If the titular question, 'why did my insurance go up?' were asked in unison by everyone looking for an answer, the combined sound might trigger a high-magnitude earthquake. To prevent this and subsequent property damage insurance claims, we will survey recent insurance industry history and explore how the market works in order to come up with answers.
A broad survey is needed because the causes of insurance rate increases are many. Long gone are the days where insurance rate increases were localized or regionalized and easy to explain.
At present, insurance carriers are feeling pain in historically loss-prone areas like California and Florida as well as regions that never have to worry about hurricanes or wildfires. They have faced massive reinsurance rate increases, claims cost inflation, regulatory challenges, and post-COVID changes in the overall economy and workforce.
The industry’s woes have resulted in an often-confused customer base, stressed brokers, and carriers stuck reacting to global events rather than proactively positioning their business operations.
It is worth outlining how we arrived here, why this scenario is unlike typical past market challenges (aka hard markets), and what industry professionals can do to help consumers.
Conducting a complete review of the insurance market would require the length of a book or even a series of books. To avoid this piece becoming too long for broad consumption, I will focus on what I understand to be the primary factors causing consumers’ property and casualty insurance rates to rise across the US.
I take a global view in this industry survey, but I do so to paint a picture of my area of greatest familiarity, namely the US property and casualty insurance market. The industry’s interconnected nature requires a broad view no matter how simple I would like to make matters.
Industry insiders are the most likely readers, though I have done my best to relay my understanding of these complex topics in a jargon-free way wherever possible. The goal is to also allow for the general public, non-insurance focused financial professionals, and journalists to benefit from reading.
The following sections will focus on the main culprits causing insurance prices to rise. These include catastrophic weather events, unique challenges facing insurers operating in California and Florida, inflated costs of building materials and labor shortages, “nuclear” jury verdicts, regulatory hurdles, and reinsurance rate increases.
I will also consider overall industry performance and explain how headlines about record profitability do not tell the whole story when it comes to market challenges or overall industry success. The point of doing so is to prove that despite what you may read, the industry is indeed struggling and not simply raising prices to boost profits.
There are plenty of articles being published about the insurance crisis, but rarely are they written by industry experts outside of trade paper reporting. I mention this not to insult journalists who are trying to cover an important topic for a non-professional audience. Instead, I do so to suggest that if you see an article with a narrow, simplistic, or even politically appealing explanation about what is causing problems in an industry as nuanced as insurance, you consume it with a large grain of salt.
After reading, you as a consumer or industry professional will have a broad understanding of why the insurance market appears (and is) abnormally chaotic. You will know why prices are increasing for many types of policies. You will also know why they are likely to continue doing so in the coming years.
Much of the information provided may appear negative, and much of it necessarily is. However, the insurance industry will eventually stabilize and so will year-over-year policy premium increases. When that happens, we will all forget about this tough time until the next hard market arrives, hopefully long into the future.
Part 8: Conclusion
The Same, Only Worse for Florida and California's Insurance Markets
We will begin this survey by focusing on the two most extreme scenarios facing the US property insurance market, namely Florida and California.
While desirable to live in, both California and Florida are and have always been prone to extreme weather and environmental risks. Where Florida is known for destructive hurricanes and tropical storms, California’s can be relied on to produce catastrophic wildfires and earthquakes. Due to these natural features of the states alone, property insurance rate increases in Florida and California have long been nearly as consistent as the severe weather events residents of these states experience.
Any insurance professional who is surprised that FL and CA can quickly become unprofitable states to do business in is either new to underwriting there or new to the industry in general.
The sudden billion-dollar+ losses wildfires and hurricanes can cause for insurers is difficult to predict and even the best risk management efforts are never foolproof. For example, excellent brush clearance at your home in Los Angeles County does not mean your neighbors have all made similar efforts to remove fuel from a potential wildfire's path.
Despite knowing these risks are ever present, it can be tricky to predict losses accurately and to therefore set insurance premiums adequately, even with ample historical data. There is nothing new about CA and FL being problem states for insurance companies, but a range of factors have exacerbated existing problems.
Allow us to consider the case of California’s collapsing insurance market before we head East to FL.
Beyond wildfires and mudslides, California is dealing with a partially self-inflicted problem that has been making insurance in the state harder to come by.
