If you own property, then you likely have property insurance coverage. Lately, you’ve probably noticed an increase in your premiums, even though you have not experienced a loss in a long time. You can place most of the blame on the Three I’s, which I will explain as you read on. While this is aggravating to all of us, if we return to the fundamentals of insurance, it starts to make sense.
Insurance centers around the law of large numbers. You get enough people to pay a reasonable premium to cover the probable losses, computed by actuarial analysis, and you have the resources to pay claims as losses occur. For catastrophic losses, insurance carriers enter into reinsurance agreements, whereby the reinsurer assumes the liability for paying losses more than the insurer’s limit. For example, let’s assume that company X insures many people in the path of a hurricane with aggregate losses in the tens of millions. Company X likely has an agreement with a reinsurer to cover losses more than a certain amount. So, in this hypothetical case, Company X will pay up to the aggregate loss amount indicated in the agreement and the reinsurer will pay the excess amount. This type of arrangement has provided stability in the property market for many years as the reinsurers pay a bulk of catastrophic losses, which until recently, have been far more predictable.
Currently, we are experiencing what’s called a “Hard” market for property. That means premiums are higher and, in some instances, coverage limits are reduced. This is especially prevalent in the commercial markets. In the personal lines markets, carriers are either significantly raising premiums, reducing coverage or non-renewing policies in areas prone to losses. So, you might ask why, especially with the backstop of re-insurance? Read on for the ugly truth.
During 2022, the US experienced approximately 22-Billion-Dollar + weather and climate disasters. With hurricane Ian topping the list at approximately $112 Billion, none of the events were small. Concurrently, inflation has shown its ugly face causing properties to be undervalued on many insurance policies (Insured to value is the term used to assess whether the replacement cost of the property is appropriately valued). We can summarize these realities as the Three I’s. Remember, when an insurance company must replace a property, they don’t have the luxury of time to plan the project like a developer. They must replace the property promptly and with the same materials, quality, and workmanship to put you back to the place that you were prior to the loss. Therefore, they are paying top dollars in many cases to restore the property. That’s why sometimes, replacement cost estimates can be higher than market value.
So, analyzing the effect of the Three I’s; Ian (and other superstorms), Inflation, and Insured to value, let’s also look at human nature. Most successful people like to matriculate to places that are exciting or pleasant like; Florida and other coastal communities (Hurricanes), California (Wildfires and Earthquakes), and the mountains (Wildfires). Successful people like to move to nice places that keep them close to their friends, creating an abundance of property value in those areas. When a catastrophic event hits, it doesn’t discriminate. And, with all that value at risk, even the reinsurance companies can lose billions replacing and repairing damaged property. The same fundamentals apply to commercial risks, as population dictates the needs for goods and services to be delivered in those areas.
So, for the first time in many years, we are experiencing the perfect storm in the property markets. Capacity is decreasing, as many reinsurers are unwilling (or unable) to strike the same deals that they have in past years, while premiums for those that are willing to play are skyrocketing, and often for less coverage. That’s how the Three I’s have delivered our “Hard “market. Until the conditions change (Inflation) and mother nature decides to settle down a bit, we are navigating a very difficult property market and, even if you live in an area less prone to catastrophic events, you are still part of the “Large number” and will feel the pain.