Happy New Year everyone!
With 2020 in the rear view mirror, let’s hope for a 2021 that puts a little more normal back into our lives.
With all that has happened in 2020, I thought that we could take a moment to review how insurance carriers are reacting to the different changes in our daily lives and how that might impact your premium. To be transparent, some of this is information from our carriers and some is opinion based on industry trends and what we are seeing in the marketplace.
Let’s start with auto insurance. For the first time, we saw insurance carriers return premiums because the pandemic changed the way that we used automobiles. Some carriers gave a flat amount, some a percentage for a number of months, and some a renewal credit. From here, the question is, how did the carrier results end up for the year? Did the credits make sense? Will the rates sustain themselves or even drop in 2021?
From what we have seen, carriers have done well on the auto side in 2020. With reduced driving, claim frequency has gone down across the board, despite the fact that we have had a lot of carriers mention a jump in accident severity which would impact results negatively. Overall, we expect a positive outlook for 2021, with auto rates remaining relatively stable.
From the property side of things, 2020 was not quite as smooth. There were two significant things working against the carriers: storm activity and construction costs.
First, let’s review storm activity and how it might affect your insurance policy. It is important to ignore the myth that Midwesterners are paying for protection against hurricanes even though we do not experience the direct impact of the damage, because it is simply not true. 2020 was a terrible year for hurricanes as well as wildfires in CA and CO specifically. Those natural disasters can have an impact on the Midwest because most carriers purchase insurance to cover these catastrophic events to help defray the costs. It would be fair to say that we can expect our carriers in the Midwest to pay more for this reinsurance because of the unprecedented season of storms and fires, but it would have a more minor impact on rates.
We have also had our fair share of storms in the Midwest, which do have a direct impact on claims activity and rates. Many of us learned a new word this year, derecho. This was a storm that went from Iowa into Illinois on August 16, 2020. Think of it like a hurricane on land. It was very powerful and caused a lot of damage. It is very unusual for a storm this widespread to pass through the Midwest and the estimated damage was between $7-8 billion. Obviously, a hit like that takes significant capital from the insurance carrier’s pockets.
If you couple the major storm activity with a sharp increase in construction costs, the situation gets trickier. Let’s look at lumber for example. The US/Canadian border is closed due to the pandemic, meaning that lumber cannot be sourced from Canada. In addition, the mills are also operating at a lower capacity due to Covid-19. Throw in significant storm activity, and now there is a situation where the cost of lumber skyrockets with increases anywhere between 3-4 times. Construction costs have also increased 30-50%. If you look at Cedar Rapids, IA (ground zero for the derecho), there is no lumber (and many other materials) to acquire. Combine this with transportation costs to get the materials, and you see another unusual increase.
In the end, all of this adds up to expected increases in property insurance rates. Claim frequency is up due to storms and cost have increased due to a variety of factors including the pandemic. We hope that as the pandemic lessens and people can return to full production safely, that we will see relief. We are expecting somewhere around an average of a 10%-15% increase on property insurance rates for the next 12 months.
There’s the overview for 2021 based on some on the impact of 2020. We are hoping for a much smoother 2021 which results in less volatile rates for everyone. In the meantime, as always, thanks for allowing us to protect your families. Keep them safe and healthy.