Can industry changes soften a hard property insurance market in California?

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There are suggestions of hardening markets for US property insurance participants, and there is no better example of this than what is occurring in California.  Non-renewals in wildfire prone areas, premium increases, reductions in coverage and the seeming ultimate reaction- regulatory prohibition of policy non-renewals.

How did the state get to this point, and is there a lesson to be gained for any area that is exposed to regional maximum losses?  Is the hardening multi-trillion dollar California homeowners market a bellwether for others?

 

Patrick Kelahan is a CX, engineering & insurance consultant, working with Insurers, Attorneys & Owners. He also serves the insurance and Fintech world as the ‘Insurance Elephant’.

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Hard Market — in the insurance industry, the upswing in a market cycle, when premiums increase and capacity for most types of insurance decreases. Can be caused by a number of factors, including falling investment returns for insurers, increases in frequency or severity of losses, and regulatory intervention deemed to be against the interests of insurers.[1]

 

An on point definition of a hard market for the California property insurance market prompted in great part by successive years of severe wildfires throughout the state, a circumstance that recently culminated in the state’s insurance commissioner to enact temporary regulations that prohibit non-renewal of homeowners’ policies for one million insured properties located within wildfire-prone areas. The commissioner’s action came as a result of insurance premiums in affected areas rising to seemingly unaffordable levels, in carriers refusing to underwrite properties, and in delayed recovery in wildfire areas due to limited availability of hazard insurance.

[1] https://www.irmi.com/term/insurance-definitions/hard-market

How did a bad fire situation get worse? Two years of homeowners’ lines’ loss ratios averaging in the 190 range, or $1.90 being paid out for every dollar of earned premium.  Who expects carriers to absorb that extent of loss without an according rise in premiums?  Let’s take a look at how the state got there (we’ll set aside the climate risk and fire damage negligence/liability discussion), and how things aren’t as simple as one might think.

Loss History

The state’s homeowners’ carriers were essentially the same in 2017-2018 as they were in the ten years preceding the heavy wildfire years.  Why does that matter?  Consider this chart of data for HO line earned premium, losses, and loss ratios for the ten years prior:[2]

CA Premiums Losses

[2] http://www.insurance.ca.gov/01-consumers/120-company/04-mrktshare/2018/upload/MktShrSummary2018wa_RevisedAug1519.pdf

$37.4 billion surplus of earned premiums over losses incurred during that ten-year span. That is not bad.

 

If one looks at the 2017 and 2018 results, the numbers flip:

Earned premiums–           $15.6 billion

Losses incurred–               $29 billion, or a $13.4 billion deficit. That gets companies’ attention.

A significant compounding concern for carriers for the 2017-18 period is that the losses were compressed into repetitive geographic areas, reflect concentration of maximum losses within same, and the factors behind the peril have not materially changed. So even though there was a $37 billion surplus noted for the ten years prior, carriers (being forward looking for revenues) reacted not only to raise premiums, but to restrict available coverage and restrict the scope of coverage, classic hard market characteristics.

Premiums and pricing

If the discussion continues to market factors regarding historic pricing, more evidence of the roots of a hard market come to the surface. Average homeowners’ policy premiums for the state relative to median property values are significantly skewed in comparison with other states with higher population and exposure to concentrated risk:[3]

States Premium

[3] data from https://www.policygenius.com/homeowners-insurance/how-much-does-homeowners-insurance-cost/#average-homeowners-insurance-cost-by-state

So the case builds for how a hard market builds- premium levels that seemingly fail to consider the potential effects of regional peril occurrences.  California having premium values one quarter of those in Florida?  There is also significant evidence that- on average- properties have been under-insured for value in that post-disaster rebuilding costs are exceeding coverage limits. The market (through pricing history) inadvertently set its own table for hardening.  And it’s not just carriers- homeowners and financing institutions are partners in the issue.

Coverage

Homeowners do have options when persons have are unable to obtain voluntary insurance due to circumstances beyond their control- the state’s default insurer, the FAIR (Fair Access to Insurance Requirements) plan.  The state’s FAIR plan provides limited coverage for primary perils but its use requires property owners to have separate wrap around policies in order to have cover that reasonably matches the benefits of voluntary cover.  The FAIR plan is a syndicate pool supported by the state’s property insurance carriers, so think of it as analogous to auto/motor risk pool insurance.

Increasing the number of persons accessing the insurance of last resort is one thing, but considering a recent order by the state insurance commissioner to require FAIR to provide broadened coverage limits[4] (to $3 million) and broadened peril coverage (to mirror an ISO HO-3 policy form) seems (per FAIR leadership) to exceed the commissioner’s authority.  Right or wrong, the change in the FAIR plan does not alleviate the issues with concentration of risk, actuarially supported rates, or the fundamental fact that risk factors need to be mitigated.

[4] https://www.insurancejournal.com/news/west/2019/11/14/548537.htm

What to do?

Property insurance is a keystone to any economy- borrowing, recovery, risk sharing, and risk management, etc. Absent a thriving insurance industry, a jurisdiction simply will flag in comparison with other areas. A hardening market is a wake-up call that the inherent cycle of insurance is at an attention point- carriers see challenges in the near future and are retracting access to insurance and placing a premium on price, even if company capital levels are currently higher than average.  Soft markets certainly reflect the reverse, but who complains when underwriting is easier and rate taking is de-emphasized? The surpluses in premiums gained during 2007-2016 are long forgotten.

