It’s no secret that the insurance industry is facing unprecedented challenges, with five straight years of losses and a 10-year high in catastrophe claims damage. In 2022, inflation was at its highest level in decades. The insurance market struggled to match premiums with actual claims costs.
The world is getting riskier.
These insurance industry trends have affected pricing and premiums. It’s led to reassessing underwriting and risk selection.
Swiss Re reports the struggles to find rate adequacy in a hardening market pose a financial stability risk to the industry as a whole.
Insurers are facing immense challenges due to:
- heightened prices of materials
- supply chain issues
- labor shortages
- rising replacement costs and underinsurance issues
- struggles with regulation rates
- an increase in catastrophic weather events
- reinsurance rate increases
- increased litigation
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Industry Trends and Risk Mitigation
Insurance Industry Trends in 2023
Inflation and Supply Chain Challenges
According to The US Bureau of Labor Statistics, $1.00 in 2020 now costs $1.78 in 2023, creating a domino effect of increased pricing. Inflation has been gradually easing over the past year, slowing to 6% in February 2023. That’s down from a 40-year-high of 9.1% in June 2022.
However, combined material costs have still increased 7.8% from 2022 to 2023. Interior trim (up 22.1%) and roofing (up 16.5%) were huge drivers in rising reconstruction costs.
Some states had larger spikes in reconstruction costs than others. The costliest states for rebuilding residential homes were:
- Florida: up 12.4%
- South Carolina: up 11%
- New Mexico: up 10.7%
- Arizona: up 8.3%
Similarly, labor costs rose 9.4% from 2022 to 2023.
These increases have affected every area of business. The increased materials and labor costs, supply chain delays, and specialty labor shortages have led to much longer repair wait times. Customers are in temporary rental homes much longer than before, which further increases costs.
Auto insurance has seen even worse impacts. The complexity of customized luxury vehicles makes it more expensive and time-consuming to repair a vehicle.
According to the CCC Crash Course Report 2023, auto parts are up 22.5%, and car repair labor costs increased 9% last year, even higher for luxury auto technicians. The average repair wait time is 4 – 6 weeks due to supply and labor shortages. The report also noted more cars are being totaled as a loss instead of being repaired.
As a result, premiums have gone up significantly to compensate.
Replacement Costs and Underinsurance Issues
“Replacement cost” is the term used for the cost to rebuild a home in today’s market with like quality, design, and materials. An accurate replacement cost on the policy ensures the home is rebuilt to its original quality.
But the rapid changes in the cost of luxury materials, labor, and property value are leading to an underinsurance issue for many homeowners. If an insurance policy has not been updated to reflect coverage in today’s market, it leaves the homeowner underinsured if a claim happens.
Reconstruction coverage must keep up with these changing prices. Thus, reassessing a home’s insurance-to-value more frequently is necessary.
Another change impacting reconstruction costs is manufacturer discontinuations. Luxury material manufacturers now stop producing colors, patterns, and materials every 6 – 12 months. This leads to matching issues following a claim. Replacing small, damaged sections becomes impossible, so claims become much larger.
Also, affluent individuals have higher quality materials requiring expertise to rebuild and replace. Coverage needs to adapt to changes in costs to ensure the replacement coverage protects all assets.
Struggles with the Admitted Market
Given the state of the market, insurers who are not utilizing Excess & Surplus (E&S) will struggle as regulation lags and insurance pricing issues remain.
Changes to regulation are slow. The rate-approval process is set up to recognize trends over a long period instead of considering sudden economic changes impacting customers and insurance companies.
Considering these rapid changes but slow regulation updates, insurers are finding it increasingly more difficult to insure high-net-worth clients with traditional policies. This has led to more policies being underwritten in the E&S market after failing to find an insurance product that will meet the customer’s needs in the admitted market.
In areas such as California, where wildfire risks are high, underwriting has seen a loss 2011 to 2020. Regulations require wildfire coverage and prevent non-renewals due to catastrophic risks. It has become clear over time there’s no way for an insurance carrier to turn a profit in such a market under traditional insurance policies.
