1 Nov, 2023
Claim severity surges for California's largest homeowner insurers
California's largest homeowner insurers are reporting a surge in non-catastrophe claim severity as they seek to substantially increase their rates.
Insurers in the Golden State have had to contend with large catastrophe losses due to wildfires in recent years. The losses were particularly acute in 2017 and 2018 when the industry recorded direct incurred loss and defense cost and containment expense ratio of about 200% in both years. The loss and DCCE expense ratio measures claims, including reserves, plus costs such as of legal expenses, such as lawyers fees, court costs, and paying for experts and investigators.
However, the rising cost of ordinary non-catastrophe losses are also impacting insurers' rates even without consideration of the recent record wildfire losses. An S&P Global Market Intelligence analysis shows California's largest homeowners insurers have experienced double-digit severity increases annually over the past five years. The study reveals the median average annual two-year increase in claim severity filed by these insurers is 19.7% and the median average annual five-year increase is 11.6%.
Inflation has pressured insurers' results in the past couple of years, as the cost of building materials and labor remains well above historical norms. A cost analysis report from Verisk calculates that national total residential reconstruction costs, including materials and retail labor, rose 3.9% year over year in October 2023 and are up 1.9% from July 2023. California is one of 19 states above the national average year-over-year change in October.
Labor shortages in the construction industry are also exacerbating insurers' claim costs. Skilled worker shortages can cause delays in repairs, which leads to higher costs as the claims stay open for longer.
Claims severity is accelerating for largest insurers
State Farm General Insurance Co. reported its rolling four-quarter average cost per claim on its non-tenant homeowners policies rose to $35,387 for non-catastrophe paid losses at the end of June 30, 2022, according to its pending rate filing.
The pace of the growth in the average cost of a claim, or the severity, has accelerated over the past two years for the State Farm unit. The insurer reported an annualized two-year severity trend of 24.9%, compared to an annual trend of 14.7% over the past five years. The two-year trend for State Farm General is the highest among several of the largest homeowner insurers in the state.
California's largest homeowners writer is seeking to boost its non-tenant homeowner rate by 29.0%. The increase would be on top of the 6.9% rate increase that went into effect on June 3, 2023, for both new and renewal business.
Liberty Mutual Holding Co. Inc.'s General Insurance Co. of America unit reported non-catastrophe annualized two-year severity from Dec. 31, 2022, is 21.0% or about 11 percentage points higher than its reported five-year trend. The insurer is requesting an overall rate increase of 29.0% on its HO-3 policy form. If approved, the new rate will go into effect Feb. 16, 2024, and will impact about 209,000 policyholders.
Along with The Allstate Corp.'s decision to suspend writing any new homeowners business in the Golden State, the insurer is pursuing a 39.6% overall rate increase for renewals on its owner-occupied homeowners business. The insurer's combined units of Allstate Insurance Co. and Allstate Indemnity Co. reported an annual two-year severity of 18.4% from the period ended Sept. 30, 2022. The trend is 6.1 percentage points higher than its five-year trend.
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Amid a backdrop of worsening severity trends, Allstate reported the number of reported claims, or frequency, has also recently increased. Its annualized frequency rate is up 6.1% over the two-year period compared to the six-year trend, down 2.2%.
Farmers gets back-to-back filings
Units of Farmers Insurance Exchange, Fire Insurance Exchange and Mid-Century Insurance Co. all sought and received back-to-back rate hike approvals. An overall rate increase of 17.7% went into effect for both new and renewal business on June 15, 2023. Another filing was approved Aug, 11, which will boost rates by another 12.5%: its Next Generation policy increased by 9.9%, Smart Plan Renters by 45.3%, Smart Plan Condo by 12.5% and Smart Plan Home by 15.6%. The additional rate increase was effective Oct. 30.
The three combined entities are parts of Farmers Insurance Group of Cos. that provided frequency and severity trends across different perils. Of the five specifically named perils, only wind and hail reported a declining severity trend over the prior two-year period that ended Dec. 31, 2022. Theft, fire and water perils all reported increases greater than or equal to 20% for the annual two-year trend.
