Insurers can’t control the weather, but they can do more to reduce homeowners claims.
The year 2020 introduced new wrinkles in homeowners insurance. While insurers know that weather perils will continue to pressure loss costs upward, they could not have anticipated the COVID-19 pandemic or its influence on private dwelling owners and claims.
Weather events and natural catastrophes, which are perennially responsible for the lion’s share of losses, continue to worsen. From West Coast wildfires to Midwest tornados and hailstorms to East and Gulf Coast hurricanes, and most recently the freezing temperatures in Texas, insurers are feeling Mother Nature’s wrath in losses.
Since weather-related insurance costs are pressuring coverage affordability issues, homeowners insurers are taking a more serious look into the percentage of claims that residents can possibly prevent to reduce expenses. Meanwhile, homeowners appear to have invested more in making homes more livable than in claim-mitigating maintenance.
Market Conditions
“Overall, the combined ratio for the industry for the first nine months is virtually unchanged from 2019,” offers Robert P. Hartwig, clinical associate professor at the finance department and director for the Center for Risk and Uncertainty Management at the University of South Carolina. “If it weren’t for the fact that 2020 was the third most costly year for insured disasters, the combined ratio would have shown a decline,” he observes.
Before the major weather events and pandemic, homeowners insurers began 2020 with little profitability, according to the most complete data currently available from 2019. The year 2019’s net combined ratio is 98.6, which is similar to the five-year average from 2015 to 2019 at 99.1, according to A.M. Best data provided to the Casualty Actuarial Society.
“The sluggish economy has not impacted premium growth in the homeowners line,” says Hartwig. He observes that for the first nine months of 2020, direct written premium grew 5.5% compared to the same period in 2019, which is similar to the 5.3% growth in premium for 2019 compared to 2018.
Premiums are expected to increase in 2021. For homes valued under $1 million, premium is expected to climb 5% to 7%, and 7% to 9% for those over $1 million, according to the survey report “Insurance Marketplace Realities 2021-Personal Lines.” Released by Willis Towers Watson in November 2020, the report bases these predictions on large- and middle-market risks.
For homes located in areas prone to natural catastrophe (CAT), the price of coverage jumped 20% to 50% with contract limitations. Homeowners who filed CAT-related claims saw premiums rise 50% to 100%, causing some homeowners not to renew their policies. “There are tighter underwriting standards because there have been increases in loss ratios in the past couple of years,” says Tyler E. Banks, national practice leader for personal lines at Towers Willis Watson.
Notably, the most recent five-year period includes the beginning of the record-breaking years of weather-related losses starting in 2017 (see AR July-August 2018). Not surprisingly, the combined ratios for the years 2017 and 2018 were an unprofitable 107.2 and 104.0, respectively. However, the average loss and LAE ratio was lower in the second half of the recent decade than in the first. Specifically, from 2015 to 2019, the loss and LAE ratio was 69.5, compared to 72.2 during the first half of the decade from 2010 to 2014, according to A.M. Best data.
Loss frequency, including CATs, for the four quarters ending September 2020 was 4.98 per 100 households, which is close to the average of 5.08 for the five years ending in September 2020, according to Fast Track Monitoring System data provided by the Insurance Information Institute. Claim costs continued to rise. For the four quarters ending in September 2016 compared to the same period ending in September 2020, average claim costs climbed 14% from $9,745 to $11,145.
The average claim cost for losses not attributed to natural catastrophes, according to Fast Track data, climbed 25% from $10,212 for the four quarters ending in September 2016 to $12,854 for the four quarters ending in September 2020.
Weather Vulnerabilities
Weather events are becoming a much more significant issue, says Roosevelt C. Mosley, principal at Pinnacle Actuarial Resources, “because CAT losses are not just at the coasts but throughout the country.” The year 2020 ushered in another annum of unrelenting weather events in the United States. A derecho in Midwestern states last August was the third most severe weather event since 1980 with CPI-adjusted costs over $10 billion from damage to infrastructure and crops, according to a news release from the National Oceanic and Atmospheric Administration’s (NOAA) National Centers for Environmental Information in January 2021.
On the East and Gulf Coasts, there were 30 named hurricanes, breaking the previous record of 28 in 2005. Meanwhile, according to NOAA, the Western U.S. experienced the most active wildfire year on record, with five of the six largest fires in California history and the three largest fires on record in Colorado.
