Hope everyone is doing well!
I wanted to take a moment and give you a 2021 insurance industry year in review, as well as some predictions for 2022. These findings are a mix of what I have read, anecdotes from carriers, and personal experience.
2021 year in review
We are seeing mixed results from carriers in 2021. There was a significant amount of storm activity which led to increased pressure on property insurance claims. Couple that with excessive cost of materials and labor shortages — especially in early and middle 2021 — and you have a perfect recipe for increased costs of property claims as an insurance carrier.
Some carriers will be affected differently than others depending on where their business is concentrated, how difficult materials and labor were in their specific areas, and how they structured their reinsurance. Yes — even insurance carriers buy insurance from other carriers (called reinsurance) to cover the large loss events they might incur.
Insurance carriers purchase coverage for large storm losses; these are commonly referred to as cat losses (short for catastrophe). Think of it like a giant homeowners policy with a $3MM, $5MM, $10MM deductible and coverage up to a certain amount per storm: $100MM, $200MM, etc. Carriers also purchase aggregate (total) coverage for all of the storms in a given year so they know the maximum amount they would have to pay on the deductibles. You’ll see this topic resurface in my 2022 outlook.
On the auto insurance side of things, rates probably took a bit of a decrease coming off of 2020, which saw limited driving and fewer claims.
In 2021, we have seen supply chain issues causing problems. It has been extremely difficult to obtain replacement parts, causing extremely long lead times which can increase rental car coverage costs and repair costs to damaged vehicles. Increased costs and values of used vehicles also impact claim cost because the value of a totaled vehicle might have increased significantly in the last 12 months.
On a positive note, with less traffic on the road, claim frequency has been down significantly. To give an example of impact: we spoke with a local body shop that we insure after one of the winter snow storms in early 2021. This storm was a worst-case scenario storm where it snowed during the day, leaving the roads a mess for the after-work rush hour. The owner of the shop had some connections to determine the number of accidents in the Metro-Milwaukee area in these types of situations. The findings? During similar storms from 2019 there were 550 accidents, but in 2021 there were only 57 accidents. Fewer cars on roadways has certainly lowered accident frequency significantly.
Severity has been a different issue. Using simple logic, people have more room to drive faster — and higher speed equals higher severity. This is my opinion based on speaking to many of our insurance carrier partners. As we continued through 2021, traffic started to increase, which will likely lead us to see more frequency and less severity.
Predictions for 2022
Property insurance will see significant rate increases in 2022. The carriers will have to absorb increased costs in reinsurance because of the heightened storm activity from 2021 and the resulting claim frequency.
Carriers will also need to account for increased construction costs on current policies. This will happen by bringing replacement values on policies up to date. We usually see inflation factors on policies of 2-4%. For example, if you have a $500,000 property, a 4% increase is $20,000. With today’s increased construction cost, it is not unusual to see 10-20% increases in replacement cost on some property policies. Depending on the situation, that amount — and then some — could certainly be appropriate given the construction increase we have seen.
Premium increases will be felt not only in the rate itself (due to increased cost of reinsurance and construction), but also in increased replacement cost amounts on property policies. All told, depending on the carrier, we would expect a 5-10% rate increase as a norm. Until the construction costs and labor shortage work themselves out, expect this to be normal. Once they flatten out, we will be looking for more consistent rates.
Auto in 2022 is going to be interesting. I believe the biggest factor will be the shortage of parts and used vehicles. The cost of claims could increase significantly until these items are more under control. At this time, there is really no end in sight, so I believe we will see pressure on auto rates. If traffic patterns start to resemble pre-pandemic form, we would logically see an increase in frequency but a decrease in severity. Normally, those might cancel each other out, but with the repair cost issues we could see pressure on the auto rates as well.
In general, I don’t think the auto pressure will hit until later in 2022. Auto insurance is more predictable than property because you don’t have to guess what is going to happen with storm activity. It will all hinge on the cost of repair and the availability and price of parts and used vehicles. If we see frequency issues and the cost pressures don’t change, I think we will see minor increases in late summer/early fall of 2022. Because this area is not nearly as volatile as property, we could anticipate increases of maybe 3-5%.
These are our best guesses for 2022. Of course, you also have to predict many outside factors. One thing that has been very favorable — and helped carriers control costs the past few years — is that investment returns have been excellent. Whatever they have invested in the stock market should have positive returns, helping to deflect some of the increased costs that are mentioned above.
It would appear that interest rates will probably increase in 2022 to start to control inflation. That would have some impact on a lot of the things that we mentioned above, both positive and negative.
Best guess: an overall increase of 3-8% considering all of the factors. If we get some stability on construction and vehicle repair costs, we might see less impact; if inflation continues, we might see more.
There are certainly plenty of parts moving together in a complicated system. Hopefully, this gives a little insight into how all of it comes together and affects all of our insurance worlds. We will continue to work with everyone to make sure you are placed with quality carriers that are doing their best to control all of these factors and deliver the best value to you, our client.
All the best to each of you in 2022!