The state’s regulatory body has proven less willing to approve rate increases and coverage changes than Florida’s OIR. While they are doing so with consumer protection in mind, the result has been the exodus of major insurance companies from the state. Florida has lost carriers in recent years due mainly to financial insolvency. California’s departing carriers, on the other hand, have generally left of their own accord after chalking the state up to being unprofitable under the current circumstances.
After years of resistance, the State’s insurance Commissioner, Ricardo Lara, has shown some willingness in recent months to adjust regulations to attempt to keep or win back carriers but the success of these efforts remains to be seen. For example, he is now allowing carriers to expand their use of catastrophic loss data modeling. This may seem obvious, but being able to factor in the potential catastrophic claims in your pricing and risk modeling is imperative in wildfire, mudslide/flood, and earthquake prone state like California.
It should be mentioned that Mr. Lara was elected to his position (first in 2018). His having been elected is why I refer to the state’s woes as at least partially self-inflicted.
Regardless of how Mr. Lara became CA’s insurance commissioner and putting aside his newfound openness to considering carrier perspectives, the state’s insurance market is in dire crisis.
Increasing numbers of home and business owners in the state are forced to see the totality of their coverage through the state-backed FAIR plan. Others are using the FAIR plan coverage to obtain a base level of coverage to which private market carriers will agree to add an additional layer on top. This is far from ideal and was traditionally a last-resort solution that has fast become the go-to first option for thousands of Californians.
While it may be helpful to have a state-backed insurance solution, the FAIR plan now insures approximately $300B worth of value despite having just $200M reserved to pay claims. Should a horrific wildfire take place (and someday, hopefully far in the future, it will), this $200M pool could be wiped out in days, resulting in private carriers and ultimately their policyholders making up the difference. In other words, the FAIR plan’s logical function has far been exceeded and its policies may merely be serving as placeholder coverages solutions until a major loss event takes place.
Florida has a state backed carrier known as Citizens Property Insurance Corp. Citizens had historically been Floridians’ carrier of last resort but just like the FAIR plan in CA, it has increasingly become the only or the most affordable solution for over one million property owners and renters. Citizens functions somewhat differently than the FAIR plan, but the general concept and risks of too much sudden premium growth are similar. Citizens also has an issue in that they are regulated in how much and how quickly they can increase premium rates.
In other words, even if their executives say they are not adequately reserving premium dollars, they have no fast-action mechanism to resolve this. In recent months, smaller insurers seeking to grow their presence in Florida have applied for what we call policy takeouts from Citizens.
Takeouts essentially allow a private carrier to make an offer to someone insured by Citizens to move their coverage to said carrier. These are merely offers, and most who receive them choose to decline to make the jump. An increase in takeout applications does seem positive but the inability of Citizens to raise prices should continue to limit insured movement and prevent a remedy to the problem.
Additionally, major carriers have ceased writing new policies in the state and some others have gone out of business due to insolvency. Florida’s now less competitive market makes it difficult to envision a scenario where its property insurance rates stabilize. Without increased competition and rate stabilization, the state’s insurance market cannot become competitive again and takeout offers will only partially relieve Citizens’ burden.
Another crucial aspect unique to Florida that we must consider is the state’s legal environment.
In 2022, the OIR (FL’s regulatory body overseeing the insurance industry) indicated that Florida was home to nearly 71% of US claims litigation. This means that although the highly populated state sees roughly 1.5 out of every 10 claims filed in America, nearly 7 out of ten claims-related lawsuits take place within its borders.
What this means is that not only do carriers deal with paying out claims, but they must also respond to lawsuits related to those claims. While plenty of claims-related lawsuits can be justified, the number in Florida could only be described as exorbitant.
Insurance policy wording for most policies is state-approved and there is ample legal precedent that has gone into determining how carriers interpret their contracts. This should in theory limit the lawsuits involved in claims handling. However, Florida has an enormously powerful legal lobby. There are particularly influential personal injury firms who are politically active and able to prevent legislation that might limit an individual or company’s ability to sue a carrier related to claims handling.
The way this can work in practice is an insured, let’s say a homeowner, had a hurricane related claim for damage to their home. Their home insurance provider will review the claim and work to resolve it in accordance with their contract. Then, a lawyer can get involved, suggest that the settlement they received was inadequate, and initiate a legal proceeding. This makes it difficult for carriers to predict a claim’s real cost. To account for this unpredictability and the negative impact it can have on their bottom line, they raise their policy prices.
Some of these are undoubtedly legitimate lawsuits and some carriers feel less than willing to honor their policies than they do to collect premiums. However, even the state’s insurance commissioner has pointed out the negative impact excessive claims lawsuits have had on consumers' insurance costs.
