State Of The Insurance Industry: A Message From Jon Oaks
Good Day Everyone:
I wanted to provide an update on the state of the insurance industry, including its impact on our insurance rates. Additionally, I would like to discuss what we can learn about these effects as consumers and offer ways to offset some of the costs.
State of the Industry:
As we know, the concept of insurance is to have a carrier provide their clients with protection against financial loss. The individual clients pay premiums to the carriers which they collect from a large number of people using these funds to pay for the financial loss of a few. In a perfect environment, the insurance company’s goal is to collect premium from all of us and be able to pay all of their expense and claims with those premiums and make a little bit of money investing their surplus which is on hand to pay for all of the claims. Based on that model, the surplus on the carrier can go up and down based on their claim experience and expenses. Carriers also protect themselves from large losses by purchasing reinsurance from other carriers. This is a very important piece of the insurance market as it gives the everyday carriers that we deal with coverage for a large single loss and well as a catastrophic loss of a certain dollar amount from a storm. The past two years (especially 2022) were difficult from a weather perspective. Both the frequency and severity of claims were impacted by an extremely active storm season in the Midwest. Increased frequency along with severity mean more dollars paid than expected by the insurance carriers. Outside factors such as inflation, supply chain issues, and labor shortages all negatively impacted claim payouts. If a hail storm damages a roof and it costs 25% more for materials and 30-40% more for labor, those costs are absorbed by the carrier as part of the replacement cost contract to fix a roof damaged by wind or hail. 2022 saw used car values increase 42%. Many had vehicles totaled in hail storms and were paid more than they purchased their vehicles for 3 and 4 years ago. A shortage of cars, low miles due to COVID, and general inflation were all factors.
Close the book on 2022 and bring on 2023 was the predominant cry through the industry but……….not dissimilar to us as the insurance consumer having to share in the increased costs, the reinsurance carriers took a lot of the hit from 2022 storms and it was time for the everyday companies to pay the price. The short version explanation of reinsurance is that each carrier negotiates their own deal with the reinsurance carrier to prevent a large loss from a single event. There are many examples of reinsurance but for this example we will focus on storms. There are two elements to the reinsurance for property, the retention and the rate. Rate is obviously the premium being paid. Retention works similar to a deductible, it is the amount that the carrier would absorb before the reinsurance starts to help. In speaking with our partner carriers, retentions have increase 200-300% which means if a carrier was taking on the first $20 million in a storm it is now $60-80 million PER STORM. That is a significant change in the insurance landscape and cannot be overstated.
Impact on Rates:
Given the current market conditions, we fully expected rate increases from our carriers. They have to try and not only recoup some of the additional losses from 2022 but account and plan for the new retention models. The obviously solution is to charge more premium, we will all see the impact of that. There are also a number of concepts which relate specifically to storms and the largest risk to significant payouts, wind and hail. The carriers have to figure out ways other than premium increases to offset their exposure to wind and hail. We are seeing changing in the underwriting for home roofs to where the carrier will only provide replacement cost coverage a certain period of time (usually 15-20 years) as well as changes in the deductibles where wind and hail might be a higher amount or even a percentage of the home value. Many are also taking the age of your roof into consideration when rating a homeowner’s policy. The bottom line is to review your policy a little more closely than usual and look for any changes being made. Of course, we are here to help review as well.
With rates on the rise, what are some ways to offset the cost? In most cases, it becomes a situation very much like the carriers themselves dealing with the reinsurance companies. We can clearly see that the insurance companies are looking to off-load some of their exposure to storms. The primary way that we can reduce costs is to share some of that risk with the carriers by increasing deductibles at the policy level or accepting larger wind/hail deductibles. If the carriers rating process aligns with their strategy, we should see bigger incentives to increase to higher deductibles. We can certainly help explore the cost savings and help you determine if that makes sense. The other major focus should be to make sure the underwriting information is accurate. We do our best to update information but until recently it really did not matter if your roof was 16 years old or brand new, now it can make a significant difference. Make sure your carrier knows the age of your roof especially if you have had it replaced recently. It will most likely result in a lower premium.
With this as a backdrop please know that we are here to help you in any way we can. I do not see these rate increases slowing unless we have a very tame storm year in the Midwest. My opinion is that many are underestimating the impact of the increased retention on our insurance carrier. I hope that I am wrong but if the impact continues we are here to educate you and try to make the best decisions regarding to coverage and price to maximize your coverage while controlling the costs as best we can.
Thanks again for the opportunity to protect your families.