IRC: Rapid Rise in Homeowners Claim Costs

The cost of homeowners insurance claims has been rising rapidly due to increases in claim severity and frequency, and insurers face significant challenges in responding effectively and managing the volatility of catastrophe-related claims, according to a new study from the Insurance Research Council (IRC).

Consumers should also consider steps to control their personal exposure to risk and to mitigate the damages and costs associated with severe weather events, the IRC said.

The IRC study of homeowners insurance claims found that from 1997 to 2011, the average claim payment per insured home countrywide rose 173 percent, from $229 to $626. In 2011 alone, homeowners insurance claim costs per insured home increased 27 percent.

Over the entire 15-year study period, the annualized rate of increase was 7.4 percent.

The IRC examined separately claim trends for claims not related to catastrophic events and those that were related to catastrophic events.

It found that trends in average claim severity (the average claim payment per paid claim) for both groups were similar in some respects.

For both groups of claims, countrywide claim severity increased almost 200 percent and ended the 15-year period in 2011 with similar values—$8,077 for noncatastrophe-related claims and $7,553 for catastrophe-related claims.

Significantly, however, the trend in catastrophe-related claim severity was much more volatile from year-to-year, with dramatic increases and decreases over the study period.

With respect to trends in homeowners claim frequency (the number of paid claims per 100 insured homes), the IRC said these were very different for the two groups of claims over the study period.

The frequency of claims unrelated to catastrophic events fell substantially from 1997 to 2005. Since 2005, however, noncatastrophe-related claim frequency has increased at an annualized rate of 2.9 percent.

Catastrophe-related claim frequency, while much more volatile, remained fairly flat through much of the period.

The study also found that catastrophe-related claims played a significantly greater role in overall claim trends in the second half of the 15-year period. Catastrophe-related claims accounted for 25 percent of overall claim costs countrywide from 1997 to 2004, on average, but 29 percent of overall claim costs from 2004 to 2011.

Check out this PC360 article for more on this story.

Also take a look at I.I.I. facts+statistics on homeowners insurance.

The Lowdown on Auto Insurance

Good news for drivers. Just-released analysis from the Insurance Information Institute (I.I.I.) projects that the average expenditure on auto insurance today is lower than it was in 2004.

The ability of insurers to better assess risk has led to more competitive marketplaces and as a result for many drivers  auto insurance expenditures have dropped, the I.I.I. says.

The average annual expenditure for U.S. auto insurance coverage this year is expected to total $839, less than the $842 the typical U.S. driver spent for coverage in 2004, according to I.I.I. forecasts.

When adjusted for inflation, auto insurance expenditures are expected to be 19 percent lower in 2012 than in 2003 and lower than at any point in nearly 20 years.

Dr. Robert Hartwig, president of the I.I.I. explains:

Auto insurers have made great advances in their ability to assess risk and this trend, along with innovative new products, such as pay-as-you-drive policies, has resulted in highly competitive auto insurance markets in every state. Consumers have never had more options in terms of the number of insurers competing for their business, offering them an unprecedented ability to compare prices, shop and save.†

More from the I.I.I. on what determines the cost of your auto insurance policy here.

California Wildfire Risk Analysis County-by-County

More than two million California homes face extreme wildfire hazards and many of these homes are located in densely populated suburban neighborhoods, according to new industry research.

Analysis by the Insurance Information Network of California  (IINC) and Verisk Insurance Solutions – Underwriting, reveals that the majority of these high-risk homes are located in Southern California, though Northern California has a higher percentage of high risk homes.

Candysse Miller, executive director of IINC, says:

Nearly 15 percent of the 13.5 million homes in California face severe wildfire risk. That’s nearly as many homes as are in the entire state of Colorado. Wildfire risk is not exclusive to mountain or rural communities. Many of these homes are in densely-populated suburban neighborhoods.†

More than 417,000 of these high-risk homes are located in Los Angeles County and Southern California counties represent 53 percent of the high-risk homes statewide, the study found.

However, Northern California has a higher percentage of high-risk homes. The counties of Alpine, Mariposa, Tuolumne and Nevada account for more than 95,000 homes, but more than 77 percent of these, or nearly 74,000, are considered high-risk.

Statewide, insurers protected more than $3 trillion of residential property in 2011, according to the California Department of Insurance, less than 1.25 percent of which was insured by the California FAIR Plan, the state’s insurer of last resort. As a result, private insurers cover nearly 99 percent of the insured residential properties in the state.

For a county-by-county view of  California’s wildfire risk, check out this interactive map on the IINC website.

More facts and statistics on wildfires available here.