Whether or not Mother Nature’s mischief was categorized as a weather catastrophe, sources agree that the cumulation of non-CAT events are also having a noticeable impact on claims experience.
All told, there were 22 separate weather disasters each costing an estimated $1 billion or more in total losses, according to NOAA. The 2020 experience broke the previous record of 16 occurring in both 2011 and 2017.
If the trend of pure catastrophic natural disaster losses increases as observed the past two decades, the 2021 to 2030 time period will see an average of $45 billion in CAT losses per year, Hartwig says. During the years 2000 to 2010, the average annual cost of CAT losses was $20 billion to $25 billion, which increased to an average of $35 billion annually during the decade of 2011 to 2020.
Whether or not Mother Nature’s mischief was categorized as a weather catastrophe, sources agree that the cumulation of non-CAT events are also having a noticeable impact on claims experience. “Clients are choosing higher deductibles to offset the increased cost to insure their homes,” Banks observes. Deductibles are going up, he explains, due to loss ratio increases.
“It’s the first time I have seen wildfire deductibles on an admitted homeowners policy,” Banks observes. Specifically, deductibles are about 10% to 15% of a home’s value,” he notes, which is the standard practice of non-admitted carriers. He expects deductibles for wildfires and hail risk to become more common practice, as is already the case for earthquake, flood and wind coverage.
One contributor to loss ratios for 2020 is the rising cost of covering alternative living expenses, which, Banks observes, is increasing since homes are taking longer to rebuild. Supply chain interruptions also are raising material costs, he says.
Total reconstruction costs in the United States, including labor and materials, rose 9.1% from January 2020 to January 2021, according to “360Value Quarterly Cost Update,” a first quarter U.S. report by Verisk. Pandemic-driven demand increases in lumber markets sent reconstruction costs soaring. Material costs increased in all categories, with lumber costs up 54% due to higher building activity, supply shortages related to the pandemic shutdown and lower winter productivity. Labor costs are also up. The labor costs for drywall installers/finishers, for example, rose the fastest at 13%.
Experts expect weather damage to homes to become a larger concern as climate change continues to undermine properties in places once considered safe to build. “There is no doubt that global warming is a serious issue impacting the insurability of certain homes,” Banks says. “Unfortunately, it is being left to state governments as the insurer of last resort to fill in vacated insurance options,” he notes.
CAS staff actuary Ken Williams observes that affordability is becoming a larger concern. The combination of rising rates and shifting to deductibles based on the percentage of a home’s value can create hardships for average homeowners, he explains. In a February 2021 post, the online real estate marketplace company Zillow reports that the average cost of a home nationwide is $266,222; a 1% deductible can be financially burdensome for the average homeowner as it is more than quadruple a $500 deductible and double a $1,000 deductible.
Personal lines insurers are concerned about auto insurance profitability. This is due to competition as well as COVID lockdowns reducing driving, ridesharing and driverless technology. As a result of this, Williams says that they are looking to homeowners insurance to help make up the difference in profit.
Now, insurers gently encourage claims mitigation by promoting maintenance or, sometimes, Internet of Things technology. As premiums and deductibles continue to rise, homeowners might feel a greater incentive to pay closer attention to risk. “We have spent more time analyzing causes of loss [that are] more clearly human-related,” says Raul Retian, senior director of personal lines actuarial products at ISO/Verisk.
The effort is not easy. Fire as a cause of loss can be due to activity inside or outside the home, such as a wildfire, he explains. Similarly, the role of weather on water losses is not clear. Looking at claims data by pure premium for the five-year average of the years 2015 to 2019, weather losses during those years cost the average homeowner in the U.S. an average of $313 annually, which is 40.6% of losses, according to ISO/Verisk data. (See Figure 2.) The wind and hail category is the most common cause of loss at $265 per household. Non-weather claims combined, however, are about 59.4% of losses or $458 total.
The COVID-Occupancy Effect
While property insurers expect the weather to have the most significant impact on homeowners insurance costs, there was no predicting a worldwide pandemic or its modern-day implications. When the Spanish flu closed down public activity starting in 1918, insurers generally covered fires only. Now that homeowners insurance is more comprehensive, the lockdowns in response to the COVID-19 pandemic have introduced new wrinkles in homeowners insurance.
