Property owners in some states could face insurance premium increases as high as 500% at renewal time.
The increases are due to weather-related damage claims, inflation, high density population growth in areas of risk and other factors, said Jenny Broomhall, an insurance consultant with BOK Financial Insurance, Inc. She and her team provide risk management and insurance brokerage services, primarily to commercial real estate owners and companies exceeding $10 million in revenues.
To make things worse, switching providers to escape the rate hikes may not be a viable solution. State Farm and Allstate—with a combined market share in property and casualty insurance of more than 14%—stopped writing new policies in California in May. Ranked No. 1 and No. 4 respectively in California with $12.4 billion in combined property and casualty premiums, the companies' actions may extend to other damage-prone states like Texas, Oklahoma and Colorado.
Unprecedented times for damages and losses
One factor is the growing number of policy holders, which can increase the probability of claim payouts, especially in high-density communities experiencing a fire, tornado or hurricane. None of these threats discriminate residential from commercial structures, and all damage must be accounted for, said Broomhall.
Incurred property and casualty losses in 2022 were more than $60 billion in both California and Florida, where Farmers Insurance also recently stopped writing homeowners' policies. In Texas and Colorado, losses totaled $51.9 billion and $10.2 billion, respectively. In all, losses exceeded $10 billion in 16 states last year.
Density multiplies damage potential. "Where we formerly had green spaces, we now often have 1,000-unit apartment complexes and hundreds of single-family homes," Broomhall said, speaking of a residential development near her Denver-area home.
"What stresses the insurance system as a whole is when premiums lag claim costs from disaster events or cumulative catastrophic losses."- Jenny Broomhall, an insurance consultant with BOK Financial Insurance
In Colorado, for example, the December 2021 Superior fire destroyed more than 1,100 homes. Smoldering backyard embers and sparks from power lines, fueled by high winds, were recently cited as causes. Damages have totaled hundreds of millions of dollars, with many homeowners exhausting their loss-of-use benefits. And rising home prices in the region may keep others from rebuilding.
Now it's more difficult to obtain fire insurance in Colorado, as wildfire risk is scored by an insurance industry mapping system. But this scoring system may ignore mitigating factors such as a building's proximity to a fire station, Broomhall noted.
Consequently, some owners seek Excess and Surplus lines (E&S) coverage that's specialized and even more expensive. It typically applies to high-risk businesses like construction, building and roofing that traditional insurers may not cover.
What's driving the increases?
Besides weather-related events—be they fires or earthquakes in California, tornadoes in Oklahoma or hurricanes impacting Florida and Louisiana—other factors are significantly raising insurance premiums across the country. Among them are general operating expenses like professional services, worker's compensation and "social inflation" that includes escalating litigation costs, shifting social and cultural attitudes, social media influences, presumed accountability, and defendants' ability to pay.
Broomhall quickly points to persistently high inflation rates—which influence the rising price of reconstruction—as a major factor, saying, "Had the inflation spike of the last few years not occurred, or at least not happened as fast, we may not have seen carriers refusing to write coverage."
Labor shortages and supply chain issues are also to blame, Broomhall said. These factors are delaying the reconstruction of homes damaged by the Superior fire in Colorado. Moreover, some of those homes may not be rebuilt—at least not anytime soon—if owners have exhausted their loss-of-use policy benefits, have relocated or are otherwise facing severe financial hardship. "It's just getting very difficult all the way around," she said.
Bracing for impact
Given the necessity of insurance, Broomhall has these recommendations for anyone who owns a business, property or home when considering renewals:
- Online tools can help get you started on an approximate fire, flood, heat or wind risk assessment on your property to better understand a carrier's perspective on underwriting risk.
- Work with a broker who stays ahead of the renewal process. Broomhall and her team generally work 90 days ahead of client renewals, allowing time for policy adjustments.
- Read carriers' newsletters or industry-wide news from organizations like MarketScout.
- Ask carriers and brokers directly about changes in the industry and how they might impact you or your business.
"The worst thing a broker can do is paint a picture that nothing's changing—because it is," Broomhall said.
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