truly E&S space is that it’s going to be a real supply-demand driven world and how much competition can come out of that.”

“But you know those markets, they’re E&S markets, and I don’t mean this to be critical, but they’ll be opportunistic.”