In 2020 certain causes of loss typically constituting about five to ten percent of all losses behaved as “we might have expected due to COVID-19,” says Retian, who observes that theft, medical payments and liability all saw frequency decline in 2020. Theft likely declined due to insureds being home, he explains, while social distancing protocols meant that there were likely fewer liability and medical claims arising from having guests in the home. Claims from water-related losses, he adds, were about the same as previous years.
Since the pandemic transformed the home from the “place to hang one’s hat” to the center of people’s lives, insurers have been learning the risks and benefits of higher home occupancy while anticipating what the “new normal” for the home will mean. Unquestionably, Americans have been staying at home more in the past year. Eighty-five percent of 5,000 Americans surveyed by HomeAdvisor report they spent more time at home, according to the referral service’s “State of Home Spending” report released in November 2020. Seventy-one percent of Americans surveyed by the Pew Research Center reported working from home.
For private dwelling insurers, there are several implications for more people staying at home. Constant home occupancy has its advantages and disadvantages. Depending on how an insured is living in their residence, occupancy can reduce the frequency and severity of some claims while boosting others.
Since the pandemic transformed the home from the “place to hang one’s hat” to the center of people’s lives, insurers have been learning the risks and benefits of higher home occupancy while anticipating what the “new normal” for the home will mean.
Neos, the first provider of connected home insurance in the United Kingdom, reveals that during the lockdowns in England in 2020, overall loss ratios dropped by over 30%. “This is simply a function of people being home and [fewer] claims due to reduced crime and people on hand to quickly react to any at-home disasters, such as burst pipes,” says Jon-Michael Kowall, an insurtech advisor. “Further, Neos has leveraged data on over 50,000 policies to better understand new risk factors. Based on two years of data, customers who are always home have a loss ratio that is nearly half the loss ratio for customers who are vacant from the home working a standard schedule of 9 to 5.”
The opportunity for the forward-thinking insurer is in replicating this loss cost reduction, Kowall explains. One approach is to introduce smart home technology that creates virtual occupancy or simulates or even enhances human occupancy to provide a competitive advantage and reduce claims. (Note: Actuarial Review will be taking a closer look at Internet of Things technologies in a future issue.)
Seventy percent of respondents in the HomeAdvisor survey say they are cooking more, explaining the uptick in kitchen fires. “We saw a few more kitchen fires and smaller things like that because people were at home and cooking more than ever before,” observes Todd Lehmann, vice president and chief actuary of Quincy Mutual Group. “However, we saw fewer maintenance types of claims related to wind and hail damage or frozen pipes.”
Greater home occupancy also impacted how Americans spent money in their personal living space. Garages are seeing greater use for additional storage, a home gym or home office, according to the “America at Home” survey conducted in October 2020 by Gazelle Global Research and sponsored by three women who work in the commercial real estate industry.
The motivation for home improvements changed in 2020 compared to 2019, reports the Home Advisor survey. The top reason for home improvement spending in 2020 was to suit lifestyle needs better; pre-pandemic in 2019, the top reason was to replace or repair damage, defect or decay.
Released in December 2020, Chubb’s fourth annual Homeowners’ Risk Survey found that one-third of those surveyed had not invested in home maintenance because of COVID-19 and 45% said the pandemic reduced the ability of contractors to handle maintenance needs. Compared to 2019, homeowners are less concerned about day-to-day upkeep in 2020, as 60% expressed this concern, down from 72% in 2019, according to the survey of 1,000 homeowners that represents 25 million U.S. households. The respondents also were less concerned about external or weather-related damage than the year before. In 2019 75% of respondents expressed such concern, which dropped to 38% in 2020.
When it comes to home protection behaviors, according to the Chubb survey, most respondents do not do what the insurer considers to be the easiest home maintenance efforts. The 2020 survey respondents reported that they check appliance hoses periodically (36%), inspect home heating systems (29%), perform water heater maintenance (16%), look for roof damage (15%), install water shutoff (10%) and add pipe insulation (6%).
Homeowners indeed shifted their focus to adapting their homes to enhance livability during the pandemic. Total spending for home improvements, on average, grew by more than $4,000 for households completing home projects, rising 44% from $9,081 in 2019 to $13,138 in 2020, according to the HomeAdvisor report. Average home maintenance spending increased by $2,087 from 2019 to $3,192 in 2020. Sixty-three percent of respondents reported noticing more areas for improvement around their homes.