Ideally the market would:

  • Set premiums at a level anticipating significant regional events
  • Price wildfire risk into all policies in the state (everyone gets affected when these events occur)
  • Leverage the available capital surplus and interest from reinsurers
  • Partner with private risk vehicles (ILS, Cat bonds) for broader backstopping of risk
  • Consider wildfire cover that is similar to earthquake or wind covers, with more substantial deductibles for that peril
  • Adopt complementary parametric plans that trigger when wildfires occur, providing immediate recovery funding to affected property owners rather than wait for government programs alone (that may take years to administer)
  • Refrain from using FAIR plan changes to circumvent needed changes in voluntary policies/underwriting/pricing
  • Tread very cautiously before having regulators take anecdotal actions ex post to occurrences
  • Implement immediate subsidies for areas that suffered direct and as yet unrecovered damage- not taking action affects all

With these efforts being in conjunction with all efforts being made to mitigate risk factors, encouraging behavior changes, and encouraging policies more in keeping with risk management- climate, economic, and functional.

Why this?

The state has other, potentially bigger concerns with risk- earthquakes.  Wildfire risk has had terrible effects, multi-billion dollar effects, most often in more remote or less densely populated areas than urban Los Angeles, San Francisco, and Oakland, heavily populated and developed high-risk earthquake areas.  EQ insurance penetration (approximately 11% of property owners) suggests uninsured losses will far eclipse wildfire losses if a significant quake occurs, and there is not enough resources (currently) for the state to back-fill an EQ disaster recovery.  The entire country will be affected.

And what of the balance of the world’s economies?  A recent Swiss Re Institute assessment of insurance protection globally denotes an estimated $222 billion natural disaster gap[5], a number that again would be overshadowed by temblor damage in developed regions.  What of the wildfires in Australia, where the affected areas are more than six times greater than the 2018 California wildfires affected?

 

Hardening of insurance markets- that’s a challenge for insurance customers, but for markets like California’s homeowners’ lines it’s a precursor for what may be coming elsewhere.

[5] https://www.spglobal.com/marketintelligence/en/news-insights/latest-news-headlines/56236161

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The InsurTechs were nestled all snug in their beds, with visions of 2020 dancing in their heads

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It’s the end of 2019, an auspicious year for insurance and InsurTech, and it’s the end of the year with expectations in the business world for business results and (hopeful) bonuses.  And of course there is the wondrous shadow of December holidays over all, with visions of sugarplums dancing in heads.

Not everyone celebrates a Christmas holiday, Chanukah, or Eid, but one cannot avoid the end of year holiday gifting and hopes.

In keeping with that spirit this final InsurTech column for 2019 wishes all well for the season and bright things for 2020.

Patrick Kelahan is a CX, engineering & insurance professional, working with Insurers, Attorneys & Owners. He also serves the insurance and Fintech world as the ‘Insurance Elephant’.

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There are some friends and businesses for whom its hoped that Santa/Father Christmas/whoever finds holiday gifts.  All deserving, all have been good this year.

  • Parametric insurance– better understanding within the industry of its opportunities for cover and dramatic growth
  • John Bachmann, Social Survey– more vowels so his customer experience video series can carry on into 2020
  • Zurich Insurance- Mark Budd and Nicola Cannings– full subscription for its innovation contest
  • Erika Kriszan– recognition as the founder of the quietest best InsurTech conference- MOI Vienna
  • IRDAI– prudence in choosing the twenty participants in the Indian insurance sandbox
  • Coverager– all the respect they deserve for keeping the insurance industry informed

Holidays – any holiday – are such a great opportunity to focus on bringing the family together.  Lidia Bastianich

  • Paolo Sironi– a platform to expose his finance and economics ‘chops’ to a broader audience
  • The Daily Fintech– continued recognition as a best-in-class Fintech/InsurTech/blockchain/crypto resource, and being seen as the best value within the respective blogs’ world
  • Michael Porpora– a project for 2020 that outdoes his 2019 365 days of connections
  • Robin Kiera– a championship for the Hamburg football team
  • Nomaan Bashir– 2% insurance cover penetration within the Pakistani market
  • Lloyd’s of London– a balance beam to help the venerable institution integrate business and org change into its 300-year-old club
  • Insurance Nerds– continued traction advocating for insurance and continuity of the many of are privileged to work in insurance jobs

The holiday season is a perfect time to reflect on our blessings and seek out ways to make life better for those around us. Terri Marshall 

  • Benekiva– beneficiary first in every life insurance company’s stocking
  • Ukrainian InsurTechs– realization that there are great things happening in the industry there that have nothing to do with global politics
  • Intellect SEEC– more storage capacity to hold all those data
  • The California Dept of Insurance– an understanding that best intentions can produce unintended consequences
  • Lemonade Insurance– markers of many colors to try as an alternative to magenta
  • Rahul Mather– rest.
  • Road Warriors– time at home

Merry Merry and Happy New Year.

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