If you read insurance journals or articles, then you already know this. But if you don’t that’s ok, this is what Brukhouse Insurance is here for. We are experiencing the perfect storm (forgive the pun) that has pushed us into the hardest market that anyone currently working in the insurance industry has ever seen. Here I will try to explain what is happening, break down why it is happening and then share some strategies to help us all get through it.
The first indication that something is going on may have been when you received your insurance renewal with a 50% + increase. As we have seen this across our entire book of business, we have been diligently remarketing our clients. As the year has progressed it has become increasingly more difficult to find insurance companies willing to take on certain risks. As insurance companies tighten their underwriting guidelines and restrict new business, we are pushed into different strategies for mitigating the higher premiums we are seeing.
WHY WOULD A COMPANY SAY NO TO MORE BUSINESS?
This is a legitimate question we hear. It doesn’t seem like insurance companies could have a scarcity event since insurance is just an idea written in the form of a legal contract. How can you run out of contracts when we don’t even need to print them on paper these days? The issue is the financial obligations that come along with those contracts in the insurance industry.
Insurance companies purchase “reinsurance” which is exactly what it sounds like. You buy insurance for your home, auto, business etc. and then the insurance company has millions of dollars of “risk” on their books. Reinsurance is a way of spreading some of that risk out. The reinsurer agrees to financially participate once a storm or fire loss hits a high enough amount. Reinsurance costs have increased this year anywhere from 30% to 80% depending on the product, area of the country and carrier capacity. In some cases, insurance companies have decided to slow or stop their new business growth rather than purchase more reinsurance. In other cases, they have increased rates to compensate for the increases.
A widget factory can make a profit if the supply and demand are predictable and steady. If a company that has made 100,000 widgets in recent years needed to increase that by 10%, they may be able to do that relatively quickly and with little effort. Suppose though that they had an offer for 1,000,000 widgets in the next six months? Likely they would not be able to meet that demand and would have to pass on the offer. Now if other widget factories began to close or limit production, that would exacerbate the problem. This is what we are seeing in the insurance industry with companies tightening underwriting guidelines or in some cases leaving states.
HOW CAN THERE BE A SUPPLY ISSUE WITH INSURANCE?
“Profit” is often spoken as a bad word in many circles these days. When it comes to property/casualty insurance the term is called the combined ratio. This is the combined ratio of losses and expenses to earnings. A healthy combined ratio is considered .95 meaning that insurance companies make five cents on every dollar. With these tight margins, insurance companies are vulnerable to things like inflation, supply chain, EPA regulations and local regulations that impact the cost of repairs and replacements for vehicles and homes. In the past year plus, the industry combined ratio has been running at over one, meaning that companies are losing money on every dollar. The old joke about selling at a loss but making it up on volume comes to mind. If a company is losing money, they can’t sell their way out of it. They need a course correction and that comes in a few forms.
First and most obviously, companies can raise rates. If you have received your renewal, you are likely keenly aware that this is happening. While this is an important step, it doesn’t make an immediate correction since it takes time, really a year, for all the annual policies to renew at the higher rates. In the meantime, insurance companies still must contend with the issue of more frequent and severe claims. So, they need to use a second tool, restrict new business.
By restricting new business an insurance company limits the amount of risk on the books and limits the amount of claim reserves that are required by the departments of insurance. Some of the ways insurance companies can restrict new business is to place new restrictions on underwriting. We have seen companies restrict the age of homes, not insuring homes that are over 10 years old. We have seen restrictions on roof age since here on the Front Range we get more hail and wind that damages property. In these cases, a roof over a certain age will have a much lower payout and a much higher deductible. Companies can restrict new business by putting onerous documentation requirements in place. Past claim history may cause a risk with a prior claim to become unacceptable. These restrictions have a more immediate effect than rates because they limit the possibility of claims that new business brings.
Thirdly and most extreme is to cease writing a line of business or pulling out of a state completely. We have not seen this happening in Colorado but, in California three major carriers have stopped insuring homes and in Florida recent years have seen many carriers leave the state completely. This is extreme and usually indicates a solvency issue of the carrier or a regulatory issue that is not resolved in time.
WHAT GAMEPLAN CAN GET US THROUGH?
Take control of what you can. Even though our current market is restrictive, shop the renewal especially if it has been a while. The worst case in that is you find that you have the best rate that you can get. In shopping you might also find that you have a coverage issue that you were unaware of, that needs to be fixed. Years ago, homeowner policies were all guaranteed replacement policies. Today that is no longer true. You may have 20% – 100% of extended coverage for your home but if you have not looked recently that may still be too little. Insurance companies rarely run new reconstruction estimates at renewal. It is your responsibility to make sure that you have adequate coverage.