Outside of claims being litigated and property insurance becoming unprofitable, FL juries have proven just as prone to those in other states to render massive verdicts against negligent individuals and companies involved in civil litigation. Back in 2020, for example, a FL jury deemed a single vehicle trucking operation to be on the hook for $411 million in damages related to a lawsuit filed by an injured party. This type of verdict is aptly referred to in the insurance and legal industries as a "nuclear verdict."
Although it is unlikely that a verdict this massive can or will be collected, it is still relevant. What this does is set legal precedent for similar future civil suits to be view similarly. This concept is known as anchoring and is ensures that future lawsuits will result in verdicts and settlements of eye watering amounts.
Naturally, insurance companies offering liability insurance to individuals and companies take this risk into account when applying for rate increases. This scenario is by no means unique to Florida, but its having occurred in that state illustrates just how diverse the issues facing companies operating there are.
Another area where the state of Florida has had a unique challenge is in assignment of benefits (AOB) related claims. The general idea of AOB is that it allows a third party to assume the responsibility of an insurance policyholder. In Florida, this has frequently taken the form of roofing companies seeking an AOB from a policyholder to attempt to get insurance money to replace or partially update their home’s roof.
For years, AOB allowed roofing contractors effectively had been able to act simultaneously as the insured and as a third-party expert suggesting that a roof needed to be replaced. They could easily point to a particular weather event (e.g. a hurricane or tropical storm) as the culprit. In late 2022, the FL legislature moved to ban this practice and was successful in passing a law change to that end.
Organizations representing roofers have tried to find ways around this law change, but the result should be far fewer questionable uses of the former AOB rules. This is a positive development, though one that reduces only a single area where the Florida insurance market has posed difficult to predict challenges.
If you are a broker or buyer based outside of these two states, I appreciate your having made it this far. You might be wondering why it was necessary to go into such depth focusing on just two states of the 50 that make up our Union. I promise that doing so was necessary.
CA and FL together have over 61 million of the US’s ~330 million residents within their borders and abnormally high concentrations of wealth and property values in high-risk areas. This means that what happens in these states impacts consumers both near and far away from them.
Less than a decade ago, carriers insuring properties in California and Florida might have found a 3-5% premium rate increase and a roughly equivalent inflationary increase on insured property values to be adequate in most years.
Today, those numbers can change to 50% and 10% or more and come in tandem with coverage restrictions or limitations. Today, professionals in the industry often have to tell clients they are lucky that they only are getting charged more and not having their coverage non-renewed or cancelled altogether and finding themselves forced to seek shelter from Citizens or the CA FAIR plan.
While the ultra-wealthy may be able to afford these increases in both states, retirees living on fixed income and middle-income families are being squeezed beyond their financial means in many cases. That is part of the reason these states insurance markets have earned focus in public interest stories in publications not typically focused on insurance or even finance.
CA and FL’s difficulties impact pricing in other states both surrounding them and far beyond. When carriers find themselves losing money in one state or region, they will naturally seek to resolve that issue and find other geographies where they can make up for lost income or profitability.
Historically, this sort of pivot was not too difficult to make. However, inflation and labor shortages are facing the US as a whole and make a geographical re-focus more challenging and less impactful than ever.
To expand upon this, we will now detail the impact of inflation and labor shortages on the overall insurance industry beyond these two states. It is worth noting that these problems may be nationwide but impact FL and CA as well, making the problems there even more difficult.
Inflation and Labor Shortages Do Not Just Impact Food Prices
When inflation hits, the first places we typically feel its impact are at the gas pump and the grocery store. Insurance is highly regulated and when prices for things like manual labor and building materials increase, insurers are not at liberty to instantly adjust their prices to reflect this reality. The result is usually greater than expected claims costs in the near term followed by an attempt to raise premiums to account for increases in loss costs down the road.
Despite not involving raw materials or manual labor, there are also increased costs related to handling casualty (aka liability) insurance claims that carriers are dealing with. A lengthy covid-related backup in our courts had a lasting impact on the speed at which litigation moves, slowing down an already notoriously snail-like process. Slower claims handling and more hours dealing with litigation naturally raises liability claims costs. This issue is less severe than it was during the early days of lockdowns, but an ongoing shortage of prosecutors and judges makes it necessary to mention in any conversation about liability claims challenges.
