Nine of the 10 states with the worst 2012-2022 median direct combined ratio for U.S. homeowners/farmowners are landlocked, according to a Best’s Market Segment Report. Only No. 9 Georgia, with a 94.7 combined ratio for the period, is a coastal state.
Record-breaking severe convective storm losses, wildfire and hurricane risk, economic inflation and higher reinsurance and legal costs are stressing homeowners markets beyond Florida, California and Louisiana, the three states where carriers are restricting or exiting business and enrollment has grown at insurers-of-last-resort, according to insurance experts.
National homeowners writers are exiting some business in areas beyond those three states, said AM Best Senior Financial Analyst Janet Hernandez. Local and regional carriers have taken on additional coverage and a number have reached their limits in certain ZIP codes or areas, she said, casting some uncertainty on what will happen in the next year or two.
Also, smaller writers are generally steering clear of new high net worth homeowners, said Hernandez, because the high cost of construction and raw materials mean “one loss can hit the bottom line.”
As losses have risen, homeowners underwriters have taken underwriting up another notch. “They’re really inspecting the risk, the roofs, the siding … ” she said. On the claims end, carriers no longer replace roofs or siding when the damage is only cosmetic.
“It’s not just about double-digit rate increases,” Hernandez said.
Severe storms accounted for $60 billion of an estimated $100 billion of 2023 natural catastrophe losses Swiss Re said at the start of December, the first time the peril has caused that level of loss for the industry.
They’re hitting in states with the already highest median direct combined ratios for the decade, places like No. 1 Nebraska, 121.9; No. 2 Colorado, 112.8; and No. 5 Illinois, 97.3. South Dakota, Montana, Wyoming, New Mexico, Iowa, Georgia and Idaho round out the top-10 list.
Catastrophic risk is causing a fundamental shift in the residential insurance market, according to Insurance Information Institute Chief Insurance Officer Dale Porfilio. “Multiply climate risk times inflation times legal system abuse and you get property insurance price.”
Large weather losses aren’t new. But the severe convective storms are pummeling carriers in regions that were normally safe ports from stormy coasts, said Porfilio, the geographies where “a whole lot of insurance companies used to go to get away from the coastal issues.
Losses from tornado, wind and hail damage have further expanded beyond a traditional “tornado alley” whose eastern edge was as far east as Louisiana, to swaths of the Southeast — “Dixie alley” — and across more of the Midwest.
This month storms spawned a destructive tornado outbreak in Tennessee and Kentucky, generating thousands of claims. One of six tornadoes, an EF-3 on the ground for 43 miles, damaged more than 1,000 residences in the two states.
Now layer in legal system abuse and a 24-month inflationary period, with costs rising 55% during the heart of the COVID-19 pandemic, said Porfilio. “It complicates and exacerbates” losses for insurers. “It is a compounding effect.”
AM Best recently reaffirmed its negative outlook for U.S. personal lines, citing the factors mentioned by Porfilio and more, including higher reinsurance costs combined with tighter terms and conditions and a restrictive regulatory environment in some states.
The direct combined ratio for carriers writing homeowners/farmowners business in Florida in 2022 was 163.5. That was lower than the 222.7 posted in South Dakota, and the 193.7 in Minnesota. And not far above the 157.6 in Nebraska last year, which was followed by 150.3 in Arkansas and 141.1 in Wisconsin.
By comparison, in regulatory-tough California the lines yielded a direct combined ratio in 2022 of 82.9.
Regulators in New York and New Jersey have also pushed back on rate hike requests. But in 2022 the direct combined ratio for homeowners/farmowners in New York was 84 and in New Jersey 81.8.
The combined ratio for homeowners/farmowners spiked to 464.2 in Louisiana in 2021, the year Hurricane Ida made landfall less than 60 miles from New Orleans. Private insurers had paid or reserved $13.9 billion a year later, according to data from the state Department of Insurance.
A year earlier, when multiple Category 4 hurricanes came ashore in the state, the combined ratio was an unhealthy 294.1.
Florida legislators took additional action over the past year and say the market is stabilizing.
Porfilio suspects plaintiff attorneys are casting wider nets, seeking legal cracks to widen in other states. Georgia and Texas are potentially vulnerable to a rise in litigated claims, said Porfilio.
Insurance Council of Texas Executive Director Albert Betts Jr. said repair cost currently hit carriers hard. Large weather-related losses, 170 since 1980, cost more than $1 billion each since 1980, according to NOAA.
Name it, said Betts, and Texas gets it. Severe convective storms are a problem, particularly in the Dallas-Fort Worth Metroplex, which is located in the southern end of tornado alley. Just north in Oklahoma, NOAA recorded $108 billion economic events since 1980, 70 of them severe storms. Homeowners rates reflect the risk.
Betts said plaintiff attorneys have aggressively targeted commercial lines, heavily advertising for clients involved in truck accidents, which can and have yielded “nuclear” verdicts. And fraud is a problem.
Legislators in Texas have tried in recent years to reduce excessive legal costs. Betts noted action legislation addressing property damage class actions after disasters and a move to curb plaintiff tactics, including one in which lawyers would suggest a figure for damages before liability was decided.
Carriers have increased deductibles for certain perils, increased rates as much as 20% to 30% and done more to improve results and maintain solvency, said Betts. “What helps (homeowners), even in these tough times, is you have choices. You’re not limited to a residual market. Companies are doing different things so you have to shop around.”
Betts reeled off other natural events that impact homeowners: hurricanes — the last major event was Harvey in 2017 — wildfires — the second highest number in 2021 — floods, earthquakes, freezes and tornadoes, none of which have deterred population growth.
The state of Colorado “is really at a tipping point. It’s still a competitive market, but the risk is growing and there is more at-risk. Paying out more in claims than you’re taking in in premiums? That’s not sustainable. We have to adjust to a higher cost of insurance,” said Carole Walker, Rocky Mountain Insurance Information Association executive director.
Rates are rising in the state and availability is tightening, Walker said, noting that’s understandable in a state where the state Forest Service estimates half of the population lives in an area at high risk for wildfire.
“We have companies limiting their capacity” for homeowners, said Walker. Some factors differentiate it from another state with high wildfire risk, California. Colorado allows forward modeling. It doesn’t have same political issues or Proposition 103 restrictions, she said.
In Washington, Oregon and fast-growing Idaho insurers are reevaluating risk exposure, particularly in wildfire-threatened areas, said NW Insurance Council President Kenton Brine.
He hasn’t heard of any carriers leaving the Northwest states, but said some aren’t writing new business in select areas. Nonrenewals are up on wildfire risk.
“And across all three states, premiums have been rising — dramatically in some cases — as insurers try to catch up with claims costs” that have risen country-wide on inflation, construction material and labor hyper-inflation and the “dramatic rise of natural disaster/climate-related claims from a variety of perils,” said Brine.
He recently heard of some Northwest policyholder holders whose premiums rose 50% as coverage declined 50%.
“All three states are engaged in various public policy efforts aimed at improving forest health, increasing firefight capacity, focusing additional efforts on property mitigation & community-level resilience and/or enacting or considering legislation to increase transparency around insurance underwriting and rating,” Brine said.
Insurers nationally have been taking rate but earned premium is lagging in a line where the majority of policies hold one-year terms, said Hernandez. She also pointed out another trend stressing the homeowners market — an underwriting appetite for houses 10 years old or newer, especially in catastrophe-exposed areas like Texas and Florida.
Rates and deductibles are rising most briskly on housing older than that, she said, because carriers prefer structures erected under the latest building codes.