2024 State of the Market Executive Summary

Real Estate State of the Market Introduction

In 2024, the real estate industry and insurance market continue to navigate a complex landscape shaped by persistent economic challenges, escalating construction costs, inflated replacement costs, and evolving litigation trends. Despite these persistent headwinds, certain segments of the property insurance market have begun to show early signs of stabilization, while others remain under pressure. In contrast, the casualty market continues to deteriorate, as evidenced by heightened underwriting scrutiny and rate increases.

Many key drivers, such as capacity constraints and heightened underwriting discipline, continue to reshape the risk environment for real estate owners and operators. The impact varies across asset types and individual portfolios, prompting strategic shifts in how insureds manage and transfer risk throughout ownership and lifecycle of a project. Understanding these dynamics and anticipating their trajectory will be critical for real estate stakeholders looking to navigate this period of market transition effectively.

Real estate property and casualty overview

The availability, rates, and terms for coverage will be influenced by each portfolio's specific risk characteristics, such as size, geography, asset mix, loss history, property management practices, coverage structure, and capital expenditure plans, with variability across coverages. Habitational real estate, assets in disaster-prone areas, and assets in high-crime areas remain challenged in the current property and casualty (P&C) market. In prior years, some of these factors may have received less scrutiny, but today, underwriters assess each variable with precision. They do so while balancing the broader exposures their companies face globally, weighing how worldwide losses impact capacity and pricing decisions.

Property

Though the recent property market has experienced significant, unprecedented challenges, in 2024, the market has fortunately begun to show early signs of stabilization because of insureds' investments in enhancing their risk quality, and insurers' efforts to improve loss ratios. Insurers have been diligent in their efforts to improve rate adequacy through strict underwriting practices that assess insureds' ability to prevent, respond to, and rebound from potential loss scenarios. Insurers have also remained focused on insurance to value (ITV), which has allowed them to make strides in reducing the protection gap and improving the predictability of loss patterns.

While primary layers of coverage remain challenging, there is a notable moderation at higher attachment points. Fewer markets are needed to complete property towers, with oversubscription to higher end CAT limits also leading to some reductions in overall rate. However, properties located in distressed geographies or where ITV concerns remain, as well as those with less desirable construction characteristics (non-sprinklered, wood-frame, etc.) are likely to experience much steeper rate increases.

Casualty

On the other hand, the casualty market remains under pressure due to the persistence of nuclear verdicts, economic inflation, growing medical costs, fluctuating replacement values, and increasing labor costs, which have adversely impacted insurers' loss ratios. With losses outpacing favorable reserve developments, insurers are scaling back their capacity and raising rates to proactively hedge against liability exposures.

As a response to escalating liability exposures, many insurers have introduced coverage exclusions or restrictions for high-risk events, such as assault and battery, abuse and molestation, and firearms, even for accounts without related loss history. In other words, policies may exclude coverage for incidents, like on-site assaults, that could lead to costly litigation. Moreover, many casualty insurers are now imposing deductible obligations where previously first-dollar coverage was more common. Additionally, more insurers are implementing a policy aggregate where they previously offered "per location" coverage.

Reinsurance

January, April, and June reinsurance renewals that signal greater stability for the property market. Even though the reinsurance environment for property is more stable, it does not mean that there will be rate reversals or that insurers will reduce underwriting scrutiny, but rather that the market, as a whole, is acclimating to a new normal for loss patterns driven by weather events and higher replacement costs. In spite of improvements for property reinsurance renewals, reinsurers demonstrated diminishing risk appetite for litigation exposures from casualty insurers in U.S. markets.

The reinsurance sector, like the broader insurance industry, is emphasizing loss mitigation and technological advancements.

Industry trends and insurance market drivers

In 2024, many familiar forces will continue to shape the real estate P&C market.