Other states, such as Louisiana, have seen huge losses as well. Winter Storm Uri, followed by Hurricane Ida, led to many insurers going insolvent. The state saw loss ratios far above 100% for several lines of business.
This led to huge losses in 2022. Guy Carpenter Strategic Advisory US High Net Worth Personal Lines Overview from Marsh McLennan notes that high net worth homeowners combined loss ratios have averaged 110% over the last five years, 6% higher than the general market.
Personal auto insurance was the poorest performing line of business, with a 93.1% loss ratio, up 10.9 points from 2021. Industry-wide reported losses were $36.3B in 2022.
As a result of these challenges, more insurers are moving to E&S home policies and making changes to auto underwriting. E&S premiums exceeded 10% of total industry premiums in 2022, more than double the share in 2021. AM Best rates E&S lines as a resilient area of business for the foreseeable future.
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Cat-Prone Homes Will Pose Huge Risks
Rising global average temperature has led to widespread changes in weather patterns. Extreme weather events are likely to become more frequent and more intense, according to the Environmental Protection Agency.
Over the past five years, we have seen an increase in these events. Weather projections over the next few decades will impact the insurance industry and risk appetite.
These changes have led to catastrophic losses, driven by population growth in disaster-prone areas.
High-net-worth clients tend to live in the same communities in cat-prone areas, driving up the risk and costs when catastrophic weather occurs.
The Met Office reported the total cost from catastrophic events of 2022 was $165.1 billion. It was the third most costly year on record, behind 2017 and 2005. Before 2017, the average number of severe weather events in the United States was only eight events a year. The average between 2017-2022 was 18 events.
Aging or poor-quality homes are ill-equipped to handle these types of events, leading to huge increases in water damage and freezing claims. Water and freeze damage comprise about 30% of all claims, causing $20 billion in damages annually.
Unprecedented weather changes are now happening year after year. The Deep South freeze, caused by Winter Storm Uri in 2021, occurred again for the second year in a row in 2022, causing pipes to freeze in Texas and Florida. These types of weather claims events aren’t supposed to happen in these regions.
The 7th National Risk Assessment: Worsening Winds report also acknowledges tropical cyclone patterns and wind exposure levels will change over the next 30 years. These pattern changes expose 13.4 million more properties to severe weather patterns.
Wildfires continue to be a widespread problem. While California is most at risk due to its Mediterranean climate, other states such as Texas, Florida, Arizona, North and South Carolina, and South Dakota are seeing more wildfires. 2021 was the costliest year on record, costing $4,389,000,000 for wildfire suppression.
According to Swiss Re, climate change-related claims could increase more than 60% by 2040.
As a result, leading insurers and brokers are going to be taking a leadership role in advising clients in risk mitigation and education.
More insurers will have mandatory requirements for mitigation tools such as temperature monitoring devices, water leak detection, and automatic water shut off valves. They’ll reassess previous building code requirements and inspections to ensure homes can withstand the current climate.
They’ll also be sharing more educational resources, such as best practices for storm prep. Coverage will be reduced or co-insurance imposed to incent maintenance and risk mitigation. And they’re reassessing risk appetite and distribution models to reflect climate change.
Reinsurance Rates Skyrocket
Reinsurance companies and retrocession both play a large role in the insurance world. It’s a factor many outside the industry don’t realize the extent to which it impacts insurance pricing.
Reinsurance is insurance for insurers to back part of their risks, such as major events like hurricanes. Retrocession is what reinsurers buy to cover some of their own risks, too.
Starting at the top, there’s been a reduction in retrocession, meaning reinsurers must hold more of their own risks without a backup.
Besides less retro to work with, reinsurers have also been leery of the continued impacts of weather events. Hurricane Ian and the increased frequency and severity of storms are causing huge losses.
