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If you have never read one of our blogs, PLEASE READ THIS ONE. If you have been reading them, THIS ONE IS EXREMELY IMPORTANT. It’s pretty long but hang in there until the end.
We are going to take a few moments and address sweeping changes in the property insurance marketplace and how things will be covered moving forward in wind and hail claims. Everyone with a homeowners policy and most with a business policy will be affected by the terms and conditions of the policies themselves. We are doing our best to make everyone aware and there is plenty of written documentation in each policy but I wanted to take a moment to give everyone an overview of how the market got to this place and where things stand moving forward.
In the property insurance market we are seeing rates rising 20-30% as the norm rather than the outlier that it might have been in the past. 2022 and 2023 brough unprecedented challenges to the Midwest insurance marketplace due to a combination of increased storm activity and inflation surrounding repairs and replacement cost of damaged or destroyed property. The industry results for personal insurance were very poor in 2022 and 2023. Most carriers had a combined loss ratio (claims plus operating expenses) of somewhere between 110 and 140% for those two years. Simply put, those percentages mean that carriers paid out somewhere between $1.10 and $1.40 for every premium dollar that they took in. Underwriting has also tightened up and we are seeing many carriers change requirements in order to obtain coverage. All of this leads to a situation where it becomes very difficult to obtain replacement coverage at a better combination of coverage and price than current even though these significant rate increases are in play.
Call the increases and underwriting changes part one of the story. Carriers need to stabilize their balance sheets by adding more rate. Insurance consumers will have to carry the burden the poor years in 2022 and 2023 with increased premiums in 2024. This has happened a few other times over my 30 year career and can be explained with simple economics. We are all paying small amounts of money to the insurance carriers to cover much larger valued assets. The insurance carriers count on the law of large numbers and can usually predict patterns in claims, policyholder behavior, etc. in order to set the rates at a level where they are MAKING 0-5% not losing 10-40. When the industry-wide results get negative as we have seen in 2022 and 2023 there is usually some sort of reckoning coming in order to make up for the previous losses. When thinking about this issue, we have to remember that it takes the insurance carriers a good 12-18 months in order to improve results. A rate increase effective today takes an entire 12 months to run through an entire book of business (they can only increase rates at your renewal) and improvement in results typically lags another six months as the increased premium catches up with the loss history. I wanted to point that out because it is not as simple as increasing the cost of gasoline to account for the next truckload or the price of eggs for a temporary shortage. The carriers will still be recovering through most of 2024 as the increases take effect at the renewals.
Here is part 2, TIME TO PAY ATTENTION, this has never happened in the industry to this degree. While the carriers try and right the ship from a financial perspective, they also have to make sure that their products are sustainable into the future. The wind/hail claims, especially those with roof resurfacing, have become a huge part of the expense on the carriers’ property insurance writings. The companies have had no choice but to change the language in their policies in order to combat the increasing cost of repairs (especially the roof) and clarify what constitutes damage as it relates to these claims. The typical claim prior to the shift in coverage would offer replacement cost on the roof. Hail damage to an asphalt shingle roof is considered a compensable claim because the integrity of the shingles is damaged by the impact of hail and subsequent loss of the granular composition of the shingle. The problem facing the industry is that roofs 20-30 years old are far more susceptible to damaging hail, technology has made hail much easier to track, and roofing contractors have become adept at navigating the insurance policy and offering the homeowner a solution to their damaged roof which does not include having to pay for it themselves. The industry has to find a way to continue to offer coverage on the roofs while finding a middle ground between the replacement cost contract of today and whatever is offered moving forward. There is no doubt this will shift how wind/hail claims are managed moving forward and policyholders will be left carrying more of the burden in return for making sure that these new insurance contracts keep the market viable into the future. There are four pieces that address most of the coverage changes. Carriers are shifting these forms as we speak, most have changes that are working through their renewal book of business already and some have plans in the works. At this point we are certain every carrier will have made some changes to address this issue.
Here is a summary of the four methods. Keep in mind the information will be spelled out in the renewal documents sent by the carriers. If you are looking for further clarity on how these changes might impact you, please reach out to your agent and we will explain the difference in the coverage. Some of these may also have been implemented within the last 18-24 months and may already be spelled out in your policy.
