Sean Kevelighan from the Insurance Information Institute explains why homeowner insurance rates are rising, even with a lack of major hurricane landfalls so far this season.
00:00While the hurricane season is not over yet, we have not had a landfalling name storm, well, hurricanes certainly, along the United States, but homeowner insurance rates are still rising.
00:13The first half of the year brought billion dollar disasters from wildfires in L.A. to deadly flooding in many other states.
00:19Here with more on how weather disasters can impact your rates is Sean Kavalehan, CEO of the Insurance Information Institute.
00:32Thank you for being with us. Sorry if that did not come out the way it actually sounds.
00:36I have no pride in pronunciation on that last name, so no worries. Thanks for having me.
00:41No problem. All right. I appreciate the humor with that.
00:44Even with the lack of landfalling hurricanes this season in the U.S., why are some homeowner insurance rates continuing to rise nationwide?
00:54Well, I think it's important to look at both the short and longer term trends that we're experiencing.
00:59In the short term, especially coming out of COVID, we saw extraordinary inflation.
01:04In fact, for the replacement costs in terms of what needs to be the cost covered for claims, we saw homeowners insurance replacement costs on average go up close to 30 percent on inflation over the last five years.
01:17Auto, very similar. So we've seen inflation. Now we're also, as we're getting back to normal inflation rates, we're now seeing some tariff pressure as well happening.
01:26Not as much as COVID, but certainly some pressure happening. On top of all that, over the last 10 years in particular, you've seen extraordinary legal system abuse.
01:35Americans are going to litigation first instead of a last resort, and that is driving up costs for everyone.
01:41And then if you switch to the longer term, what you have are natural catastrophe losses.
01:46As you mentioned earlier in the opening of the show, we've seen multibillion-dollar events.
01:50In fact, this year, we've seen $14 billion-plus natural catastrophe events already.
01:56We're in the midst of hurricane season still, and while we haven't seen landfall, as you noticed, we still need to get through hurricane season to see where we're going to end up.
02:06But regardless, we'll probably see another year of $100 billion in natural catastrophe losses.
02:11That's up tenfold since the 80s.
02:13So you've got a variety of circumstances that are impacting everyone in terms of insurance costs, because that's the price of risk these days.
02:21And how do events like the Los Angeles wildfires, spring storms, and flooding contribute to overall home insurance costs?
02:32Well, overall, the industry average did spike in the first quarter as a result of the California wildfires.
02:39In fact, what we call the combined ratio, which is the expenses we pay out versus the premiums we take in, for every dollar a premium we took in, we paid $1.11 in expenses.
02:52And that is in large part due to the California wildfires.
02:57So that's a record for first quarter losses in our history tracking.
03:02So certainly we've seen some impact there.
03:04How do insurers plan and price for future disasters?
03:10What variables go into setting these rates?
03:13Well, there are a variety of variables.
03:15A lot of the variables I talked about early on, about inflation and tariffs and legal system abuse and natural catastrophe losses, those are all variables that are used for pricing.
03:25But what we call risk-based pricing also includes things like credit, which is an important correlation to how an individual manages its risks.
03:33So we have a variety, and every insurer uses different variables to price their risk.
03:38And then they transfer that pricing mechanism over to the regulator to help them understand how they're getting to the various pricing.
03:45So it's a work done hand-in-hand with the regulatory bodies to ensure that all pricing is fair and transparent.
03:52Now, some insurance companies are leaving states, like Florida and California.
03:59How can homeowners find coverage and keep their premiums manageable?
04:04Well, what's interesting, actually, when you mention Florida and California, Florida has actually seen over the last three years nearly 20 new insurance companies returning to that state.
04:14That's in large part because they had legal reform.
04:18Three-plus years ago, more than 70% of all homeowners' litigation resided in the state of Florida for the entire country, even though that state only had about 15% of the claims.
04:29Now that they've had reform, we're seeing insurers go back.
04:32We're seeing that market stabilize.
04:33In fact, we just had one insurance company announce a billion-dollar refund to consumers in the state of Florida.
04:40California is different.
04:41California has some regulatory troubles, I would call them, where they don't allow the actual rate to be applied.
04:47The insurer just can't get the rate it needs because of regulatory restrictions.
04:52And as a result, insurers are making what they would call an unfortunate decision to have to withdraw from that state.
04:59You know, insurance thrives on big economies.
05:01And when you see a state like California, one of the largest economies, not just in the United States, but the world, having insurers withdraw, there's something wrong there.
05:09And we would say that what's been wrong for many years is the regulatory restriction, the regulatory environment, because that simply – you have many other states out there that have a very healthy insurance market.
05:19For example, the state of Illinois has a healthy insurance market.
05:22So you need to kind of understand the differences between states, but certainly when we get the regulatory restrictions or an abundance of legal litigation, legal system abuse in a state, those have a severe impact on insurance pricing and the insurer's decision to have to stay in a state.
05:40Sean Cavalian, CEO of the Insurance Information Institute.
05:45I've learned so much.
05:47Very good information.
05:47And now I have such an interest in insurance.
05:49And I think a lot of people now realize, okay, something can happen elsewhere in the country, but you're impacted.
05:54So thank you so much for joining us and educating us today on AccuWeather Early.
Be the first to comment