We are well into the first quarter of 2023, and the property insurance market continues to seek premium increases. This extends a trend that has persisted for the last two years.
We’d like to explore several of the factors causing the price increases and what you can do to manage the impact on your insurance program.
We want our clients to understand market forces and be prepared to deal with these trends as they approach the renewal of their insurance program. An informed and educated buyer is better equipped to make good decisions.
Catastrophes
2022 was an expensive year for property insurance catastrophes. A catastrophe (CAT) is often defined as a single event causing any of the following:
$25 million in property losses
Ten deaths
50 injuries
2,000 claims filed for property damage
CAT losses are significant as they impact both the primary insurance company and the reinsurance markets that support the primary insurer. When both markets are impacted, the result is pressure to strengthen pricing. A traditional tool to address loss severity trend is to limit business in geographic areas, with quake and hurricane exposures this is an option.
Unfortunately, the nature of CAT events is no longer limited to earthquake and hurricanes. 2022 has a list of CAT events that included hurricanes, severe convective storms (hail), wildfire, drought, winter storms and floods. The geographic reach of 2022 CAT events preclude an effective geographic strategy. The diversit y of CAT events crosses over every geographic region and every business segment.
Inflation
The industry focus for 2023 is on requiring the correct values for the property being insured.
Since the pandemic in 2020 the construction industry has been adversely impacted by supply chain pressures, material shortages, labor shortages and a pent-up demand after the pandemic. The result has been double digit inflation of construction costs for the past two years. Insurance companies feel the impact of this when adjusting losses and the reconstruction costs exceed the expected values.
The insurance industry has responded by applying increases to property values. Some automatic escalation clauses increased to 8% – 12% per year. Higher values mean higher premiums even if the rate in unchanged.
It is important for the buyer to monitor the insurance to value numbers. If the values are significantly lower that the true reconstruction costs a coinsurance penalty could be enforced. The insurer could also withdraw the blanket insurance and agreed amount endorsements. Both would negatively impact the protection provided by the policy. See our prior article on Coinsurance for more details.
What Can I Do?
The first thing is to get ahead of the process. Prepare for your agent a list of the property improvements, risk reduction programs and steps you have taken to upgrade or protect your property. New roof, new alarm system, updated electric, updated plumbing or HVAC are all of interest to your property insurer. This is valuable information when negotiating with an insurer. The insurer wants to retain risks that are proactively managing their property exposures.
The second is to evaluate your property values before the insurance company dictates their values. You should know what the true insurance to value number is for your property. We published an article on Insurance to Value. This article details the data elements used for this process. Do not assume the number from the carrier is correct.
If a price increase is inevitable, do you want the increase based on a higher rate or higher values? There is a benefit to having higher values on the policy as it increases the pool of money available in the event of catastrophic loss. A higher rate only benefits the insurance carrier. Ask if the carrier will accept a higher value in lieu of a higher rate.
A third consideration is evaluating your deductible. There are premium credits as the deductible increases. If you can afford a higher deductible and your loss frequency is low, then this can be a tool to manage costs.
A final tool in managing your property insurance cost is evaluating your claim reporting practices. If you have a relatively low deductible, you may have reported small claims that impact your experience. For every action there is a reaction. Filing small claims can ultimately result in higher costs. You should know what is on your loss runs and be sure that data is accurate.
The Driehaus Difference
We understand the risk management choices that influence property loss expectations and potential premium costs. We can help you identify cost effective risk reduction programs and strategies that will improve your insurance program and your risk level. We share our insights on pricing trends to help our clients make informed decisions. Call us at 513-977-6860 or contact us on our site at www.driehausins.com to learn more