Moving one, it is not just massive trucking losses causing carriers on-road insurance headaches. Automobile insurance in general is a key area where insurance companies are dealing with challenges on both the liability and property sides of their businesses.
Even giants like State Farm are struggling to get auto losses under control despite having a massive nationwide client base. One might think distributing their risk across the US would help a carrier’s efforts to reap a consistent profit. The rules of probability tell us that it does help, but auto liability claims and nationwide increases in the cost of manual labor and parts needed to repair damaged vehicles are unavoidable. These issues have proven to be more negatively impactful than the positive aspects of distributing risk as of late.
Anyone who has had an accident in recent years that might have been considered relatively minor a decade ago may have been surprised to see their carrier choose to total the damaged vehicle. Ultimately, totaling a vehicle and selling its remaining parts can be more predictable than dealing with unknown repair times and higher than normal labor costs.
Though anecdotal, I have seen scenarios where drivers get involved in scenarios such as relatively low-speed T-bone accidents who had their vehicles totaled by the carrier insuring them. Theoretically, the vehicle might have had only an estimated $10,000-$15,000 worth of damage. Unfortunately, the inability to predict labor costs and the difficulty in obtaining some repair parts made the carrier choose to payout the total vehicle value, which in one particular case was in the $40,000 range.
Simply put, carriers cannot insure automobiles profitably when common claims are suddenly 4-times as costly as their historical data would suggest.
I now want to go back to State Farm. Please note, I do not seek to single out State Farm to be unfair. Instead, it is worth returning to the Bloomington, IL based behemoth for further study because their struggles are indicative of those facing many companies in the broader industry.
State Farm’s recent underwriting losses have been so massive that they dwarf the entire balance sheets of many of their theoretical competitors. In 2022, for example, their automobile insurance underwriting business saw a loss of $13.4B which lowered to a still-staggering loss of $9.7B in 2023.
As you might imagine, State Farm is far from alone in dealing with difficulties in automobile insurance pricing and claims handling. However, it is important to consider that if a longstanding operation like theirs with a wealth of data and an eagerness to turn a profit is struggling to do so, other less-adept carriers may have even greater difficulties.
With this being the case, I would not expect auto insurance rates to stabilize for perhaps 3 years, assuming inflation gets under control and if not, for perhaps half a decade.
There are too many factors that can impact claims costs to be able to justify a positive prediction. For example, even if labor shortages are resolved and premium increases get approved, a single geopolitical event like a potential seizure of chip making Taiwan by China could instantly throw the technology reliant new and used auto industry into a flux. While some regions and states may return to stability more quickly (and I hope they do), I am approaching this topic from a nationwide perspective. As we will now explore, geopolitics is far from the only way in which seemingly distant events can have local impacts to us in the US.
Understanding the overall labor market picture in the US is beyond the scope of this piece. However, it is worth quantifying how challenging the near future may be for claims handling.
An organization called Associated Builders and Contractors (ABC) estimates roughly 450,000 new construction workers will need to be hired in addition to the industry’s normal pace of hiring to have an adequate labor force to meet anticipated demand. This is only one organization’s estimate, but I believe it was worth noting.
The ABC also brings forth that another inconvenient data point facing the construction industry beyond hiring needs. Roughly 20% of the industry’s workers are 55 or older. This indicates a large coming wave of retirements over the next decade that must be made up for. As insurance companies rely on construction workers to repair and rebuild damaged homes and commercial buildings when claims are filed, this shortage will have a direct impact on claims costs.
As if the construction industry’s labor shortage was not enough of a problem, the automobile servicing industry is dealing with a similar scenario. Per MarketWatch an estimated 100,000 automobile technicians will need to enter the workforce annually through 2026 to handle anticipated demand. Auto claims always cost money, but less labor availability will continue to keep costs sky high. If the problem is not resolved, at least partially, it is difficult to envision a scenario where auto insurance prices can stabilize.
Certainly, some states and regions will be impacted more than others when it comes to construction and auto technician labor shortages. As the insurance industry operates in every enclave of the US, however, the impact is going to be felt nationwide if these anticipated gaps cannot be filled.
Reinsurance Rate Increases: Global Changes with Local Impact
We will now shift our globally from Asia to Europe, particularly to Germany. What is now modern-day Germany was the birthplace of the reinsurance industry as we now know it following 1842’s devastating Hamburg fire. Its now globe-spanning companies remain at the heart of many reinsurance transactions.
