From The Iowa County magazine DECember 2022 issue
Let’s Talk Pricing
Cyber Insurance Premiums surge by 50%
Commercial Property Insurance Premiums Spike a Record 20.4% in 2023 Q1;
Global Reinsurance Market 2023: Challenging…;
You know things are bad when the term “nuclear” is deemed inadequate…”
These are headlines from articles written in just the last 45 days regarding insurance pricing. It’s a safe bet that every county in Iowa has experienced a rate increase at renewal time in the last two years. The outlook for 2024 is a slowing down of the pace of rate increases, but at this point, the industry is predicting additional rate adjustments.
The rate is different than the premium. The premium is the amount paid for your property, liability or workers’ compensation coverages. The rate is the cost per exposure unit. For example, each $1,000 of coverage is an exposure unit. (Your agent can explain the premium increase due to a rate change versus an exposure change. We encourage you to contact your agent for additional explanation.) The rates are used to calculate the premium. In other words: rate x exposure units = premium.
In 2023, the insurance industry is experiencing a hard market. The Insurance Risk Management Institute (IRMI) defines a hard market as an “upswing in a market cycle when premiums increase and capacity (the supply of insurance available to meet demand) for most types of insurance decreases.” That means insurance is more expensive and harder to obtain in a hard market. Today’s hard market is a perfect storm; it is made up of economic, political, and climate factors that affect the insurance industry.
Economic Factors: The economy affects insurance just like any other business. Insurance companies invest their income in stocks, bonds, and CDs, similar to counties in Iowa. Investment income is earned as a result. When there’s a downturn in the economy, investment income drops significantly.
A domino effect occurs when inflation is factored into the mix. Inflation drives up rebuilding costs which are impacted by the cost of construction, labor, supply chain issues, and materials costs.
Inflation also leads to increased property values (replacement costs) which means higher insurance payouts when a claim occurs as well as higher costs for claim repairs.
Inflation also affects reinsurance costs which are passed on to the primary insurers.
Political Factors: Regulations at the state and local levels also impact the insurance industry directly.
Global and national policies and events, like inflation and the war in Ukraine, impact the liability and property reinsurance market.
Climate Factors: Weather events are probably the greatest contributor to our current property insurance crisis. The U.S. (including Iowa) has experienced a tremendous number of weather events in the last four years. From 2018 through 2022, there was $89 billion spent due to weather disasters in the U.S. That amount will continue to increase as repairs are made due to, among other factors, a scarcity of labor and materials.
Pre-2018, the insurance industry was in a soft market. Rates were low, coverages were broad; it was a buyer's market. Post-2018 transitioned into a hard market which caused higher insurance premiums, restrictive coverages, and stricter eligibility rules from underwriting.
Even though insurers raised rates, they couldn’t keep up with the continuing catastrophic claims. Rates had to increase to pay the claims. Recenty, in Southern Iowa alone, there were five catastrophic weather events. Combined, these events equal hundreds of millions of claim payments.
Claims from the August 2020 Derecho were originally estimated at $7.5 billion. The Iowa Insurance Division reported more than 200,000 Derecho claims were filed in Iowa alone. As of this date, the Derecho has cost $11.5 billion – over 50% above the original estimate.
Prominent Iowa insurers announced in the spring to expect property rates to increase between 20 – 35%. The same factors that contribute to increased rates for counties are also affecting individuals.
Reinsurance is a factor most consumers are unaware of. Reinsurance is insurance for insurers and governmental pools. Reinsurance provides protection against catastrophes and allows the insurers and governmental pools to spread their risk and stabilize underwriting. Reinsurance validates the adage: “Don’t put all your eggs in one basket”.
However, reinsurers have left the U.S. market leaving fewer options for insurance companies to negotiate terms.
Industry experts expect the 2024 insurance market outlook to remain challenging. Iowa Communities Assurance Pool (ICAP) and Iowa Municipal Workers Compensation Association (IMWCA) continue to utilize strong loss control, safety/risk management as well as effective reinsurance agreements to provide limits, stability, and broad coverages at appropriate costs.
Resources: Insurance Journal; Business Insurance; Bank Rate; Property Casualty 360; New York Times; AM Best; Reinsurance News; Swiss Re; HAI Group.
CRMS serves as the bridge between counties in Iowa, and their agents, and ICAP and IMWCA. We work with officials and local insurance agents to help ensure counties have access to property, casualty, liability, and workers’ compensation coverages and resources to help prevent and respond to loss. CRMS programs currently provide coverage for 81 counties in Iowa and are endorsed by ISAC. Please reach out to your local agent or any of the CRMS representatives with questions. Learn more about CRMS at crmsia.com. We’re here to serve you!