Intensifying weather events are driving higher losses for insurers

Extreme weather events continue to intensify, leading home insurers to develop new services and rating plans to keep their books of business more accurately priced for risk. The latest research shows an increase in both the number of losses and the percentage of losses that resulted from extreme weather events.

The 2018 Home Trends Report from LexisNexis Risk Solutions highlights by-peril trends in the U.S. home insurance industry — including wind, hail, fire, water, theft and liability — to help insurers make more informed business decisions. Across the country, loss costs increased 19% over the previous year, and of those claims, catastrophe claims made up nearly 35% — a 5% jump.

The impacts of catastrophe claims in recent years were particularly dramatic, especially in states affected by Hurricanes Harvey and Irma, and those regions affected by the California wildfires. For example, the intense hurricane season in 2017 resulted in 60% of wind claims being catastrophe-related, primarily in Texas and Florida where Hurricanes Harvey and Irma inflicted their greatest damage. In 2017, a similar spike in catastrophe water-weather claims was concentrated in Texas and Florida as well.

These intense weather events led to 2017 being the most expensive hurricane season in U.S. history, costing more than $200 billion in property damage. Hurricane Harvey ranks second ($125 billion) and Irma fifth ($50 billion) on the top five list of costliest U.S. hurricanes. The extent of the destruction was so severe that the World Meteorological Organization retired both hurricane names.

Related: Local governments begin to confront climate change risk

Intensifying fire events

Loss cost for fire claims rose sharply in 2018, as well, due to a continued increase in claims severity. The most dramatic factor was the intense wildfires across the U.S., with the severity for fire claims increasing nationwide by 20%.

While fire loss claims have continued to increase in recent years, 2017 saw a particularly sharp increase (70%) in the severity of claims due to California’s wildfires in October and its Thomas Fire in December. In fact, the 2017 California wildfire season is generally regarded as one of the state’s worst; both in terms of destruction and cost. The Thomas Fire — the largest in California history until 2018’s deadly Camp Fire catastrophe — took nearly two months to contain, and combined with the October fires in wine country resulted in $9.4 billion in insurance claims.

These fires were so significant, that California accounted for 30% of claims in 2017, where the state typically only accounts for 10% of national fire loss-costs. This high level of severity was due in part to the intensity of the events and in part to the high home value situated in the fires’ paths.

Related: Four insurer tips to help homeowners navigate wildfire recovery

Hail frequency subsides

If there was one bright spot in the by-peril trends, it was with hail claims. While costs associated with hail-related losses increased between 2016 and 2017, the frequency of hail-related claims decreased to 2012 baseline levels. The intense storms that hit Texas in 2016 accounted for nearly 25% of the hail claims in 2017, showing significant improvement from the record-setting $6 billion in combined hail and wind losses in 2016.

However, as claim frequency decreased, hail claim severity increased in 2017, resulting in an increase in hail loss cost. High-risk hail states also remained the same, with Nebraska, Colorado, South Dakota, Texas and Montana in the top spots.

Related: Spring means hail, and costly hail damage

Correcting course

So what’s to make of all the new data? While the continuing intensity of weather loss trends is sobering, home insurers can utilize the findings of the Home Trends Report to better understand their performance in the marketplace, and make necessary adjustments.

The trended data can also help insurers generate insights into by-peril history, seasonality and geography to better select and manage risk. It can also help them support more sophisticated pricing at point of quote and renewal, benchmark their performance against the performance of the market, and they can identify underserved market segments or opportunities for pricing improvements.

As home insurance carriers continue to be tasked to meet loss-ratio objectives and growth targets, aggregated by-peril data can help them achieve a deeper understanding of the risk associated with a particular location. This, in turn, enables them to differentiate their business and avoid adverse selection as the use of industry-wide data becomes more common. In the long term, aggregated by-peril data can enable more accurate pricing, a healthier book of business and long-term profitability.

Related: Natural catastrophe losses driven up by secondary perils

George Hosfield (george.hosfield@lexisnexisrisk.com) is senior director, home insurance for LexisNexis Risk Solutions.