Homeowners rate increases

[Maphistos_Sidekick]

A story on rate increases for homeowners coverage is currently at the top of the WSJ website (this should be a free link):
https://www.wsj.com/articles/home-insurers-are-charging-more-and-insuring-less-9e948113?st=8wtr37axiqpsn2b&reflink=desktopwebshare_permalink

Home insurers are insuring less and charging more as they try to claw their way back to profitability after losing money in five of the past six years, analysts and insurance agents say.

Since the start of the last year, double-digit rate increases have been approved in 31 states, according to an analysis by S&P Global Market Intelligence for The Wall Street Journal. Arizona, Texas, North Carolina, Oregon, Illinois and Utah had the biggest total of approved increases, ranging from 20% to 30%. In states such as California, some insurers are halting sales of new policies.

In wildfire-prone California, where State Farm and Allstate have stopped writing new home policies, the industry says regulatory curbs on pricing mean they cannot charge enough to cover their costs. California’s insurance regulator says insurers have failed to ask for adequate rate increases.

[ALivelySedative]

@Maphistos_Sidekick

The industry is trying to rebound from years of losses owing to storms, fires and inflation.

The industry is trying to rebound from shock reinsurance costs.

[DeepPurple]

@ALivelySedative

The industry is trying to rebound from shock reinsurance costs.

I think this is inflammatory and misleading. I object to the word “shock.”

[ALivelySedative]

I mean, I was shocked.

[DeepPurple]

Why?

And what is/was your perspective? By that I guess I mean, generically, what is your day job and how does that interact with reinsurance costs?

[Maphistos_Sidekick]

In my day job, I do capital modeling.

1/1 property treaty renewals were a “shock” in the sense that there was a sharp increase in cost / a sharp pressure on limits/attachments as compared to prior renewals.

My reinsurance folks knew going in that it was not going to be a pleasant renewal, but they (and our reinsurance broker) were surprised at just how unpleasant it was.

I respect that from a reinsurer’s perspective, the term “shock” has some unfortunate negative connotations, provoking feelings that are not dissimilar to how P&C pricing actuaries feel about criticism over recent rate increases, etc., but there aren’t many other succinct terms to describe “unexpectedly big change from expectations”.

[DeepPurple]

@Maphistos_Sidekick

“unexpectedly big change from expectations”.

Well, realizing that to you, I am just some random joe-shmo internet guy, so take this with a grain of salt.

If your expectations were merely based on the observations of “for the last 10 to 15 years, the average reinsurance price increase was X%”, and this year the price increase was Y% and Y% was a multiple of X%, then perhaps you may have been shocked. But that is naivete.

Many internal and external factors are occurring simultaneously that change the game. They all have a leveraged effect which compounds heavily into reinsurance.

Here is a truth that may shock you, but should not. The price you pay this year is potentially much too low and may not cover the losses you cede. Your reinsurer(s) may be unhappy that they only got Y% and not Z%.

[Maphistos_Sidekick]

@DeepPurple

Here is a truth that may shock you, but should not. The price you pay this year is potentially much too low and may not cover the losses you cede. Your reinsurer(s) may be unhappy that they only got Y% and not Z%.

It’s not a surprise. I know from my own work that P&C reinsurance was sometimes stupid-cheap, and I’ve seen layers that were purchased because it was just too good a deal to pass up, rather than for risk management purposes.

It’s not an alien concept. At my current and prior employers (primary insurers), I’ve either witnessed or been a party to arguments with senior management, or representatives from parent companies, where the disconnect between (profit load implied by comparing enterprise volatility to the risk/reward implied by the stock market) and (profit load supported by market pricing) created friction.

Anyone paying attention knew that eventually reinsurance pricing would go up and capacity would decline.

The shock element came from just how quickly the market changed. I know that in my company, when going through planning season a few months before treaty renewals, we planned for higher costs, etc., anticipating changes. The surprise was that we underestimated just how hard the market became.

Even if there had been no surprise, even if we had been perfect or even a little pessimistic in planning for the impact of the renewal, the magnitude of the difference from one year to the next was great enough to be described as a “shock”, in the sense of being a material discontinuity in the associated metrics.

I think you’re reading too much into the use of the term “shock”. It’s a term that has multiple definitions, and at least one of them applies here.

[DeepPurple]

@Maphistos_Sidekick

In wildfire-prone California, where State Farm and Allstate have stopped writing new home policies, the industry says regulatory curbs on pricing mean they cannot charge enough to cover their costs. California’s insurance regulator says insurers have failed to ask for adequate rate increases.

That last sentence has not received any commentary here.

I’d be willing to wager that there are plenty of insurers that may disagree.

[ALivelySedative]

I’m on the reinsurance committee at a primary insurer that handles the cat treaty purchase. My being shocked is a direct sample from the population in question. We have not been loss affected in recent years, for what it’s worth, which contributes to my perspective.

I hesitate to provide a great deal of detail for business reasons, but I saw the results directly.

@Maphistos_Sidekick

The shock element came from just how quickly the market changed. I know that in my company, when going through planning season a few months before treaty renewals, we planned for higher costs, etc., anticipating changes. The surprise was that we underestimated just how hard the market became.

Even if there had been no surprise, even if we had been perfect or even a little pessimistic in planning for the impact of the renewal, the magnitude of the difference from one year to the next was great enough to be described as a “shock”, in the sense of being a material discontinuity in the associated metrics.

This is a quality summary. A downstream effect is also that primaries are subject to more regulatory restrictions on rate, so we can’t just load it all in. And when you can’t get rate, you mitigate losses, re: everyone pulling out of Florida/California. While we don’t write there, and so I can’t confirm directly, I highly suspect the reinsurance market played a roll in those decisions, which I would also consider shocks.