This industry has expanded far beyond its early Hanseatic and Teutonic borders, but companies in Germany and neighboring Switzerland continue to dictate reinsurance coverage structures and pricing for much of the insurance industry. 2022 saw changes to the Euro’s valuation compared to the US dollar, ongoing severe central European flooding claims payouts from 2021 flooding, and overall loss cost inflation experienced globally. This forced reinsurance carriers to raise rates and adjust attachment points.
For many carriers, a ~40% reinsurance rate increase along with a higher attachment point was common in 2023, meaning they were paying more for a benefit that was less likely to be utilized (this may sound familiar to some consumers).
Even well-run, profitable carriers saw double digit increases. The unexpected additional cost has negatively impacted bottom lines and forced a reassessment of underwriting appetites.
Although reinsurance rate increases are not immediately passed on to insureds, their effect was almost instantly felt. This involved carriers filing rate increase with regulators and pushing more and more business to the Excess and Surplus lines market (more on that later).
Impacted insurers have been doing their best to return to stability in profitability and pricing. The direct impact on consumers is higher prices today or higher prices likely coming at their next renewal for many policy types even if the insureds are claims free and risk averse.
One may naturally ask, why not skip buying reinsurance altogether? The answer is simple. Carriers would risk their financial stability ratings (and justifiably so) if they got rid of this crucial stop gap measure. As noted above, reinsurance was developed following a severe fire in Hamburg, with the primary reason being that carriers of the time simply did not have a mechanism to offset claimed losses when more came in during a brief period of time than their balance sheet could respond to.
Reinsurance allows a company to know the maximum amount of money it could need to pay out in a policy year (or for a particular type of insurance they offer). This allows them to know how much money they must reserve, how to properly manage their surplus premiums for investments, and how to plan their operations a bit more clearly.
The impact of reinsurance cost increases and coverage changes can extend far beyond property insurance rates. Again, the insurance industry is interconnected and this interconnectedness is needed for it to function.
Unfortunately, it can lead to confusion among consumers who naturally do not hear about major flooding in Germany or the Euro’s weakness relative to the dollar and expect it to impact their wallets in a year or two when their homeowner or commercial property policy renews. Throughout 2024, and perhaps beyond, we will continue to feel the impact of the reinsurance industry’s price/coverage changes.
Carrier Profits Are Skyrocketing, Why Are They Still Charging More?
There is no question why headlines spring up when publicly traded insurance companies announce booming quarterly profits. However, as we move past the headlines and take a broader view, the picture is less pretty, sometimes for the particular company and often for the industry. Overall, 2023 saw an estimated combined ratio of 103.9 for property and casualty insurers. In non-technical terms, this means the industry lost nearly $1.04 cents for every $1.00 in insurance premiums it took in. The majority of that ~$1.04 comes from losses with the rest coming from general business expenses.
This is of course an average and it does not mean some carriers did not have a great 2023. It also does not preclude the industry from making a profit, as odd as that may sound.
Insurance companies can generate income or reduce liabilities in ways that go beyond the underwriting of insurance business. For example, they can invest in the stock market, invest in startups, hold liquidity in fixed income assets, sell off assets such as office buildings, conduct layoffs, and engage in other more obscure profit generating activities.
On any given year, it is not uncommon for property and casualty insurers to lose money on their insurance operations. In fact, the industry as a whole has done just that in six of the past seven years. It is also important to remember that booming year-over-year profit growth in one quarter for one company does not mean that even they will have a profitable year. Headlines, as usual, rarely provide the full picture.
What about the companies that are doing well despite industry headwinds?
Even companies who are in excellent financial shape and turning an underwriting profit will and have already begun to raise rates. Although this may seem unjust, it can be viewed in part as a reward for managing their operation well in years past. This may seem like gouging, but the insurance industry is highly regulated, and carriers must usually present regulators with large amounts of actuarial data backing up their proposed rates.
There will also be profitable carriers who see larger companies with more and better data raising rates and will choose to follow suit, assuming the big companies simply know better than them. These companies feel it is wise to keep up with the market overall while still trying to remain competitive. It is tough to fault them for doing so. A delay in raising rates can lead to a company getting caught flat footed when they suddenly see their profitability dry up with rising loss costs in the near future.
