22 Feb Insurance Talk — What’s Going On in the Insurance Business
Rex and Cheri have the answers. Listen here.
Cheri Martinen – Welcome to Insurance Talk with Cheri Martinen and Rex Lesueur. We are the father-daughter team from Bancorp Insurance located in beautiful Central Oregon. And we’re starting off the year here in 2021 with a fun podcast for everyone to listen to.
Rex Lesueur – I know you’re all excited to hear about what’s going on in the insurance business and how is it going to affect you as a consumer going forward through 2021.
CM – Every day we read about insurance news. I know it’s surprising, we like insurance so much. We read about it every day, but we know that you don’t, which is probably a good thing. For us, it’s entertaining. For you you’re going, “Why would I ever do that?” But we thought it probably wouldn’t be a bad idea for everyone to sit back and see what’s happening in the insurance industry, big picture. And how is that going to affect you.
Climate Change and the Insurance Business
RL – What’s going on is we’ve had a remarkable year. Nothing like this has happened in my lifetime, and I don’t think there are very many people who are alive who went through the 1918-1919 pandemic and remember it. Literally, you would have been a couple of years old at the most. So we’re living through a time where we’re all stumbling through things, learning new things, adapting. And what happens with the insurance business is whenever there’s stress in society and in the economy, the insurance industry reflects that. Not only because of the pandemic is the insurance industry under stress, but we’ve also had some other outside stresses like climate change. Whether you believe in it or not, we’ve had drier summers over the last few years, we’ve had more hurricanes this year.
CM – And they ran out of names, right? They had to go to Greek names for the hurricanes, it started to get weird.
RL – They start off with 26 names and you have 26 tropical storms. Most years there are only 15 or 20 and now all of a sudden there are over 30.
CM – If you’re on the West Coast, you’ve seen the fires. You’ve smelled the smoke. There are a lot of tornadoes in Tornado Alley. There have been more of them.
RL – Whether that’s global warming or just a weather pattern we’re dealing with, it affects the insurance business because every time a hurricane hits the coast, even if it’s a Category 1, not a big one. Someone’s roof is getting blown off, some tree is falling on a power line, some hail is pattering someone’s poor car or their roof. And that’s an issue.
Then you look at the fires on the West Coast. In Oregon, I’ve never heard of the kind of fires that we had this year. Look at what happened in Talent and Phoenix. 2,600 structures, that’s a huge amount of structures. And then look at the town of Detroit. They had maybe 600 structures to begin with and they lost 500 of them. There are some phenomenal losses, and those losses start to trickle back into the prices of insurance on the personal line side and on the home and auto side.
There’s a really huge pool of people buying that and the bigger the pool, the less likely the impact on the individual rates from the individual companies. But that doesn’t mean that those companies haven’t been impacted. You look at the big companies like State Farm, SafeCo, Farmers, and Allstate. You look at 2,600 dwelling units in Phoenix and Talent, and even if they only had 500 of them a piece, there are hundreds of millions of dollars worth of losses. Those losses end up coming back to us in the form of rate increases. How much is hard to say. Some companies will raise them more, some will raise them less.
CM – We’re talking probably more on the property side. So this is your actual home structure.
RL – Your home insurance. One of the things that a lot of people don’t understand is there’s a whole separate industry out there called reinsurance. And that is where insurance companies buy insurance from other insurance companies so that if there is a catastrophe like this, they don’t have to bear the brunt of it. A company like Allstate might keep the first 25 million of any loss that happens, or maybe a hundred million if they’re big enough. But after that, all of the losses that aggregate beyond that go to a third-party insurer that reimburses Allstate. Those companies have been hammered because of the hurricanes and the fires, not just this last year in 2020, but a continual slow burn that they’ve felt for a while. The reinsurers and all the companies buy reinsurance from literally the same reinsurance companies.
CM – There’s only so many of them.
RL – A company like Allstate or Farmers will buy reinsurance from 25 or 30 different reinsurers because they’re spreading the risk as well. And when the reinsurers decide they want more money, they want more money and basically, the insurance company is going to have to pay up and then pass that cost onto their customers. So thinking about that, we’re probably looking at anywhere from 7% to 20% increases in homeowners insurance this year, depending on where you’re at.
If you’re in a community with a fire hydrant right down the street and a fire department a few blocks away, you’re going to do better than if you’re in a community where you are rural and there’s no fire hydrant and the fire department is more than five miles away. The rural consumer is going to be affected by this more because of wildfires in the West. Those are the houses that we lose more often, although Phoenix, Talent, and Detroit all had paid fire departments with hydrants. So those communities burned anyway, but the insurance companies are probably going to focus most of their attention on the rural customers.
Now, flip it over to talk about commercial. Commercial is pretty much the same as property. We’re going to be seeing 15% to 20% increases in some lines, maybe more in hard-to-place lines like remote resorts, remote properties, and remote homes. Some people might not be able to even get insurance from a standard company, and they’re going to be ending up in the excess surplus lines market. It’s going to be tough. I don’t know exactly how it’s going to happen this year, but a lot of our insurance companies are telling us that they don’t want to do PC 10. Protection Class 10 is where there is no protection or very little protection from a forest fire from a fire department.
CM – They make a map and they say, “How far away are you from a fire hydrant? And how far away are you from a fire station?” And then based on that information, they put you in a protection class. 1 is good. 10 is if you live out in the sticks.
RL – Someone might respond, but they might not. So if your house gets started, it’s probably going to burn to the ground. If the fire department shows up, they may show up just in time to keep your house from burning the forest down and setting the rest of the neighborhood on fire. So that’s where we’re at.
On the commercial side, property is going up, commercial auto has been steadily going up as well. Two reasons for that. Commercial vehicles are more expensive nowadays. You look at buying a commercial truck, they’re $80,000 for a basic commercial Ford or Chevy 4×4 double cab. That’s what they go for, they’re not cheap. Second of all, courts have been awarding higher awards when it comes to injuries, partially because when people get injured, it costs more to have them taken care of and to reimburse them for their injuries. So that’s going up.
One of the areas that’s going up quite a bit, and the pandemic actually has affected this, is directors and officers liability and employment-related practices, probably more employment-related practices. When employers have to lay people off, employees take that moment to decide that it’s a good time to sue their employer for real or imagined wrongs. And these imagined wrongs or real wrongs can be sexual discrimination, failure to hire, failure to promote, just being mean to your employees, wrongful termination, emotional distress. We’ve seen it all.
People will say, “That boss of mine, he treated me badly. I’m going to sue him.” And that is happening more and more. And that line of business is actually going up a lot more. It’s probably going to go up 25% or 30% this year because there are so many more lawsuits. And if you don’t have it, it’s actually hard to get in some cases if you have that kind of business. Or if you’re in a particular state like California, it might not be easy to get.
CM – This is the stuff we read about.
RL – We’re going to do a separate podcast on employment practice here in a little bit. So stay tuned and we’ll give you some more information on that.
Keeping Up with the Insurance Industry
CM – If you have any questions about your insurance or your insurance renewal, you can always call Bancorp Insurance at 1-800-452-6826. You can visit us online at www.bancorpinsurance.com. Or, of course, you can keep listening to us here, check out our website. We’d love to hear from you, hear your comments on what you think, or what you’re seeing on your insurance bill. I think we all have that moment where we check our insurance bill and go “Oh!” and if that’s happening to you, it doesn’t hurt to shop. You can always call us, see how it goes. I would say we live out in the trees and so we have to insure ourselves, too. We like helping our neighbors.
RL – We do. So give us a call.