November 28, 2023

2023 a Fun Year in Insurance [Not Really]

Welcome to 2023 and this might just not be your typical blog post. My blogs have historically attempted to be helpful, yet accurate in helping consumers and business owners in how to procure the best types of insurances. Sometimes that means sending you elsewhere. Sometimes that means selling you just part of the package.

Editors Note: this original article was written in early 2023 [Jan, Feb timeline] but never got published due to the extreme business events. [My phone just started ringing off the hook] In the End of the winter 2023 the California Insurance market became even more complicated as more and more insurers decided to stop writing property policies. Then at the end of May 2023 State Farm stopped taking in all new policies.

What is Ahead for the 2023 Insurance Market:

The year 2023 is already shaping up to be a tough year for the risk management market, nationally and here in California. To begin with – what started off as a hard market for Fire Insurance in the foothills, parts of Marin, and other obscure locations – has gone statewide. Homes that you previously thought would have no problem procuring insurance now have trouble. Second Excess Liability – AKA – Umbrella Insurance has signficantly changed in coverage amounts, premiums, and accessibility. Third Business Insurance has been thrown from a loop. The Business Insurance agents here in the state that used to poke fun of the Personal Lines agents. – no longer do so.

We won’t go into Flood Insurance and Earthquake or Land Movement Insurance. [Didn’t we just have a signficant earthquake recently?] Both of these forms of insurance are also getting far more complex.

The latest and greatest challenge now – is Personal Auto Insurance. Basically Car Insurance. Even the Gecko is falling over now it appears. What is going on with Insurance?

In this blog – we are going to focus on a few thematic challenges in the US and here in California:

Reinsurance and the Risk to Insurance Premiums:

Lets start off with a microtopic of Reinsurance. Simply put reinsurance is insurance for the insurance company. The NAIC loosely defines/ explains reinsurance as ” a contract between a reinsurer and an insurer. In this contract, the insurance company—the cedent—transfers risk to the reinsurance company, and the latter assumes all or part of one or more insurance policies issued by the cedent. ” They also state that “Reinsurance is an essential tool insurance companies use to manage risks and the amount of capital they must hold to support those risks. Insurers may use reinsurance to achieve an optimal targeted risk profile.” Therefore reinsurance is a must have for most insurers. However not all insurers use the same amount. Some insurance companies more heavily rely on it than others. Keep in mind that reinsurance is NOT the only way that insurers locate capital to provide coverage, but it is an important method.

Reinsurance rates nationally are going up. According to GlobalData “reinsurers are planning to raise prices by 10% to 30%,” They “are responding to five years of unusually high disaster losses and mounting concerns” And that is a real problem for the insurance companies. Well – the insurers should just raise their premiums the same amount you say.

The challenge with admitted insurers raising their premiums is that there are so many different regulators and many of these regulators are onerous rules. Investopedia notes at least six different types of basic types of insurance rate laws” from File and Use to Prior Aprpoval to Use and File, etc. [More on that below].

The Changing World:

Wildfires are more significant in California. We all know that now, lets not even spend time attempting to describe and detail it. More frequent, larger wildfires seem to be here. Are they caused by Global Warming or the Power Companies, or the Changing nature of the forests? Who really knows. Perhaps it has something to do with more and more consumers living in the forest.

Insurers are really struggling to catch up with all of this. Some of this with certainty has to do with the indivdiual insurance regulatory bodies approving rates – absolutely. But an element of this has to do with insurers understanding which risk mitgation strategies work best. As a personal lines insurance agent, we get different versions of similar questions all the time: Is the property clear of brush? What is the brush setback? Is the home located 300 feet from brush? What is clear to me is that their is no clear central thinking here.

Another potential exposure to wildfire seems to be the slope of the home. Some insurers seem hestitant on anything over 20 degrees while other seem OK up to 40 degrees. Why do insurers carry about the slope? That might be another story.

All the insurers look at the general location and use a full variety of tools to assist in ascertaining the exact nature of the risk of the location. Fireline, ISO, and various proprietary lookup tools are now used on every home I write in California. [AI here we come.]

The Big Deal Dog Bite – and the Changing Nature of Liability Risk:

Ever hear the story about the multimillion dollar lawsuit about the woman and the hot coffee at McDonalds? These high paying lawsuits have repercusions in the insurance marketplace. What used to be a small claim when a dog bit a child nowadays can be a $2MM case. Small liabilty claims are giving way to so called nuclear verdicts. Insurers are flat out petrified of these claims and have taken numerous steps to prevent these types of payouts.

Liability coverage used to be relatively simple – now its not. Increased underwriting is required. Declines, nonrenewals – the sedate world of personal [and commerical] umbrellas and excess liablity policies is now the wild west.

Of Regulations and Other Governmental Challenges:

In the admitted insurance world in the State of California, Insurance premiums must be reviewed and approved. When premiums are held back, its possible that insurers may stop taking on new insurance policies. California is somewhat unique in requiring prior approval. But other states have regulations about increasing premiums as well.

Regardless of how Insurance departments regulate premiums and coverages – often insurance companies find the process to be onerous and slow. Think months, not days.

In California “The Rate Regulation Division reviews all filings for Personal lines (automobile and homeowners) and Commercial lines (business property, liability, workers’ compensation, title, and surety) except life, ocean marine, health, disability, and mortgage insurance.” In general California [among other states] must approve rate increases.

The problem becomes most apparent that the insurer wants [needs] to raise premiums -but are at the mercy of the regulator in these extreme situations. According to S&P Global from 2021: “California has stopped all private passenger auto rate hikes, regulators across the rest of the U.S. have given green lights to increases.” While this quote is a little dated it does show that the problem has been swirling for a bit of time. Now the Auto Insurance rate story is all the rage in the media. To an extent though this is also the same problem with the home insurance market. Admitted insurers wanting to increase premiums to so they can write more fire insurance.

Two Ends of the Story Tied Together:

Remember in the begining of this story we discussed the increased cost of reinsurance that admitted insurers are paying? There is ample evidence of these increased costs. Reinsurance rates are largely not regulated. However consumer rates for products such as Home Insurance are. And in California they are some of the most regulated. To boil that down even further auto insurers are often NOT allowed to increase their premiums while at the exact same time are forced to pay more for their own insurance. See one of the core issues now? If the cost for my ingredients to bake a cake double…what will I do with the cost to sell a whole cake? There is an old saying from the Soviet Union – They pretend to pay us – and we pretend to work.

What is Going to Happen in the California Insurance Market in 2023?

Remember when I said that this article was written earlier in the year? Frankly its not possible to write this part prognosticating what will happen to Insurance in 2023 when I already know how it turned out. Just cant do it! Therefore, at some point I will link to another article on what we all learned from 2023.

Thanks for reading my insurance post about the Crazy California insurance marketplace in 2023.