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Why Are Insurance Premiums Rising? | EXPO Returns to Chicago

March 24, 2022

Why are Insurance Premiums Rising?

 

 Scott Graham for Unsplash

 

If you are feeling like everything you purchase costs a little to a lot more, you’re not alone. At Chartwell, we track average premium costs for dwellings each calendar quarter; from that data we calculate an index that shows percentage changes from year to year. The latest figure shows an average increase across all insurance carriers of just over 14%. We would, of course, prefer to see much lower increases (or none at all), however, the reality is that rising homeowners insurance premiums are a current economic fact of life for almost everyone.

In this Chartwell Bulletin, we examine some of the factors that are contributing to these rising premiums, starting with the current general rate of inflation.

General Inflation

Inflation —the amount by which prices are increasing across a broad spectrum of typical expenditures— is calculated as a rate: by how much are those prices higher than they were last month or last year?

The federal government uses the Consumer Price Index (CPI) to measure these changes. The CPI represents the average prices paid for a “basket” of goods and services by urban consumers. The most recent findings showed that for the 12 months from January 2021 to January 2022, the CPI rose by 7.5%, which is therefore the current annual rate of inflation.

Insurance companies are not immune from the impact of inflation, and while some elements of the CPI have little direct effect —such as the cost of sporting goods— other parts such as energy and health care costs certainly do.

Insurance Industry Specific Factors:

1) Reconstruction costs

Lumber prices are the core root of this increase: at the beginning of the pandemic, the then-tepid lumber industry slowed production in anticipation of lessened demand. Instead, the demand exploded. Faced with the new working-from-home reality, thousands of Americans set out to build new or improve current home offices. With less commute time, and some Americans completely out of work, there was finally time to re-do the kitchen or build that deck.

This double whammy of reduced supply and increased demand could have only one result: massive lumber price increases. One indicator showed an increase from April 2020 to April 2021 of more than 162%.

And if you thought the vast tracts of pristine Canadian timberlands might help ease the strain, think again. The federal government recently doubled tariffs on Canadian lumber imports, the continuation of a long-standing American response to alleged dumping of cheap Canadian lumber in the U.S. market, enabled by Canadian government subsidies.

 

The cost of construction labor has also moved up. A Verisk analysis showed that electrician and plumber expense increased by nearly 7% over the 12 months from January 2021 to 2022.

Labor Cost Analysis January 2021 to January 2022

Source: Verisk Q1 22 Reconstruction Cost Analysis

Our clients often wonder why the insured value on their home —the amount which helps determine premium— is higher than the price they paid when purchasing the property. Here we can see the main reason: insurers are not concerned with market value, but how much money will be needed to rebuild or repair. These increasing costs of materials and labor directly impact that number, hence the increased insured value.

2) Natural Disasters

The planet is getting warmer, and global warming is helping to create conditions that encourage the worst extremes of destructive weather.

Warmer air can support more moisture, so hurricanes that form over the ocean can now be super-charged by their increased capacity for holding greater volumes of water, so when they release the moisture as rain it often falls in unprecedented amounts, causing flooding where none had happened before. And it’s not just hurricane-related floods; even “everyday” storms are boosted by the rise in air temperature, so those 100-year floods are now occurring maybe once a decade.

At the other end of the aridity scale the gradual rising temperatures cause inexorable drying out of vegetation, especially in regions prone to droughts (which get longer and longer). “Wildfire” has now entered the insurance lexicon, with its catastrophic and tragically deadly results. It is hard to miss the news coverage of the seemingly endless series of wildfires erupting in California, and even in the Pacific Northwest, and the havoc they cause. Wildfires, which until recently were an occasional concern are now an entire season of worry for the majority of residents in the Western US.

One particularly nasty by-product of the heat and dryness is the phenomenon of “dry lightning”. This occurs when storms form high up in the atmosphere; rain is produced —but before reaching the ground it evaporates in the arid air. The thunder and lightning is still present, however, so the fires ignited by the bolts have no simultaneous ameliorating rainfall: unchecked conflagration.

Living in the Midwest away from the hurricanes and wildfires does not mean escaping these weather extremes; damaging hail storms are most prevalent in a wide belt stretching from Minnesota and Michigan in the north, down through to Texas, Louisiana, and Mississippi. According to studies announced at a conference in 2021, increasing levels of carbon dioxide will facilitate hail storms that are bigger and stronger.

