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  • Writer's pictureChris Burand

Property Rates are Arguably Not Affordable

A friend in a major city with no material extraordinary fire or flood catastrophe risk, PC 3, low crime, and upper middle-class neighborhood, advised his homeowners premium had tripled in the last five years. The carrier wants another 20% this year. He’s never had a homeowners claim.

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That kind of rate increase makes zero sense, unless the carrier itself has financial issues. Needing to increase rates 300+% in five years means the actuarial models used five years ago were failures. The models were complete failures to such a degree the board of directors should be reviewing governance bylaws.

And if they are blaming the increase on weather, which they partially are, then again their actuaries are wrong because this is a recency bias. If the pattern is over 100 years showing an increase, then the actuaries should have identified the change five years ago. In fact, SwissRe identified weather changes in 1994, not 2020. The weather hasn’t actually “changed” that fast, though this carrier is claiming that is a cause of their rate needs.

If the carrier blew the old model so horribly, waiting 25 years to figure out the weather changed per their reasoning, then how much confidence should anyone have in their new model with triple the rate? After all, when rates increase that much, do the best accounts stick around if other options are available? Or might this carrier need a 300% rate increase because they’re already stuck with adverse selection because they are so incompetent? If so, no amount of extra rate is going to save their bacon.

It's funny looking back over a long career. I haven’t trusted most carriers’ “clear future vision” for many decades, especially if their x-ray vision requires major rate increases or radical underwriting changes. Their vision is usually camouflage for serious mismanagement. Thinking back, I remember how specific carriers wailed that the end of personal auto insurance was at hand because California passed Proposition 103 back in 1988. Instead, the market has changed completely with the best companies making high profit margins. I recall another time when a leading carrier decided there was no future in workers’ compensation, so they dialed it back right as the workers’ compensation market became so incredibly profitable that it generates almost all the profit in the entire industry per A.M. Best. Those executives had clear visions in the wrong direction, and it was pretty easy to see they were wrong at the time. But they get paid the big bucks so they assured everyone they were right. Significant layoffs and disruptions happened, but they got their retirement packages.

I am not knocking carriers just to knock carriers. I am trying to push back enough so that people will start thinking things through. My friend’s state has a reasonable five-year homeowners loss ratio of 65%, but the median is 56%. Both are better than the national average on an unweighted basis by state per A.M. Best data. Average might not be great, but 20% more rate on a median of 56% puts the loss ratio at 36%. Why in the world is a 36% loss ratio required? That makes no sense. Something is broken in the model and when carriers spout off the need for rate, work backwards and then ask whether they truly need that much rate. If they think that without 20% more rate, their loss ratio is going to explode to 76%, then they have an underwriting problem, one for which rate is not the solution. Their vision is blurred one way or the other.

But sometimes demanding such significant rate increases is actually a signal the carrier is short surplus. They are hoping that by raising rates so significantly, lots and lots of premium leaves. It is easier than nonrenewing all that premium. This is called shrinking to volume. In other words, if a carrier is short surplus and cannot increase surplus, it shrinks its premium to match available surplus.

The major problem with this strategy is it results in adverse selection probably 100% of the time. Time may pass before the full effects are felt, but adverse selection will happen.

To recap the situation: A great home with no known underwriting issues in a state with better than normal loss ratios. Why do rates need to increase 20%?

For a moment, let’s accept that 20% is required. Is the resulting premium affordable? Unaffordable insurance is a good strategy toward becoming irrelevant. Do you suppose the carrier executives want the carrier to become irrelevant?

I think some carriers take consumers and agents for granted. They don’t think the agents will move the business to save the clients and they seem to think consumers won’t shop either. Relative to real property, they are thinking loan requirements will make the insurance sticky, and to some extent it does. But many homes are bought with cash today and by private equity, so insurance is no longer mandatory.

If insurance is unaffordable, no one needs insurance companies. Excessively expensive insurance, regardless of whether the rate is genuinely needed or the result of incompetent management, is of no use.

To remain relevant, do not take anyone for granted. Then return to intelligent underwriting and common-sense evaluation of rate increases. Is the problem really an underwriting issue rather than a rate issue? Is the problem really an insurance-to-value issue rather than a rate issue? Is the problem really a risk management issue? Blanketing everything with rate indicates a lack of intelligent thought.

My friend’s situation is likely driven by the fear of convective storm damage. Millions of people have moved into these exposed areas. Other than awful hail and windstorms, these cities are attractive places. People are moving from relatively benign cities to cities that have always had greater storm exposure. Nothing new and it is not a climate change issue. After all, Florida has always been hit by hurricanes but before air conditioning, no one really wanted to live there. Texas has always had hail storms – just read the old histories of rural Texas, and their tall Texas tales of riding out the storms including the blue lightning.

Underwriting is likely the key solution. Spread the geographic risk. Many carriers find themselves with concentrations of property risk they built unintentionally. This is pretty easy to manage so one must wonder about their annual underwriting assessments. Much of the risk can be mitigated, and changing underwriting/rating to favor mitigating factors is simple. We know certain roofs withstand hail much better than other roof types. We know certain roofs can withstand far higher winds than other roofs.

But this solution requires thinking. I get the feeling that many companies are investing in technology as an excuse to not think and prevent underwriters from thinking. AI is not a substitute for thinking and if it is, then the board of directors should fire the C-suite because C-suites are paid to think things through. Maybe the job most at risk to be replaced by AI is the C-suite? Nah, that’s my own blurred vision.


NOTE: The information provided herein is intended for educational and informational purposes only and it represents only the views of the authors. It is not a recommendation that a particular course of action be followed. Burand & Associates, LLC and Chris Burand assume, and will have, no responsibility for liability or damage which may result from the use of any of this information.

None of the materials in this article should be construed as offering legal advice, and the specific advice of legal counsel is recommended before acting on any matter discussed in this article. Regulated individuals/entities should also ensure that they comply with all applicable laws, rules, and regulations.

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