January 9, 2025
Rising Costs, Natural Disasters and Politics Strain U.S. Property Insurance Market
“Along with the rising cost of living…, property insurance availability and affordability continue to be a challenge across the U.S.,” David A. Sampson, president and CEO of the American Property Casualty Insurance Association (APCIA), told Insurance Journal (November 26, 2024).
Inflation has been persistently increasing repair, labor, and medical costs; and legal system abuse is plaguing the marketplace for consumers in every state. In a challenging time like this, it’s more important than ever to have state regulators aligned and focused on how to work together to empower consumers and improve the marketplace.”
The rising cost of living, coupled with challenges in property insurance availability and affordability, poses a growing concern for U.S. businesses and consumers. Inflation has driven up costs for repairs, labor, and medical care, while legal system abuse has further strained the insurance market. To address these issues, state regulators play a critical role by overseeing market conduct and solvency. Their focus is essential in ensuring insurers maintain sufficient reserves to pay claims while preventing excessive rates, fostering competition, and promoting innovation to protect consumers.
Key Challenges:
- Market Turmoil: Losses are outpacing premiums, causing significant disruptions in the insurance industry. A.M. Best downgraded the personal lines insurance sector for the first time, reflecting ongoing financial losses. Auto insurers have faced a historically bad three-year stretch, while homeowners insurers have seen five consecutive years of underwriting losses.
- Cost Pressures: Inflation has significantly increased the costs of construction labor (up 35.1%), building materials (up 37.3%), vehicle repairs (up 22.2%), and parts (up 24.2%). These increases strain insurers, whose premiums have not kept up with rising expenses.
- Natural Disasters: The frequency and severity of natural disasters, including $28 billion-dollar weather events in 2023 alone, have led to higher rebuilding costs. Population growth in high-risk areas exacerbates these challenges.
- Regulatory and Legal Factors: Regulatory burdens and legal system abuses, including fraud, have driven up claims costs and complicated insurers’ risk management strategies.
Solutions:
- Mitigation and Reform: Insurers advocate for measures to limit damage from natural disasters and work with state regulators to address unique cost drivers, such as legal system abuse.
- Collaboration: Florida’s recent reforms showcase the benefits of industry-regulator collaboration. After legislation reduced legal system abuse, the state’s insurance market stabilized, new carriers entered, and rates decreased or remained stable for many policyholders.
Path Forward:
“There is no silver bullet and each state has its own challenges,” says Sampson. “But insurers are committed to working with state regulators and all stakeholders to provide consumers with the benefit of a healthy, competitive, and sustainable property insurance marketplace with accessible and affordable coverage options.” By addressing inflation, fraud, and risk exposure, insurers aim to create a more competitive and sustainable environment for consumers.
Postscript Commentary:
It is important to note that federal policies play virtually no role in determining the adequacy of insurance premium rates, as the regulation of the insurance industry falls primarily under state jurisdiction. The effectiveness of state-level insurance regulation often hinges on the qualifications and expertise of state insurance commissioners. Unfortunately, some appointees lack the requisite industry knowledge, which can undermine the stability and fairness of the marketplace.
Additionally, political posturing by state leaders who decry necessary rate increases, despite insurers facing escalating claims costs due to inflation and natural disasters, only exacerbates the problem. These rate adjustments are often fully justified as insurers work to maintain solvency and ensure the availability of coverage for consumers. Without a focus on thoughtful reforms and qualified oversight, such rhetoric risks further destabilizing already strained insurance markets.