With 2023 in the books and 2024 underway, I thought it would be a good time to share some thoughts about the insurance industry and where it is headed in 2024.
2023 was another challenging year for insurance carriers in the Midwest. Storm frequency and severity along with inflation pressure on replacement and repairs lead to higher than expect losses on the property side of the business. On auto, frequency leveled off but severity continues to be a concern. Juries are awarding huge verdicts to plaintiffs creating higher than expected losses on the auto and umbrella side. We were talking to one carrier in particular who indicated they had 8 losses of $5M or greater open from 2023. They had only had one such loss in 2022 and only 3 in the past 5 years. The following will provide some greater detail about 2023 along with some predictions for 2024 and where things are headed.
Auto Insurance continued to struggle in 2023. Inflation for repairs and a shortage of parts lead to long lead times and exponential repair costs. Delays with repairs caused greater than expected rental car costs with insured waiting for their vehicles to get repaired. The largest contributor to the negative results was claim severity on the liability side. Much of this is related to something called Social Inflation. Social Inflation is a term used to describe insurers claim costs increasing at a faster rate than general economic inflation. The social piece comes from shifting attitudes in society about who should be responsible to absorb the cost of a potential claim. More detail about social inflation here: https://content.naic.org/cipr-topics/social-inflation
Of course, carriers responses to increased claim costs with rate increases. Nationwide, the industry has seen double digit rate increases in 2022 and 2023 and the carriers are still losing money. Info regarding rate changes nationwide (https://www.spglobal.com/marketintelligence/en/news-insights/latest-news-headlines/us-private-auto-insurance-rates-see-double-digit-jump-in-2023-77178794
2024 looks to be more of the same unless the inflation, (social and economic), changes. Carriers will continue to increase rates in an effort to stabilize the market and at least break even.
All may not be lost moving forward, insurers are looking for solutions to incorporate AI into their rating models to more accurately determine rating. They will be able to better track mileage and where vehicle are actually going along with the characteristics of the drivers. This is not great news for aggressive accelerators and brakers, and speeders, but good for those who operate their vehicles in a safer manner. Pinpointing some specific driving activity may allow for somewhere between 20-40% according to some carriers. Of course, we all want to keep some of lives private and the increasing surge of AI technology makes that virtually impossible. I think we will see many if not all carriers using AND requiring some form of AI to measure driving habits within the nest 5-10 years. Some are already insisting that we quote the discounts for AI technology on every quote.
If you have read any of our newsletters in the past few years, you have a clear understanding that the property market has become increasingly difficult. Carriers are experiencing more frequent weather losses than anticipated and costs are skyrocketing due to market manipulation by contractors and general inflation. Most insurers purchase insurance from companies to cover larger storms. In most cases after the poor results in 2022 many carrier experienced reinsurance deductibles that doubled or tripled. Here’s an example of one carrier that we represent and how these items impacted them in 2023. The 2023 retention (deductible) on their reinsurance treaty was increased from $20M to $60M. This means that the carrier would experience $60M in losses before their insurance would be triggered. They expected 11 large storms with an estimated cost of $150M. Actual results were 13 large storms with over $300M in claims. None of the individual storms hit $60M so the insurance carrier was left to foot the bill for all of the claim cost. The net result of the change in reinsurance and large storm losses was about 10% of their earned premium.
Because of this shift, carriers have started to change policy language to have the policyholder share in more of the cost. Much of the poor experience is directly related to wind/hail claims and they have focused efforts to increase policyholder participation in three ways:
We believe that most every carrier will adopt some if not all of these items. Most carriers are implementing changes to shift some of the cost on to the policyholders especially for wind and hail claims. Example of the percentage deductible: $750,000 home and a 1% wind/hail deductible would mean that a $7,500 (1% of $750,000) would apply to any wind or hail loss.
The depreciation schedule would provide a smaller percentage of the replacement cost for a roof as it’s age increased. Example of depreciation schedule: $40,000 roof repair. Age 5 or newer might be 100%; 15 years 75%; 30 years 40%. Roof ages of 5,15,30 would result in claim payments of $40K; $30K, and $16K respectively. If your roof is between 15-30 years old there will certainly be an expectation by the carrier that costs will be shared between the insurer and policyholder.
Not dissimilar to auto insurance increases, there are some positives here. The cost shifting and sharing should result in more competition in the contractor space. Right now, carriers are an easy mark to get a $40K roof replaced. If an insured has a $10-20K stake in the cost, they may do some shopping to make sure contractors are providing a competitive price. In the end, roofing costs may come down as a result of the cost shift.
Overall, changes implemented by carriers in late 2023 and early 2024, should result in a stabilization of the market. The first piece of this process came in 2023 when the reinsurance carriers shifted costs to the main street insurance companies. Inflation, storm frequency, and increased retention made 2023 a difficult year for the main street companies but the changes implemented by the reinsurer did actually stabilize the capital available in the marketplace to some degree. The cost sharing measures and rate increases should improve carrier results throughout 2024 which will in turn create stabilization of premiums for 2025. Unfortunately, things do not move quickly. A rate increase or cost sharing measure takes 12 months to be implemented because it can only happen at the renewal of a policy. The net effects of changes do not really start to impact the bottom line for 12-18 months.
I am a little more optimistic than most but I believe we may start to see things turn around in Q4 of 2024. Many carriers implemented these ideas in the last 2 quarters of 2023 and the rate increases will have started to have an impact. I also believe that cost sharing measures on the property insurance might have a greater than expected impact on bringing some of the roofing costs in the area down with more consumer participation at the policyholder level and less open checkbook from the insurance carriers.
As long as we have reasonable storm activity in 2024, most carriers expect to begin making profits in early 2025.
Obviously, many factors play into everything, we wanted to do our best to provide you with pointed overview of why the insurance market is behaving the way that it is and all of us are having to share in the increased costs in order to protect ourselves.
As always, thank you for the privilege to protect your families.
Jon
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