The insurance industry is in the midst of a correction due to the historic number of catastrophic events (hurricanes, wildfires, floods, etc.) and the corresponding claims from the past several years. The results of the current market have been quite disheartening for some clients: high rate hikes at best, non-renewals at worst. Even if you have not yet been affected, we want to educate you on the current market situation. So that you can better understand what is happening, why, and what you can do to mitigate the impact on your program, we convened a group of senior leaders to answer frequently asked questions.
However, before we go into the details, let’s take a step back and talk about insurance more broadly.
Essentially, the market only functions because risks are pooled, and thus transferable. To cover one person’s home (or automobile or boat, etc.), carriers need to receive premiums from all their clients in an amount sufficient to offset their total exposure.
The downside: Your rates are not just affected by your personal claim experience, but also by all those in the pool with you. Insurance can’t work if rates are only raised for people who’ve made claims. So even if you have a clean record with no claims, you could experience a renewal where your rates go up because you are in an area that overall has had large losses.
The upside: While the ‘pooling’ of risk means you will be impacted by other people’s losses, it also means that in the event you have a major loss, you will likely be paid an amount that greatly supersedes the amount you’ve paid in premium over time. Say you pay an annual premium of $16,000 over the course of 20 years, then in year 21 lose a house that is insured for $4 million due to a fire, you have still come out ahead.
Alright, now to the FAQs...
Why is the market in this current state?
While it can feel like a personal affront, especially when you are on the other end of a non-renewal, it’s anything but. Rather, there are two main instigators to the market. First and foremost, extreme weather events are on the rise in many parts of the country, as evidenced by the wildfires in the West. In fact, they have doubled in the past 17 years. The most obvious stricken areas are California and the Gulf Coast, but the Northeast and Midwest have not been immune, by any stretch.
At the same time, major cities nationwide are also struggling with the effects of an increasingly crumbling infrastructure. Aging pipes in urban buildings have led to more costly water damage claims. For example, one of our carriers have paid nearly double this decade in water losses, and the number one reason is plumbing failures.
Also, the rising cost of repair and reconstruction is also compounding already troublesome circumstances. Demand for the skilled labor necessary to rebuild now outpaces the supply, and replacing today’s high-end appliances and amenities is its own pricey proposition. In 2000, a top-of-the-line Sub-Zero refrigerator cost $7,375 (adjusted for inflation); and today it’s more than $17,000. Not to mention suitable temporary living situations are also quite expensive.
Ok, so how will this affect my premiums?
Where once we considered anything more than 10% on the high side, we now regularly see jumps of 20%-25% a year. We encourage you to contact your Account Executive regarding your specific program and how your premiums may or may not be affected.
Does the new reality impact me if I don't live in an at-risk area?
It could. Keep in mind, while you may live in an area less prone to catastrophic events, that doesn’t mean you are exempt from severe losses. Hailstorms in Wyoming, tornadoes in Texas and severe winter storms along the East, have all been areas with damaging losses over the past few years. Therefore, no area is truly immune to loss.
Even if one area within a region is not at risk of catastrophic loss, there may still be a raise in rates within that state. For example, premiums may go up on a townhouse in San Francisco because of wildfires in L.A. County. The reality is, the impact of these trends is nationwide. So, it is important to speak with your insurance broker as some markets are increasing their thresholds in certain areas and others are not writing any new business.
Is there any relief in sight?
It depends largely on science. If major weather incidents and the ensuing catastrophic losses continue or increase, carriers will then need to continue to adjust their exposure and rates accordingly. For those individuals on the West Coast, the state of California responded to the crisis by restricting insurance carriers from non-renewing current policy holders in specific wildfire area zip codes for the next year.
What can I do to help myself?
To keep your premiums as low as possible, and your coverage intact, make your account look as appealing as possible to underwriters. That means sustaining small losses, utilizing higher deductibles and keeping your insurance available for catastrophic, worst-case events. This will also provide premium savings. For example, data suggests that properties with one water loss will likely realize another one soon—particularly in apartment buildings. If you put in a claim for a small water loss, you may be a riskier proposition to carriers. Therefore, taking care of small claims, could work in your favor when your policy comes up for renewal.
We also encourage you to comply with all the recommendations suggested by your insurance carrier and to pay your premiums on time. Brokers can no longer guarantee reinstatement if you cancel for non-pay.
Also, take the time to contact your broker and review all of your coverages. When acquiring new items or properties make sure you reach out to them to ensure you have the proper protection. If you still haven’t told them that you purchased a new car for your son months ago or you started investing in a wine collection – you should place a quick call and confirm coverage has been issued accordingly.
Lastly, if you live in areas with serious weather concerns and have experienced a non-renewal or a drastic rate increase, ask your broker about secondary markets. They’re not ideal, and coverage terms may not be as broad as your existing policy, but they’re better than nothing.
Anything else I should know right now?
If you plan to follow our advice and only put in claims for major losses, select policies with high deductibles. You can also get breaks on premiums by complying with any safety measures prescribed by your carrier. Even if you don’t think you need a leak detector or backup generator, putting one in anyway will maximize the credits. Hey, whatever it takes!
Always know we are here to guide you through this correction and any other insurance concerns as well.