The three-headed monster threatening insurance
Extreme weather, hyperinflation and social inflation are forcing carriers to make difficult adjustments.
Insurance carriers and their customers have been hit with a trifecta that’s impacting claims costs and the price of premiums.
In an interview with PropertyCasualty360.com, Peter McMurtrie, a partner in West Monroe’s Insurance vertical, called the combination a “three-headed monster,” with extreme weather inflating claims severity and loss costs, hyperinflation driving up labor and material costs, and social inflation bloating claim costs.
“Together, these three mighty factors are causing carriers to adjust their pricing strategies, reduce or non-renew parts of their portfolios, and in extreme cases, exit certain markets,” he said. “Insurance carriers set prices based on the anticipated cost of future claims. To determine these costs, they analyze a range of factors to predict both the likelihood of a loss and its potential expense.”
With weather events like hurricanes and floods becoming more frequent due to climate change, the Federal Emergency Management Agency (FEMA) recently announced new construction guidelines for taxpayer funded projects in floodplains.
“Historically, the primary weather concern for insurance carriers was hurricane activity affecting the coastal states along the Gulf and Eastern Seaboard,” McMurtrie said. “Now, however, severe convective activities such as hail, tornadoes, and straight-line winds have increased in both frequency and severity throughout the Midwest and Central Plains.”
“Additionally,” he added, “phenomena like derechos (severe straight-line wind events) and polar vortices (extreme temperature drops) have become significant concerns for insurers due to the substantial losses they cause.”
The riskiest locations are Florida, the Gulf Coast, Eastern Seaboard, and wildfire prone areas out west, with most forecasts anticipating large increases in wildfire-related losses due to climate change, according to a recent study by the National Bureau of Economic Research (NBER).
“Based on risk measures, the safest places are found in the Northeast including Upstate New York, western Massachusetts, and other parts of New England,” Ben Keys told PropertyCasualty360.com, a real estate and finance professor at the University of Pennsylvania’s Wharton School.
“Northernmost parts of the Midwest also come out looking relatively safe, such as northern Michigan and the Upper Peninsula, northern Wisconsin and Minnesota,” he said.
Meanwhile, persistent economic inflation and a rise in nuclear verdicts, or settlements and awards of $10 million or more, have also forced carriers to rethink their pricing structures.
Hyperinflation’s impact on the cost of goods is pushing insurance carriers into rate increases to cover the higher costs of claims and repairs, McMurtrie said.
“As a result, customers and brokers are experiencing rate increase fatigue,” he added. The lines of insurance most impacted by hyperinflation are personal auto and homeowners insurance. This is because the rising costs of repairs and replacements due to hyperinflation directly affect the expenses associated with these types of coverage.”
At the same time, the gap between liability loss and insurance coverage limits purchased by companies is widening at an alarming rate due to nuclear verdicts playing a major role in the mismatch. Nuclear verdicts also play a role in social inflation.
Social inflation refers to the widespread public perception that large corporations have deep pockets, which is driving up the cost of insurance claims thanks to nuclear verdicts, increased litigation, broader definitions of liability, and plaintiff-friendly legal decisions.
“Social inflation predominantly affects casualty lines of business, including auto bodily injury, general liability, and personal injury,” McMurtrie warned. “The lack of predictability from a geographic perspective has made this phenomenon all the more challenging.”
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