Insurance is an essential aspect of our lives, providing us with financial protection and peace of mind. However, it's no secret that insurance costs have been on the rise in recent years. Today, DSMIG will explore the factors behind the increasing expense of insurance, and even delve into some data provided by The Insurance Journal to shed light on the situation.
Introduction
Insurance is a risk management tool that protects individuals and businesses from financial loss due to unforeseen events. However, the cost of insurance has been steadily climbing, leaving many policyholders wondering about the reasons behind this trend. To shed light on the matter, we will analyze the data provided by The Insurance Journal in the first quarter of 2023 (graphic at bottom)
In the insurance industry, underwriting loss refers to a situation where an insurer's losses from claims exceed the premiums collected from policyholders. In Q1 2023, the industry experienced a staggering $8.2 billion underwriting loss, a significant shift from the $3.4 billion profit recorded in the same period in 2022. This substantial loss signifies a critical issue within the insurance sector.
One of the primary culprits behind the increasing expense of insurance is the homeowners insurance line of business. Losses in this category have significantly impacted the industry's overall underwriting performance. The rise in severe weather events, natural disasters, and property damage claims has contributed to higher payouts by insurance companies, resulting in increased premiums for policyholders. It's also worth noting that due to these severe weather events, many new contracting companies have come to areas heavily affected, and this has also lead to increases in claims (some of which, are not legitimate). These companies have been, in their words, specializing in "getting your insurance to pay for your new roof" and/or "getting your insurance to pay for damage." - not only is this an ethical issue, but an issue for insurance companies. When these companies do an assessment and make statements about "getting insurance to pay," and suggesting you file a claim, they are effectively increasing the number of claims being filed to benefit them, and in turn increasing the policy premiums of the area. More claims equal higher policy premiums.
Net income, a key metric for measuring profitability, has witnessed a steep decline in the insurance industry. In Q1 2023, the net income dropped by a staggering 70.7% to $8.1 billion, compared to $27.7 billion in Q1 2022. This decline can be attributed to a combination of factors, including the underwriting loss and increased expenses incurred by insurers.
Catastrophe losses have played a significant role in driving up insurance costs. In Q1 2023, catastrophe losses alone contributed 6.9 points to the combined ratio, pushing it to an unprofitable 102 from 95.9. The rising frequency and severity of natural disasters, such as hurricanes, floods, and wildfires, have resulted in substantial insurance payouts, which directly affect premiums.
While the insurance industry experienced a growth of 14% in net earned premiums, this positive trend was overshadowed by a surge of nearly 27% in incurred losses and loss adjustment expenses (LAE). The increase in payouts made by insurers to cover policyholder claims has created a significant financial burden, necessitating higher premiums to maintain the financial viability of insurance companies.
Underwriting expenses have also contributed to the rising costs of insurance. In Q1 2023, underwriting expenses saw an 8.4% increase. These expenses include administrative costs, agent commissions, and other overhead expenses incurred by insurers. As these costs rise, insurers pass them on to policyholders through higher premiums.
The increasing cost of insurance can be attributed to various factors, as highlighted by the data from The Insurance Journal. Homeowners insurance losses, catastrophic events, and escalating underwriting expenses have all played a significant role in the rising premiums faced by policyholders. As insurers strive to maintain profitability, it becomes imperative to balance the financial impact of claims, expenses, and premiums.
Q: Will insurance costs continue to rise in the future?
A: While it is challenging to predict the future with certainty, the increasing frequency and severity of natural disasters suggest that insurance costs may continue to rise.
Q: Are there any strategies to mitigate insurance costs?
A: To mitigate insurance costs, policyholders can explore options such as increasing deductibles, bundling policies, or installing safety devices that reduce the risk of claims. Before making changes to your policy, ALWAYS consult a licensed insurance professional
Q: Can policyholders negotiate insurance premiums?
A: In some cases, policyholders can negotiate insurance premiums by comparing quotes from multiple insurers and leveraging their claims history or loyalty to a specific company.
Q: How can individuals ensure they have adequate insurance coverage?
A: To ensure adequate coverage, individuals should regularly review their policies, assess their evolving needs, and consult with a licensed insurance professionals to determine appropriate coverage levels.
If you would like a licensed insurance professional to review your coverages and help you determine if you're paying what you should, DSM Insurance Guy would love to help. Follow the link below to upload your insurance documents and we will be in touch.