Finally, just like risk averse people seeing rate increases when others have losses, well-run carriers have not gone unscathed from the reinsurance rate hikes discussed above. Just like any other organization dealing with these increased costs, they need to make up for the anticipated impact
This is a complex industry and expanding upon how insurance companies make money and manage premiums deserves its own detailed article. For now, though, suffice it to say that the overall market is in a rough state when it comes to the underwriting of insurance and that is why carriers can and will continue to justify seeking regulatory approval to raise their rates even if they are posting profitable quarters at times.
Understanding the Growing Relevancy of Excess and Surplus Insurance
There have been numerous references to regulators throughout this piece as well as to so-called rate filings. Not all insurance has the same level of regulatory oversight. When certain types of business and properties are viewed as high-risk to insure, they often find their coverage via what we call the non-admitted or Excess and Surplus (E&S) insurance market.
This is not the place for a deep examination of the E&S vs. Admitted (i.e., formally regulated) insurance markets, I will provide a simple breakdown. Where Admitted carriers are required to obtain regulatory approval for their premium rates and coverage wording, E&S carriers have far more flexibility in adjusting prices as they see fit and operate with minimal regulatory oversight.
E&S Carriers do have someone watching them in the sense that groups like AM Best assess their finances and provide them with credit ratings. Still, the individual states they operate in have far less power over their day-to-day operations than they do standard/admitted market companies.
Typically, all that is needed for a broker to place a client with an E&S carrier are documented declinations to offer coverage from three admitted lines carriers. Specific requirements can vary and so too do the signed forms that E&S placement involves. Historically, this regulatory hurdle alone would prevent most insureds from ending up with a surplus lines policy. However, as more and more carriers limit the sorts of admitted lines insurance they offer, finding three declining carriers is becoming far easier and less burdensome.
As a related side note here, E&S insurance is often confused with coverage offered through Lloyds of London and Lloyds is in turn often confused with being an insurance provider. Many E&S policies are in fact issues on what we call “Lloyd’s paper.” Lloyd’s of London is, however, merely the marketplace through which it is offered. Lloyds represents a vital component of the US E&S industry despite being based in the UK.
Lloyd’s is best understood to be a membership-based organization that allows insurance companies to develop specialized coverage solutions. If you see Lloyd’s of London referred to in your policy, you need only dig a bit further to determine which Lloyd’s carrier(s) is/are responsible for paying out claims should you have to file any. The term for one of these carrier funded entities is a “syndicate.” Lloyd’s has many other components but for the sake of brevity, this should prove useful in describing how it fits into the distribution of E&S insurance policies.
Lloyd’s of London aside, the E&S market has long been a vital feature of the US insurance industry. Its use has expanded since the COVID pandemic hit. In 2023 alone, the E&S property insurance industry grew by $5.84B or an astounding 31.8%. This would be remarkable on its own, but this occurred just one year after growing by a massive 25.9% YoY.
Unsurprisingly, the states seeing the most E&S property insurance market growth include FL and CA (at numbers 1 and 3) along with Texas at number 2, with New York and Illinois rounding out the top five.
The E&S market is great for people and businesses that have a long history of filing claims, risky operations, and/or coastal or wildfire exposed properties.
It has now, unfortunately, become a home for historically lower risk insurance business. For example, many Manhattan condo and co-op owners and those in the Northeast’s coastal regions have begun to be relegated to E&S carriers more often in scenarios where they might have had multiple admitted coverage offers prior to the pandemic. It is typically better to have the E&S market as a fallback rather than a state insurance carrier like FAIR or Citizens (above mentioned), but it is far from ideal compared to having traditionally regulated Admitted coverage.
Until admitted carriers can return to consistent underwriting profitability, I see no reason why we should expect the E&S industry to anything but continue its stunning growth. As it grows it will further develop and solidify its position of important in the US insurance market, making a return to the traditional Admitted vs Excess and Surplus divide unlikely.
Beware the Short-Term Benefits of Switching Insurance Companies
The first instinct most insurance buyers and brokers have when they see a large year over year increase on a renewal is to seek quotes from other companies. While other carriers may be willing to offer lower rates, it is important to consider the fact that no carrier is immune to many of the factors impacting the market.
This means that even if the alternative carrier has competitive pricing at the time of quoting, there may be a good chance that the first renewal with them after moving will be substantially pricier. This is not a bait and switch if the insured is aware of the possibility that their savings will be short lived. Bait and switch concerns aside, it may prove worthless in the long term and could also come with coverage that is less well-suited to the insured’s needs.
