APCIA Says Property Insurance Market ‘Hardest in a Generation’

The combination of historically high inflation and increasing frequency of natural disasters is creating the most difficult market in a generation for property insurance, the American Property and Casualty Insurance Association said in a new white paper.

“Population, housing and business growth in hazard-prone areas exacerbates the impacts of climate change, leading to more frequent and severe disaster losses,” said Karen Collins, vice president, property and environment for APCIA, in a press release. “Higher capital costs and reduced reinsurance capacity further pressures insurance rates and could result in tighter underwriting in disaster-exposed markets.”

APCIA noted that the US inflation rate reached a 41-year high of 8% in 2022, peaking at 9.2% last June. Insurance claims have been increasing at a faster pace, contributing to underwriting losses that pushed the estimated combined loss ratio for property victims to 104% according to preliminary estimates by AM Best, the report said. It was the first underwriting loss since 2017.

Both the frequency of claims and the severity of claims played a role in the loss. The report said 2022 was the eighth year in a row that the US experienced 10 or more disasters with losses exceeding $1 billion. Losses from natural disasters from 2020 to 2022 exceed $275 billion, the highest total in three years for US insurers.

Meanwhile, material costs required for repairs and replacements increased. APCIA said the producer price index for residential construction goods jumped 33.9% from January 2020 to December 2022. The Consumer Price Index for home furnishings grew 18.7% during the period.

US spending on residential construction has generally increased since 2010. Construction spending remains “resilient,” the report said, partly due to spending required by natural disasters.

According to the National Oceanographic and Atmospheric Administration, 2022 is a unique year for landfalls in the top three years for both event frequency and overall disaster cost. There were 18 US weather/climate disaster events with losses each exceeding $1 billion, a figure that had only been surpassed twice previously, in 2020 and 2021. Total losses reached $167 billion, a figure that was also surpassed only twice previously, in 2005 and 2017 (Loss adjusted for inflation.)

Reinsurance has retreated, resulting in higher prices. Guy Carpenter estimates that the price of property disaster reinsurance will rise 30.1 percent this year following a 14.8 percent rise in 2022.

Collins said the choices of homeowners and business owners themselves are helping drive a hardened market.

“Growing population, housing and businesses in disaster-prone areas exacerbates the impacts of climate change, leading to more frequent and severe disaster losses,” he said. “Higher capital costs and reduced reinsurance capacity further pressures insurance rates and could result in tighter underwriting in disaster-exposed markets.”

Collins says insurance companies encourage property owners to insulate homes and businesses by upgrading with disaster-resistant materials. Combustible materials such as bark and piles of wood should be kept away from the house. Security devices that use smart technology are also recommended to reduce losses.

Building codes can also play a role in reducing losses. Researchers from the National Institute of Building Sciences say that for every $1 spent on natural hazard mitigation in construction the new code could save $11 in disaster repair and recovery costs. In 2020, the Federal Emergency Management Agency released a report saying buildings that comply with modern building codes lead to a substantial reduction in property losses from floods, hurricanes, and earthquakes.

The report says the amount of damage caused by Hurricane Ian last year is a case in point. Compared to Hurricane Charley, which followed a similar path across the Florida peninsula in 2004, Ian caused less wind damage and fewer partial and total roof failures.

“Commercial and residential properties with mitigation measures such as flood ventilation, refurbished roofs, and storm shutters embedded in their construction are able to withstand the rage of storms and limit damage,” the report said.

Top photo courtesy of APCIA.