Every day we get calls at our office about rate increases on all types of insurances. With the increased cost of construction on homes, the auto market still in flux from COVID, inflation, and myriad other factors many of the stories we hear talk about huge increases that are perplexing to clients. One of the more recent trends that is more worrisome is that of clients policies getting non-renewal, the insurance company decide not to continue insuring a policy after the current policy term expires. The hope of the article is to explain what is going on so that you can better understand why some of these trends are happening and you can better prepare for the future.
The Big Boys
If you have ever watched a sporting event, concert, or major broadcast you will see advertisements from one of the big national insurance companies like State Farm, Allstate, Geico, USAA, or Progressive. Their brands and marketability are of most importance to them. Because of that they do everything they can to mitigate risk and bad exposure. I’m sure many of you have noticed that those companies don’t insure many home located on Ocean Blvd. If you look back at Hurricane Katrina, State Farm got involved in heavy lawsuits over how they handled claims (Insurance Journal- State Farm Agrees to Settle Katrina Claims Lawsuit) and during Hurricane Sandy lawmakers forced insurance companies to settle claims at a lower deductible than the policy contracts read (Good News for Homeowners: Insurers Cannot Charge Hurricane Deductibles). These are huge risks that billion dollar companies cannot afford. Instead, they will focus and less risky opportunities and constant profits. Do not expect there to be an increase in activity from any of the “Big Boys” any time soon. What other options are available?
Regional and risk specific companies
The solution that many homeowners have got to recently on the coast are smaller companies that focus on specific states or regions. The are setup much different than the Big Boys which need to be explained. The Big Boys insurance all types of risk from cars to homes to life and ever banking sometimes. Pools of money that are obtained from car insurance can be used to support a homeowners line that might be struggling. However, these regional companies begin with a group of investors who will ultimately only insure a portion of the homes that they ultimately insuring. So for example, a company with $100 million worth of homes may only have 20% of that $100 million in assets to pay out claims in the event of a loss. How is that even possible? Well, the answer to that is reinsurance. Basically, the insurance companies will buy whatever risk is leftover from another group of investors for pennies on the dollar. Think of it like Amazon. Amazon has thousands of products they sell but only so many warehouses. As a result, Amazon will outsource some products to partner companies and take a percentage of the profits for doing the leg work. Same thing is happening here. You may see XYZ insurance on your policy but 90% of that protection may actually be from an investor in London.
What does that mean to you? Often times it means lower rates on properties that otherwise would be unaffordable, protection by the Department of Insurance in whatever state you are in, and often times better coverages that can be customized to your needs than the cookie cutter policies of the “Big Boys”. Other times however it can mean much more volatility. Regional companies buy reinsurance on contracts that last 2-5 years. Well if the price for reinsurance triples because the investors did not get the returns they expected on the last contract, regional insurance companies can spiral. One of the ways insurance companies mitigate this is by passing rate increases to the customer. Sometimes the insurance companies need to take a big rate increase to remain profitable, but the Department on Insurance will cap the rate increases so that the change isn’t burdensome on the clients. When that happens insurance companies will decide to non-renew certain policies that are not profitable even if the policy has never had a claim.
FLORIDA IS RUINING IT FOR EVERYONE
Keep in mind the name of the game for insurance companies is to be profitable and make money. It is usually a good idea to self-insure as much as you can afford to. Well Florida is the casino for insurance. It can have huge profits because of the high premiums that can be charged. Companies will pool money from several states to support their Florida market and be able to play there. Other times companies will just decide altogether to leave Florida for a while because the risk is too great. Well recently the trend has been huge losses on insurance claims which are leaving companies in a tough spot. At this point, you are probably thinking those hurricanes are doing all the damage. You would be incorrect. Models have shown and been able to predict losses for hurricanes and companies can plan for them. What companies didn’t plan for are the number of lawsuits being filed (Florida and Reinsurance – Pulling Back the Covers). With the huge losses in Florida companies, reinsurance rates are increasing and companies are looking to other states to support them. So, South Carolina may be profitable for XYZ Insurance Company but they will still ask for a huge rate increase so that they can remain profitable across the board, but once again the Department of Insurance is capping those companies and only allowing smaller increases than what the companies need.
Where are we now?
In 2023 we are planning to see many companies take 20% rate increases on the coast, and in some cases, non-renew many of their policies. Eventually companies will get the rates and many of the other problems figured out and will be more aggressive again but for the foreseeable future there will be a waiting game. It is very important right now to review your policy when it comes in and make sure you are covered correctly. Increase construction prices are playing a huge role in all of this. Many agencies are losing contracts and the ability to write with companies who are still competitive. We however are still growing and expanding the reach out companies we work with to make sure when we get those calls that we are still able to save people money. THERE ARE STILL OPPORTUNITES OUT THERE TO FIND GOOD INSURANCE AT AFFORDABLE RATES. The days are $900 premiums on the coast are long gone but if you are seeing rates over $3000 there are still options