Lower prices are always tempting and often there are no or few negative consequences to changing carriers to obtain them. The present market makes doing so less advantageous than was traditionally the case and many clients will agree with this if they are given a full picture of the challenges facing the industry.
Helping insurance buyers understand this is important, but it is not the only way industry professionals can help them. We will not consider other ways that insurance experts can serve as a valuable resource to consumers.
What Can the Industry Do to Help Consumers?
It may seem hard to believe, but this piece has not come close to covering the overall property and casualty insurance industry. Instead, its focus was aimed at those segments that are impacted most by what we in the industry call the ongoing hard market. Some other segments like workers compensation, professional liability, directors and officers, and cyber insurance have seen more stability or even so-called softening as the property market has struggled over recent years.
With that said, clients who are being impacted by price increases, coverage reductions, and a more limited marketplace in some areas need information that is suited to their individual circumstances.
There is no direct benefit to a home buyer or a commercial office space landlord to hear that some professional liability buyers have it easier than them. For that reason, and because those areas of industry improvement may prove short lived, I chose to keep our focus on the more traditional segments of the property and casualty market.
How can we accomplish this? Let us discuss what brokers and carriers can do to ease consumer concerns.
Brokers can be expected to continue to negotiate hard on their clients’ behalf for advantageous pricing and policy terms. However, there is a limit to how much they can do both regulatorily and realistically outside of rare or even one-off scenarios. This makes it important for them to understand the industry’s direction in depth and to be able to relay what is going on to clients.
It is not a client’s job to be an insurance expert whether they are a commercial or personal coverage buyer. This was always true from a coverage perspective but today its meaning is expanded. Brokers need to be able to detail the above succinctly so insureds can feel comfortable about what they are buying, why and how it is priced, and why there may not be a better option in the market.
If you as an insurance buyer find your broker is not up to the above task, it is time to shop your business elsewhere. The Bureau of Labor Statistics put the figure of employed insurance sales agents at 457,510 in May of 2023. Even if more than half of them may focus on insurance outside of the property and casualty space, that should leave you with a few potential professionals to reach out to for assistance.
Brokers are not alone in being responsible to insurance buyers to be able detail why rates are increasing, or coverage is being limited. Carriers play a major role here too. They must be able to relay their goals, justify the reasons for coverage/pricing changes, and work with brokers to maintain stability and trust in the industry. Again, it is not an insurance consumer’s job to become an expert on a complex global industry. With brokers and carriers working together, keeping clients comfortable and out of the dark is possible. Carriers can help by supplying brokers with relevant data justifying rate increases. They can also develop informative marketing materials that brokers can pass along to insureds. This is nothing new for the industry, but it is more important than ever if we want trust in what we do to be maintained and improved.
Conclusion: Why Did My Insurance Go Up? A Brief Wrap Up
It is now time to sum up this sweeping yet incomplete survey of the headwinds facing the US Property and Casualty insurance market. To put it succinctly, property owners and automobile drivers are generally paying far more for their insurance in the past year or two due to ongoing pandemic-related inflation, severe weather events, labor shortages, changes in the reinsurance market, and outsized problems facing insurance carriers operating in California and Florida. That is the easiest answer to the titular question of 'why did my insurance go up?'
This massive industry is interconnected, and that will never change. That is why it is crucial to take a broad view anytime one wants to consider what is happening in the insurance marketplace, even at a local level. This interconnectedness and the sheer size of the industry makes changes and corrections slow and that is why I do not envision anything approaching traditional stability in the property and casualty industry for at least another couple of years.
To end on a high note, the insurance industry remains enormous. It is a crucial component of the global economy, and it has historically been able to turn things around relatively quickly. This is not far from the first hard market companies have faced.
The beauty of being cruise ship sized is that you can handle even the biggest storms. The tricky aspect of this sort of size, however, is that it makes slowing down and turning around logistically difficult. As of year-end 2022, the US P&C insurance industry was approaching $900B in gross written premium. Almost trillion dollar, highly regulated industries simply do not solve their problems overnight.
Still, I am confident that carriers, reinsurers, brokers, and consumers can all return to a more stable way of doing business. It may take years, but daily efforts add up and compound and those of us in the industry are empowered to make them consistently. If this hard work is complemented by stabilizing post-pandemic inflation and labor shortages are resolved, the time needed to return to normalcy will be cut down significantly. We should be hopeful, though not excessively optimistic, that this will happen.
Hayden Kopser
President
North Improvement, LLC
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