Carrier would increase the deductible based on the age of the roof, value of the home, or combination of the two. We also see separate wind/hail deductibles that might apply to the coverage. Examples, you may have had a $1,000 All Peril deductible but the renewal might have a $1,000 deductible but include a $5 or $10K deductible for wind and hail losses. Some may just increase the deductible for everything to $5 or $10K.
Carrier would change the wind/hail flat deductible to a percentage of the home value. Most commonly, you would see something between 1-2%. Some will have a flat percentage while others will increase as the age of the roof increases. Examples of this -- $1,000,000 home and a 1% wind hail deductible would mean that the wind/hail deductible is $10,000 – a $500K home and 1% would be $5,000. Example of increasing with roof age, 1-10 yr. old – 1% wind/hail deductible; 11-15 yr. – 1.5% deductible; 16 yr. and older 2% deductible. This is the carriers way to offset the exposure and likelihood of damage to an older roof versus a newer roof by increasing the deductible as the roof ages.
ACV settlement means that at some point in the coverage the policy shifts from replacement cost to ACV. This is another way for the carrier to control the exposure especially on older roofs. When a typical asphalt shingle roof has a 30-35 year life it may not make sense to offer replacement cost but an ACV settlement at a certain point. ACV settlements would mean that the carrier would offer a depreciated value for the roof. There are a number of ways this has been implemented. Some have language in the policy that indicates a roof claim will be adjusted on an ACV basis after a certain age (15-20 yr. most common). Others have a depreciation schedule attached. As the roof ages, the policyholder would get a smaller percentage of the replacement cost. Examples might include 65-75% at age 15, 40-60% at age 20, etc. If the carrier has adopted this policy language, the actual schedule with corresponding percentages will be included in the policy. Others just have language that indicates all roof claims will be covered on an ACV basis based on the condition and age of the roof at the time of loss.
Most have also implemented some form of a cosmetic damage exclusion. Basic premise of the coverage exclusion is that if a homeowner has visible hail damage to part of the home but the structural and mechanical integrity of the damaged material is not compromised, the cosmetic exclusion would apply and the carrier would not pay for that loss. Examples of this might come into play on siding, gutter, downspouts, roof vents, or a metal roof. A lot of items made of sheet metal or similar materials may show signs of damage (usually from hail) but it may not alter the effectiveness of their intended use. Most common example here would be a roof vent. Many hail losses include these as damaged items even though a few indentations to the sheet metal will not decrease their effectiveness. Older policy would have replaced. The cosmetic exclusion would apply if included in the policy and the damaged vents would not be covered unless their mechanical effectiveness is limited.
We believe once the dust clears that carriers will implement at least two and in some cases all of these items in order to contain costs on wind and hail claims. To interject some opinion here, I believe that these are necessary solutions to keep the property insurance market viable. What has happened to this point is that all of us as policyholders have had to shoulder the burden of the cost of these wind/hail claims. We have all seen roofing contractors and storm chasers knocking on doors in neighborhoods after hail storms. There was probably a time where we were all a little bit less aware of when and where it hailed. Those days are certainly over. Technology provides hail maps for all measurable hail in an area with specific date information. Contractors, The Weather Channel, local news, etc. have all increased their coverage of these events. When you see your neighbor getting a new roof, of course you want to look into it for yourself to make sure something is not damaged. We have all also heard our friends and neighbors say that they are just waiting for the hail storm to pay for their new roof. I believe most of these conversation are meant to be in jest but the fact of matter is that insurance carriers have been paying replacement cost for roofs that have exceeded their effective life. As policyholders, we have all paid for these claims collectively.
Part 2, the four concepts above, will allow carriers’ product to remain viable into the future while offsetting some of the cost of each claim directly to the policyholder who is getting the benefit of the repair or replacement. We feel this will be the new long term approach in the industry to share the cost of these items as equitably as possible. Part 1, the rate increase will continue through 2024, but should begin to level off with the implementation of these concepts and hopefully, a decreased storm concentration in the Midwest.
Thanks for taking a moment to read this. Contact us if you have any questions, we are here to help.
Jon
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