Increases in claim severity and, more recently, frequency areresponsible for a 7.4 percent annualized rate of increase inhomeowners claims costs from 1997 to 2011, the Insurance ResearchCouncil says in a new study.

The IRC says that in 2011 alone, homeowners claim costs perinsured home—which includes houses, condominiums andapartments—increased by 27 percent.

“Insurance companies face significant challenges in respondingeffectively to rapid growth in claim severity and increases inclaim frequency, and in managing the volatility attributable tocatastrophe-related claims,” says Elizabeth Sprinkel, senior vicepresident of the IRC, in a statement. “In addition, consumers willfind it increasingly important to consider steps to control theirpersonal exposure to risk and to mitigate the damages and costsassociated with severe weather events.”

For the study, Trends in Homeowners InsuranceClaims, the IRC says it drew a distinction betweencatastrophe-related claims and non-catastrophe claims. With respectto claim severity, the IRC says catastrophe and non-catastropheclaims followed a similar trend. “For both groups of claims,countrywide claim severity increased almost 200 percent and endedthe 15-year period in 2011 with similar values—$8,077 fornon-catastrophe-related claims and $7,553 for catastrophe-relatedclaims,” the IRC notes.

However, the group adds that severity was more volatileyear-to-year for cat claims, “with dramatic increases and decreasesover the study period.

Speaking to the reasons behind the increase in claim severity,the IRC says inflation is only partly to blame. The report revealsthat while claim severity increased by almost 200 percent overthe 1997–2011 period, the producer price index for residentialmaintenance and repair increased by just 57 percent and theconsumer price index for urban consumers increased by 40 percentover that time.

The IRC says the intensity of storms that don't quite breach thecatastrophe threshold “may be a significant contributingfactor in the observed increase in non-catastrophe claim severity.”The report also cites the increase in size of new homes, makingthem more costly to repair when damage occurs.

Additionally, the use of higher deductibles by insurers resultsin fewer low-cost claims being filed, which increases the value ofoverall claims filed.

Interestingly, while higher deductibles may have contributed tohigher overall claim severity, it had the opposite impact onfrequency. The report notes that claim frequency “fellsubstantially” from the late 90s through to 2007 due to claimsurcharge programs and higher deductibles implemented by insurersin the first half of the 1990s.

However, claim frequency has since jumped from 5.3 paid claimsper 100 insured exposures in 2007 to 8.0 claims in 2011. DavidCorum, vice president of the IRC, tells PC360 that the recentupward trend could be due to erosion of deductibles. Ifcompanies are not continuing to raise deductibles over time, moreclaims will end up exceeding deductible amounts. He also says thereis concern that more development in areas vulnerable to weatherevents and wildfires could drive an increase in frequency.

With respect to the difference in frequency for cat-related andnon-cat-related claims, the IRC identified separate trends. Thereport says while non-cat-related claims followed the overallfrequency trend of declining until the mid-2000s and then risingsince then, cat-related claim frequency remained “fairly flat”through the entire 1997-2011 period, although with moreyear-to-year volatility.