Remodeled properties might be more valuable and leave dwelling owners underinsured, Lehmann says. “I think occupant characteristics are important and predictive but tough to maintain,” Lehmann says. “You may know who owns the house; you don’t know how its use changes over time.” Insurers can send questionnaires during renewals, but the response rate is generally poor, he says.
Homeowners insurers continue to struggle with collecting adequate premium for the actual risk of a home, Mosley says. “People tend to equate the cost of purchase to replacement,” he says. Another issue Mosley points out is that “sometimes the standard contents coverage percentages don’t have a relationship with value of content in home.”
Internet of Things technology is something else insurers should keep an eye on, Mosley says, because some of it is expensive to cover and cannot be seen from a traditional drive-by inspection. The technology also introduces potential cyberhacking risk.
Since people are staying at home longer than usual, insurers, who are often updated on homes at the sales transaction, might be in the dark for a greater duration. Redfin reports a new record of 25.1% of U.S. homeowners have been living in the same place for more than 20 years, up from 14.3% in 2010, according to a post by the real estate brokerage in January 2021. In 2020 the typical homeowner had lived in their home for 13 years, an increase from 8.7 years in 2010.[1] People are living in their homes longer for myriad reasons, including low interest rate refinancing, high agent fees and aging-in-place desires.
Home improvements related to the Internet of Things technology is something else insurers should keep an eye on, Mosley says, because some of it is expensive to cover and cannot be seen from a traditional drive-by inspection. The technology also introduces potential cyberhacking risk. Generally, homeowners insurers do not cover cyber breaches and identity theft, but more are starting to, Mosley says.
The Future
Since greater home occupancy due to COVID-19 has become a more important factor to homeowners insurers, the question becomes: How much will Americans continue to stay home when it is no longer necessary? Many Americans in the Pew survey, 54%, say they want to continue spending more time at home after the pandemic ends.[2] The “America at Home” survey reveals that more than two-thirds of nearly 4,000 respondents of all age groups say they plan to continue using the backyard to entertain family or friends, use rooms for combined purposes and reorganize more to create increased storage.
Although working from home remains popular, its permanence will vary. The Pew survey offers that 31% of respondents struggle to feel motivated when working from home and 43% find meeting deadlines and completing projects to be difficult.
More than ever, the critical relationship between homeowners insurance companies and their customers needs to be strengthened to improve retention and risk mitigation.
“The constant back talk is, ‘Man, I am productive, but I am having to work more hours,’” says Troy Korsgaden, president and consultant for Korsgaden International, which serves insurance carriers, agents and brokers. Korsgaden sees that employers will also have to figure out which employees need supervision, since not everyone engages, and determine the best ways to collaborate.
Some employers, including the federal government, are making permanent adjustments by looking to move offices away from downtowns and bringing work closer to their employees to save rent and cost of living expenses. Lockdowns are limiting going to restaurants and stores, but how much Americans will want to return to those places that manage to remain open is uncertain.
Conclusion
Recent developments demonstrate that the homeowners insurance line will gain greater prominence on the property-casualty insurance radar screen. Increasing weather losses, the rise and continuation of home occupancy and the expected reduction in auto insurance profits will compel homeowners insurers to take a more granular look at its risk mitigation, claims, data and underwriting practices.
More than ever, the critical relationship between homeowners insurance companies and their customers needs to be strengthened to improve retention and risk mitigation.
Because severe weather events and natural catastrophes dominate homeowners insurance losses, and since they are expected to become the new normal, customer involvement will be necessary to curtail potential coverage affordability. The Chubb survey sends a strong message that homeowners are not sufficiently investing in basic home maintenance practices. Insurers would do well to discover ways to improve the customer relationship to prevent potential claims toward the mutual goal of coverage affordability. Strong insurer-insured relationships would also go a long way toward ensuring customers are appropriately covered.
Homeowners insurance companies that can anticipate and provide products and services to strengthen their value propositions will enjoy a competitive advantage.
[1] https://www.redfin.com/news/homeowner-tenure-2020/
[2] Pew Research Center study, “How the Coronavirus Outbreak Has – and Hasn’t – Changed the Way Americans Work,” https://www.pewsocialtrends.org/2020/12/09/how-the-coronavirus-outbreak-has-and-hasnt-changed-the-way-americans-work/
Annmarie Geddes Baribeau has been covering insurance and actuarial topics for more than 30 years. Her blog can be found at www.insurancecommunicators.com.