As your independent agent shops your insurance there might be additional discounts found so, have a conversation about that. You may have opted out of the telematics discount on your auto insurance before but now the prospect of a 10% discount makes it more appealing. Your credit score may have improved and that can be reevaluated. You might have your policies with different companies and combining them makes sense now. Have a conversation and ask questions to make sure you get all the discounts you can.
Drive carefully. Since the pandemic incidents of road rage and violence have been on the rise. There are more drivers driving more. The added stress is making people do things they may not have done before. Add to this the push to reverse supply chain issues which puts more trucks on the road. Those trucks drive slow and block vision making driving more hazardous. There is more construction which reroutes traffic and causes delays. All these things are contributing to an increase in accident frequency. Since you can’t change how the other folks drive, do what you can to calm yourself and be extra cautious.
Consider raising your deductible to reduce your rate. When I started in insurance it was common to have a $500 home insurance deductible. That has been increasing over the years till now it is standard to see $2500 deductibles, at least for wind and hail on the Front Range. I believe that companies will push policyholders toward $5000 deductibles in the coming year. Most companies have a percentage deductible option also. We have tried to keep our clients away from those but, if you understand how it works and are prepared to pay attention to the annual change then maybe that could work for you. We recommend carrying the highest deductible that you can reasonably afford to pay. A higher deductible does at least two things, first it reduces your premiums and second it reduces the number of claims filed. The reduction of premium is an obvious benefit but the reduction in frequency of claims may be harder to grasp as a benefit.
Evaluate carefully whether to file a claim. Companies look at claims two ways, frequency and severity. Frequency is the number of claims filed and severity is the dollar amount associated. In most cases a company will count frequency as even more important than severity. If one customer has a major kitchen fire that causes $150K in damage, a carrier may not count it as much as another customer who files five claims and only one pays out at $500. The first one may see a slight increase in rates while the second one will likely be cancelled and unable to get a standard policy moving forward. The reasoning goes like this, the first person used their insurance appropriately, for a major problem that could not have been handled with ordinary savings, maintenance or pride of ownership. The second person is seen as someone who is looking for insurance to pay ordinary maintenance on their home. That puts them into a risk category that standard carriers generally try to avoid.
GOOD NEWS ON THE HORIZON FOR THE INSURANCE INDUSTRY
My crystal ball is not currently working but, I see some good things happening that may be indicative of us moving in the right direction.
I’m in Colorado and our department of insurance has been reasonable in allowing rate revisions in a timely manner and in working with insurance companies on regulatory changes. Watching Florida and California I am seeing business and regulatory movement in a good direction. Florida has seen six new insurance companies approved to do business. It may be that this allows companies who have left that state to come back and that would increase competition and spread the risk more. This is good news for us even in Colorado because it means that there are still companies looking to transact business in states with rough weather issues. It may be that we could see new companies knocking at Colorado’s door too. In California, the problem is on the regulatory side. Scan the titles of press releases here and note the number of times the word “protect” is used. Certainly, one thing a DOI needs to do is protect consumers but, in California this has mostly meant not approving appropriate rate increases and prohibiting non-renewals of policies. The commissioner seems to see his job as very adversarial toward insurance companies rather than having a mission to create a healthy insurance environment. What’s the good news in California you might ask. Well, they have finally admitted that there’s a problem and are calling it a crisis. Finally, the insurance representatives are having a real conversation with the commissioner, and we see some movement.
We are also seeing new carriers leveraging technology and streamlining insurance processes. While this does not overcome the need for boots on the ground or eyes on the risk, it helps reduce costs. The cost to underwrite a new risk comes down when accurate reports can be pulled linked to a person or address that enable companies to score and rate more appropriately. These things are new and so far the back end underwriting isn’t changing much, but decreasing costs in an inflationary environment is definitely helpful. As data gathering and technology continue to merge and improve, I am optimistic that they will hit a cost-saving stride.
WE CAN GET THROUGH
The takeaway here is that we find ourselves in a tough insurance industry market and we need to fight our way through. Understanding why we are where we are can help us by keeping our attention on the metrics that might indicate the light at the end of the tunnel. In the meantime, we all need to do what we can to make sure we keep making wise decisions. The same rule applies now as did before, don’t be penny wise and pound foolish. Make sure you have the right coverage and that you aren’t paying more than you should. Our goal is to help you get there so that you can focus on what you do best, pursuing your dreams.
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