The confluence of rising construction costs and increasingly severe weather events is pummeling the insurance companies who have to foot the bill. But there is one more element that is bruising the carriers: reinsurance expenses.

3)  Impact of low interest rates on insurers capital surplus 

Insurance companies also offset underwriting losses with income generated by their surplus.  This is capital reserved for claim payments which also produces income.  In 2021 bond yields were close to zero, and there was an exponentially negative impact on this income.

4) Cost of Reinsurance

Insurance companies buy their own form of insurance, known as reinsurance, to help mitigate the effect of catastrophic losses. A typical catastrophic loss is one which impacts multiple policyholders, for example: a hurricane sweeping through Florida, where the insurer may have thousands of policyholders. The risk here is not damage to an individual house, which an insurer can easily absorb, but damage to a great many, with potentially serious financial consequences.

So the insurer will negotiate a reinsurance arrangement whereby the financial impact of a single widespread, devastating event is shared with the reinsurer —or more likely reinsurers.

That’s all fine as long as catastrophic events are relatively rare and easier to price, but as we have seen they are becoming less rare and —due partly to the growth in construction in “natural disaster” locations— much more expensive for reinsurers to cover.

The January 2022 global property catastrophe rates rose 10.8% as of January 2022, which is more than double the 4.5% increase last year and is the biggest positive changes since 2006.

(Source: Artemis Property Casualty catastrophe rates up 10.8% at January 22 renewal: Guy Carpenter  https://www.artemis.bm/news/property-catastrophe-rates-up-10-8-at-january-2022-renewals-guy-carpenter/)

The results are unsurprising. One, reinsurers are pulling back on their exposure in these high-hazard areas, and two, charging the insurance companies more money for the protection. This added cost is passed on to policyholders.

Summary

Construction costs, natural disasters, and reinsurance pricing have all contributed to a widespread rise in premiums.

The role of the insurance intermediary is now part agent and part consultant. We at Chartwell can provide informed advice and suggestions to clients considering building or buying: how will their preferred location be exposed to the harsh reality of changing climate? We are conversant with flood maps, wildfire exposed areas, proximity of fire-fighting services as well as building materials and construction, defensible space in wildfire prone areas, and risk management devices like water shutoffs.  These are discussions we are continually having, and which we urge you to initiate with us.

If you’re interested in learning more about the steps you can take, give us a call at 312-645-1200 or email your Chartwellian.

 

Chartwell Insurance Services is thrilled to join as a sponsor for the first in-person EXPO since 2019.

Chartwell Insurance Emerging Collector Tours 
Two top art advisors will offer a guided tour of select exhibitors at the exposition, especially designed for EXPO CHICAGO guests looking to start a collection with works in the $15,000 range.

Friday, April 8th 2:00pm – 3:00pm with Richard Townsend
Saturday, April 9th 1:00pm – 2:00pm with Sue Stoffel

Tours depart from the East Information Desk located inside the main entrance of EXPO CHICAGO.

2022 Exchange by Northern Trust
Saturday April 9th 11:30am-12:30pm
Location:  Northern Trust Anchor Lounge at EXPO Chicago

Chartwell Insurance Services is thrilled to facilitate a conversation and book signing with Charles Moore on the occasion of the recent publication of his book The Brilliance of the Color Black. The panel will include Katja Zigerlig, Vice President and head of Art, Wine, and Collectibles advisory at Berkley One.  RSVP not required for attendance, but we encourage everyone to join for what is guaranteed to be an insightful and forward-focused conversation on the present state and direction of the art market as well as the evolving roles of Black artists and collectors.  Books will be made available to interested attendees thanks to the generous support of Berkley One.


Chartwell Bulletins address issues of general interest and since coverages vary by company and by state should not be taken as an interpretation of a particular policy or advice on any individual situation. Chartwell Insurance Services, Inc. is a sponsor of EXPO Chicago but does not benefit financially from attendance to these events.

A representative of Chartwell Insurance Services will be pleased to discuss your personal insurance program   Contact us at 312-645-1200, or email your Chartwell representative or info@chartwellins.com