1. Economic and interest rate environment
   Though there has not been a full-blown recession, slowing economic growth, an inflationary environment, and interest rates have created a challenging economic environment for the real estate industry and insurers alike by increasing the cost of capital, claims, and goods. Fortunately, on September 18, 2024, Fed chair Jerome Powell announced the central bank's decision to cut interest rates by half a point, down from a more than two-decade high.[1]
2. Weather events large and small as loss drivers
   Insurers have remained focused on improving their ability to account for the impact of different weather events on profitability, especially those that are becoming greater in frequency and severity, such as hail, flooding, and severe convective storms (SCS). Total global insured losses reached $108 billion in 2023, marking the fourth consecutive year where losses have exceeded the $100 billion mark. And in 2023, straight-line winds, damaging hail, and destructive tornadoes were the primary drivers for insured losses, with SCS losses tallied at around $50 to $60 billion in the U.S. alone.[2] Early estimates show that H1 2024 saw $34 billion in insured SCS losses.[3]
3. Insurance to value (ITV) as the new normal
   Because insurers' focus on replacement costs has increased their overall confidence on insurance to value (ITV) ratios in their books and put the property market in a much better position than it has been in a long time, the trend to push for accurate valuations is set to continue. Fortunately, much of the necessary correction has already taken place. Buyers who provide underwriters clean submissions with clear, accurate construction, occupancy, protection, and exposure (COPE) data, proper ITV, and detailed schedule of values (SOV) will fare significantly better.
4. Catastrophe model updates
   As a response to changing trends in loss drivers, insurers are leveraging new risk modeling technologies that can account for a new normal in which both primary and secondary perils drive catastrophic losses, though the effect on pricing has yet to be fully seen. Two notable software modeling updates include Moody's RMS v23 and Verisk's NGM, both of which utilize expanded data sets and advanced modeling frameworks designed to more precisely predict insured losses resulting from extreme events.
5. Litigation trends and casualty market
   Social inflation, nuclear verdicts, and third-party litigation funding (TPLF) continue to shape the real estate casualty market. Social inflation has initiated a cycle where nuclear verdicts have become the norm, driving up claim frequency and severity. Of the 1,288 nuclear verdicts delivered between January 1, 2013, and December 31, 2022, about half were between $10 million and $20 million, and over one-third were between $20 million and $50 million. The remaining 19 percent of nuclear verdicts exceeded $50 million, including 115 mega nuclear verdicts of $100 million or more.[4]
6. Persistent labor shortages
   The real estate industry continues to face challenges with hiring and retaining employees that can manage and maintain properties. Data from the Bureau of Labor Statistics revealed that in January 2024, the real estate, rental, and leasing sector had 178,000 job openings.[5] Elevated turnover rates exacerbate maintenance challenges, potentially increasing the incidences of cleanliness issues, safety concerns, and on-site liabilities. The scarcity of qualified candidates can force businesses to lower their hiring standards, inadvertently introducing potential risks and claims scenarios.
7. Variance by asset type and build
   The real estate industry is dynamic and continually evolving to meet people's shifting preferences for working, living, and connecting. In 2024, sector-specific trends, such as occupancy levels, demand, consumer behaviors, and geopolitical trends are shaping different areas within the real estate industry. The insurance market's risk appetite varies by asset classes, building features, and geographies, with habitational real estate and wood-frame assets being particularly challenged asset classes.

Protecting the Possible®

As you manage the complexities of your operations and navigate a continuously evolving insurance market, partnering with a specialized insurance advisor who understands and speaks your language can help you stay ahead of risks to protect your assets and investments, allowing you to remain focused on your goals. The Baldwin Group's dedicated Real Estate Practice is comprised of experts who deeply understand the complexities of the real estate industry, the market environment you operate in, and the insurance solutions necessary to protect your ventures every step of the way.

Together with you, we'll work toward fortifying your property's defenses and operational resilience to help obtain optimal results from the insurance market. Our goal is to advocate on your behalf and bridge the gap between what an underwriter might initially see about your organization and what lies beneath the surface. By tapping into your unique business intelligence, enhancing your risk profile, and leveraging our market influence, we help you approach the insurance market with confidence. And as you traverse the world of coverages and make decisions for your organization, our team will help you decode the insurance world and weigh the benefits and downsides of available options.

View the full report here

Resources

[1] The New York Times, "Fed Announces Big Rate Cut," Jeanna Smialek, September 18, 2024

[2] Artemis, "Future active US SCS seasons will see losses eclipse 2023's record: KCC," Steve Evans, July 30, 2024

[3] Munich Re, "Severe thunderstorms and flooding drive natural disaster losses in the first half of 2024," July 31, 2024

[4] U.S. Chamber of Commerce Institute for Legal Reform, "Nuclear Verdicts: An Update on Trends, Causes, and Solutions," May 30, 2024

[5] Newsweek, "Real Estate Companies Struggle to Hire as Housing Market Stalls," Omar Mohammed, March 6, 2024

Public link

Please use the above public link if you want to share this noodl on another website.