IUMI President: Marine Insurers Face Bleak Present

The marine insurance industry is facing a bleak present as it seems to be unable to adapt to a changing business environment amid ongoing economic uncertainty, an international gathering of marine insurers was told.

In a keynote address  to the annual conference of the International Union of Marine Insurers (IUMI) in San Diego, IUMI president Ole Wikborg noted that some marine underwriting entities – both old and new – were facing downgrades, and even closures, as a result of prevailing economic uncertainty.

What continues to surprise me is that with one gone, new capacity quickly fills the vacant spot with a business model not very much different from the one that had to quit. In our practical day-to-day dealings, it may be argued that our business models are not very innovative.†

This lack of innovation may be a result of marine insurers’ inability to renew a business model that is out of touch with the needs and requirements of the client base, Wikborg said.

He went on to suggest that the marine insurance industry may be unable to build and maintain a sustainable business activity through continuous profitmaking and service delivery because underwriters are disobeying the undeniable truths of their past performance.

I know it’s a hackneyed phrase, but its bottom line growth and not top line premium production inflation we need.†

Wikborg also pointed to the short-term view of some investors in the marine insurance industry:

Maybe our industry is dominated by shareholders who have no basic knowledge of the marine insurance business and its volatility, – with a short term investment philosophy and no ability nor interest in staying put when times are tough.†

New and stricter regulation was another concern for the industry:

Maybe our regulators are to be blamed for not understanding the marine insurance business model, its global reach and special requirements.†

Terrorism Risk 11 Years On

As we mark the 11-year anniversary of September 11, a just-released study from the Insurance Information Institute (I.I.I.) finds that while the risk is changing, terrorism is an evolving and ongoing threat for the foreseeable future.

The paper notes that despite recent counterterrorism successes, including the killing of al-Qaida leader Osama bin Laden, the threat from terrorism risk is far from insignificant.

Cyber-terrorism is one area of growing concern for governments and businesses around the world, according to the I.I.I.

It says recent high profile attacks, such as the sabotaging of Iran’s nuclear program via the Stuxnet computer worm and malicious infiltration attempts by China, underscore the growing threat to both national security and the economy.

It goes on to cite a recent study by the Ponemon Institute in collaboration with Bloomberg Government, that estimated private sector spending on cyber security at roughly $80 billion in 2011, but noted this was not nearly enough.

The Ponemon study found that “utilities, banks and phone carriers would have to spend almost nine times more on cybersecurity to prevent a digital Pearl Harbor from plunging millions into darkness, paralyzing the financial system or cutting communications,† according to a report by Bloomberg News.

The findings were based on interviews with technology managers from 172 U.S. organizations in six industries and government.

More I.I.I. facts and statistics on terrorism risk here.

Reinsurance Rendezvous

Reinsurance executives have been gathering in Monte Carlo this past weekend for the sector’s 2012 Reinsurance Rendezvous.

If you can’t be there in person, check out #MCRe2012 on Twitter for the latest conference happenings.

Insurance Journal writes that the reinsurance industry’s key concerns are the ongoing financial crisis in the euro zone, interest rates and capital.

Meanwhile, Artemis blog tells us that one of the hot topics of conversation at Monte Carlo this year is the convergence of the reinsurance and capital markets.

Industry appetite for mergers and acquisitions is the subject of a Bloomberg BusinessWeek report.

The improving capital position of the reinsurance sector has been the dominant theme of recent industry briefings.

A new study from Aon Benfield  found that global reinsurer capital reached a record level of $480 billion at June 30, 2012, up 5 percent from December 31, 2011, amid lower catastrophe activity.

Similarly, Guy Carpenter recently reported that reinsurance renewals took place against a backdrop of plentiful capacity at July 1, 2012.

Check out I.I.I. information on reinsurance.

MarketScout: Rates Continue To Edge Upwards

Average property/casualty rates for insuring U.S.-based risks increased by 5 percent in August 2012, according to the latest analysis from online insurance exchange MarketScout.

Commercial property rates were up 7 percent, general liability and workers’ compensation rates were up 6 percent, while BOP rates were up 5 percent.

Richard Kerr, CEO of MarketScout, commented:

Property rates continue to increase across the nation, with larger increases in wind exposed areas on the Gulf coast and eastern seaboard. This is normal during hurricane season.†

By account size, small and medium sized accounts (premiums up to $250,000) increased 5 percent, while large accounts ($250,001 to $1 million) were up 4 percent and jumbo accounts (over $1 million) were up 3 percent.

By industry classification, manufacturing and contracting risks were up the most with an increase of 6 percent.

An article on PC360 takes a closer look at MarketScout’s findings.

Check out I.I.I. information on industry results and market conditions.