Also there were specific markets that did things with which we took issue, largely to do with lack/timing of communication (so late that we’d already spent material dollars looking for other/new capacity only to have not needed it to begin with). There are markets we will avoid in the future if possible.

OH! Also, Ian happened and everybody freaked out, and it ended up not being as bad as people anticipated, so it feels we all overpaid based on that metric as well (though perhaps not on others).

[Maphistos_Sidekick]

@DeepPurple

I’d be willing to wager that there are plenty of insurers that may disagree.

I think the CDI spokesperson would have had a more accurate representation of the CDI’s opinion if they had phrased it as “insurers have been asking for excessive rate increases.”

Back when I was doing product work, I frequently found that what California considered “excessive” was something I considered “inadequate”.

I doubt that situation has improved.

[MAX]

I work for a primary company and spend about 90% of my time dealing with reinsurance. Nothing that happened last year was a “shock” to me. It was mostly expected. But it was to other memebers of the reinsurance committe that only think about it once a year. (Despite my and the brokers continuous warnings).

I can see how people that don’t deal with it on a day to day basis don’t truly grasp the market conditions and their impact on pricing.

[ALivelySedative]

What I’m mostly gathering from our small sample size (4?) is that people who work majority reinsurance saw it coming, and others did not. I don’t think this is revelatory, but might highlight some communication issues if nothing else. I don’t know what you guys told your people so I’m not trying to assign criticism directly by any means, but if that’s what the other side of our table thought they were telling us, it didn’t get through. jme.

[Maphistos_Sidekick]

It’s also probably worth remembering that there’s a nuance to “seeing it coming”.

From my vantage (capital modeling), I’ve known for years that a correction to reinsurance pricing, etc. was coming. I expected that “something” would happen that would cause a rapid change, but “when” (as in “what year”) didn’t seem possible to predict, and “how much” was difficult to predict.

I don’t know when the reinsurance team at my company knew that the change was going to happen at the next renewal, or that this was going to be a big one. There clearly was knowledge that some form of a correction was coming during planning season; the planned reinsurance costs coming through plan were higher, but the loss planning didn’t contemplate a significant change in property treaty structure.

It was 6, maybe 7, weeks before the renewal date that I started getting the priority requests to look at the impact of different potential changes in treaty structure from a capital adequacy perspective.

It’s entirely possible that there was weakness in communications on the subject in my company. We aren’t particularly exposed in terms of California property or Atlantic tropical storms. My (admittedly second- or third-hand) impression is that our reinsurance team was surprised at how tough the market had become when considering other cat exposure or as regards general property per-risk coverage, or the uncertainties left over from other changes the company has made over the past couple of years. (Yes, I’m being admittedly vague in the interest of pseudonymity on that last bit. )

That’s all a long-winded way of getting around to my question: how far in advance, and/or in how much detail must you “see it coming” for it to not be considered a “shock” (especially when linked to discussion of rates and underwriting appetites for homeowners insurance)?

[ALivelySedative]

I don’t disagree with that. I was aware well prior to that point, but we still had an ‘aha’ moment.

[Klaymen]

@Maphistos_Sidekick

California’s insurance regulator says insurers have failed to ask for adequate rate increases.

I asked for 20% 20 months ago. Is their plan to wait long enough so it becomes 6.9% annualized?

[Maphistos_Sidekick]

NYT does a story on reinsurance, in the context of homeowners rates (theoretically non-paywalled):
https://www.nytimes.com/2023/08/16/business/reinsurance-global-crises.html?unlocked_article_code=CexosiNM27rW952mDet2AjfVm42f_fIc_ZxWmTTejLeOB4AljK_ezblgNiYwYxt5zVEAPGs_bugvyBf00nuIB0dkyE0bAVEKCtuvoGwug_3kiD9ni0h1J1zWj1Ohlk-I0FoQsWYU0yMsQo27vfvrCYzZuIGMMLD71-MW6lnjnhWu529lOhz62-cUWbHogq4lZP4QkE32-ad46hawlgzBFSqp0iqvNcMKC9x_6hJ0FLIwrA3P6JuzHcYBoiQq8ZattGYNXcq1fP4R-U6dyyWvNgoR3EIrqt_cPL4DPWmUBi1svU2GE8rtt348wlbONWGsiLFKyzrKBcs85eN8gOuLEzK_J6Y&smid=url-share

No surprises for P&C pricing actuaries. It’s just interesting to see the information presented to the public.

I also saw a headline from Barrons that HO losses from the Maui fires are now projected at US$3.2b, and that “homeowners everywhere will pay the price”; but the full article is paywalled to me.

[ArthurItas]

I liked this comment “People in the industry tend to be risk averse, they tend to be looking at the same data, they tend to see the world in the same way”

The converse: insurers shouldn’t be looking at the data.

When your big risk is covering the tail and companies/people don’t feel they should have to pay for that, it’s a fair characterization.

[dr_t_non-fan]

So, analytics are doing to insurance what they did to baseball??

[knoath]

https://www.spglobal.com/marketintelligence/en/news-insights/latest-news-headlines/texas-greenlit-21-homeowners-rate-hikes-of-more-than-10-in-q2-23-77109504

The most significant rate change, a 24.1% increase, was granted to The Allstate Corp.'s Allstate Vehicle & Property Insurance Co. unit with a calculated premium change of $337.1 million. This rate change is reported to affect over 650,000 policyholders.

Also

The largest percentage change for the quarter belongs to Liberty Insurance Corp., a subsidiary of Liberty Mutual Holding Co. Inc. California regulators approved a 65% rate increase for the subsidiary’s LibertyGuard condominium program. The new rate took effect Aug. 1 for both new and renewal business and is reported to affect about 35,000 policyholders.

Yikes!