Increases in claim severity and, more recently, frequency are responsible for a 7.4 percent annualized rate of increase in homeowners claims costs from 1997 to 2011, the Insurance Research Council says in a new study.

The IRC says that in 2011 alone, homeowners claim costs per insured home—which includes houses, condominiums and apartments—increased by 27 percent.

“Insurance companies face significant challenges in responding effectively to rapid growth in claim severity and increases in claim frequency, and in managing the volatility attributable to catastrophe-related claims,” says Elizabeth Sprinkel, senior vice president of the IRC, in a statement. “In addition, consumers will find it increasingly important to consider steps to control their personal exposure to risk and to mitigate the damages and costs associated with severe weather events.”

For the study, Trends in Homeowners Insurance Claims, the IRC says it drew a distinction between catastrophe-related claims and non-catastrophe claims. With respect to claim severity, the IRC says catastrophe and non-catastrophe claims followed a similar trend. “For both groups of claims, countrywide claim severity increased almost 200 percent and ended the 15-year period in 2011 with similar values—$8,077 for non-catastrophe-related claims and $7,553 for catastrophe-related claims,” the IRC notes.

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

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

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

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

Interestingly, while higher deductibles may have contributed to higher overall claim severity, it had the opposite impact on frequency. The report notes that claim frequency “fell substantially” from the late 90s through to 2007 due to claim surcharge programs and higher deductibles implemented by insurers in the first half of the 1990s.

However, claim frequency has since jumped from 5.3 paid claims per 100 insured exposures in 2007 to 8.0 claims in 2011. David Corum, vice president of the IRC, tells PC360 that the recent upward trend could be due to erosion of deductibles. If companies are not continuing to raise deductibles over time, more claims will end up exceeding deductible amounts. He also says there is concern that more development in areas vulnerable to weather events and wildfires could drive an increase in frequency.

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

Special Reports /

Study: Homeowners Claim Costs Rising as Both Frequency and Severity Increase

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