As such, reinsurers are beginning to leave certain markets, such as Florida. Or they’re increasing prices so much that insurers cannot buy all the reinsurance they need.
Dowling reports the property catastrophe reinsurance market is performing a “hard reset.” Insurers are looking at a 30%-70% increase in risk-adjusted rates because of these market challenges. This compounds the impact of the premium rate increases.
This large price increase will trickle down into the entire insurance landscape.
Litigation Issues
Legal system abuses and litigation have caused claim costs to skyrocket. Judgments over $1 million have increased by 235%, and personal injury settlements are up almost 320%.
The APCIA has identified 11 states with high instances of legal system abuses: Florida, California, Texas, South Carolina, New York, Pennsylvania, Colorado, Georgia, Illinois, Washington, and Missouri. Swiss Re states third-party litigation funding, where hedge funds and family offices finance profitable legal action, has drawn out cases and driven up costs.
For example, Florida has one of the most punitive environments for attorney fees, resulting in significantly higher settlement costs. Florida alone accounts for 79% of all home insurance lawsuits. The Florida Office of Insurance Regulation states that $51 billion was paid out in lawsuits over ten years.
In Texas, there’s a huge increase in what TLR calls “storm-chasing lawsuits.” Attorneys approach property owners to file lawsuits following strong storm systems. More than 36,000 storm-related lawsuits have been filed since 2012.
According to the National Highway Traffic Safety Administration, the number of miles traveled in 2021 increased by around 325 billion, and road fatalities rose 10.5% from 2020, the largest annual increase since 2005. As a result, bodily injury severity increased by 40%, and personal injury judgments jumped 25% since 2020. Uninsured motorists are also on the rise, increasing by more than 460,000 people between 2015 and 2019, as reported by the CCC Crash Course Report 2023.
This rise in litigation will continue to impact the insurance market and pricing.
Underwriting Reforms
Insurers are updating underwriting policies in the face of record inflation, weather events, and stretched-thin risk appetite.
Insurers have had to aggressively respond to these rising loss costs. Policygenius reported that 90% of homeowners saw an increase in their premiums as a result. Some states saw between 15-40% rate hikes in 2022.
Underwriting and catastrophe models are becoming increasingly more precise in forecasting losses of all perils, including hurricanes, severe convective storms, winter freezes, and wildfires. This allows for targeted pricing and exposure management to provide solutions to individual risk characteristics.
They’ve also had to rethink past standards because what we used to think was a good risk isn’t necessarily the case anymore.
For example, Texas building standards do not require insulating pipes. Now, with back-to-back winter freezes, these standards must change.
In Florida, tile roofs were once considered to be high quality with a 30-year life span. But thanks to increased sun damage, strong severe storms, and hurricanes, they’re proving to last a much shorter time.
These scenarios need more thought and new approaches to properly assess risk. The E&S market can provide customized solutions for a customer’s specific risk characteristics.
Navigating Risks: Solutions to a Shifting Market
While these insurance trends present immense challenges and lasting impacts for insurers, we at Vault feel confident in the solutions for a strong future.
We have identified four vital steps to move forward:
- Shifting to E&S insurance will allow for stronger resilience and more customization of high-net-worth customer policies where none are available in the admitted market
- Updating risk appetite to reflect current trends and projected changes with weather events
- Customer risk education and mitigation to reduce risks before they happen
- Improving insurance technology, underwriting, and catastrophe models, and rethinking coverage options
We believe reducing risks through data-driven technology, strategic underwriting, and customer risk education will allow the market to navigate these risks and build increased stability for the future.
At Vault Insurance, protecting your assets is more than insuring them. It’s looking at the bigger picture to reduce all possible risks. We provide all-encompassing risk management services to help proactively safeguard the life you’ve built – that’s the Vault difference.
Request a quote and experience the Vault difference.
Related Products: Vault Custom, Homeowners Insurance
Featured Resource:
Navigating Trends and Risks in High-Net-Worth Insurance
Industry Trends and Risk Mitigation
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