Weathering The Storms: Natural And Regulatory

In the insurance world, it almost goes without saying. Despite all our actuarial and analytical skills, things never quite go the way we might expect or would like to see. The forces of nature intervene. So does human conduct and social styles. One way or another, surprises crop up.

For surprises, we have insurance. And if there is a universal insurance, personal lines–in the form of automobile and homeowners coverages–is it. What adult American does not have one or both?

Because of the volumes of policies involved, there is perhaps a tendency to “lump everything together.” Yes, the waves of personal lines cycles are huge, but this is still a dynamic area of the insurance industry, one with its own breed of twists and turns. Just when we think we have it covered, something new comes on the scene–an unprecedented run of storms, a “new” kind of natural disaster (like a mudslide), or nuisance disaster (like mold). Or there may be a new set of regulatory issues, or a run of lawsuits based on changing patterns of residence.

In our look ahead for personal lines, there will be plenty of challenges that will test our industry and each of us as a professional. There is also some reassuring and welcome news.

Many of the forces now at play in standard lines demonstrate a rational, smooth-running marketplace.

Insurable unit growth is strong in both automobile and homeowners. We have had strong vehicle sales of 16 million units-plus for the last three years. In 2004, we witnessed record home sales of 6.7 million, along with record housing starts.

Higher volumes have been accompanied by single-digit auto rate increases on the order of 3 percent to 5 percent each year. We also project a 2.5 percent homeowner rate increase for the end of 2005, the lowest increase in six years. The rate trend is understandable against the backdrop of the 1990s, when homeowners lost money nine out of 10 years, followed by rate increases from 2000 to 2004.

Of course, we still are impacted by the weather and local environments. For example, windstorm areas are still experiencing large rate increases–as much as 50 percent in coastal North Carolina last year prior to third-quarter hurricanes. We all know the horrendous hurricane experience of the last two years. Still, whether it is the Carolinas, California or Florida, Americans continue to flock to coastal areas, tempting nature while erecting increasingly expensive properties.

The most recent storm tragedy in the Gulf states illustrates another critical coverage need–flood insurance. The severe flooding in New Orleans in the aftermath of Hurricane Katrina is a call for widespread purchase of flood coverage. The federal flood program provides up to $250,000 primary coverage (depending upon the flood plain), and there are specialty markets for excess flood coverage for higher amounts.

Homeowners located in flood plains need to purchase flood coverage to prevent the financial disaster of losing their homes.

Other loss trends have included a rise in mold exposure, with California ranking in second place behind mold-claims leader Texas.

While homeowners premium rate growth may be modest, traditional loss exposures are decreasing, often dramatically. In 2004, we had the lowest arson rate in recorded history. Increased use of security systems has reduced the rate of theft claims. And a newer housing inventory results in fewer maintenance-related claims, such as for electrical or water damage, more common in older homes. In all, this means less rebuilds, reducing loss experience related to the cost of construction materials and labor.

The average value of homes, their size and cost, and the aggregate value of contents and furnishings, continues to rise. Mainstream two-income families living in half-million-dollar homes with all the amenities are not a rarity. Our industry becomes the beneficiary, in the form of the adjustments, often automatic, in the insured valuation for homeowners policies, for structure as well as contents. These increases are averaging 3-to-10 percent each year.

At the same time, we must be alert to the homeowners social environment. Two-income families, birthing trends, divorce and remarriage, elders being cared for at home, wealthier individuals (on paper at least) have brought about more employment of nannies and day-care workers, as well as more distant relatives “watching someone.”

Combined with a litigation-prone citizenry, we are seeing significant increases in employment practices liability insurance claims on homeowners liability.

Agents must have a good feel for their insureds' family situations and any lifestyle issues. This may involve more personal questions than in the past, but if presented and handled professionally, we will stay out of trouble and so will our clients.

Similar forces apply in auto insurance. We have had strong vehicle sales, 16 million-plus, for the last three years. And, while vehicles are more expensive to repair than ever before, this is offset by the greater percentages of late model and more expensive vehicles on the road, with their accompanying higher insurance valuation.

This vehicle population is also better built and safer than in the past. While rate increases should be modest for the next few years, all these factors tend to “normalize” auto and ameliorate risk, not that the liability side of exposure isn't something the industry as a whole will closely watch.

Basing qualification and rates on the insured's credit score or credit history is shaping up as the real battleground in the personal lines arena–for both auto and homeowners lines. There are 26 states examining the use of credit in auto and homeowners insurance underwriting. Arkansas has banned credit scoring in writing auto coverages, and Texas is studying whether the practice discriminates against poor and minority drivers.

Expect this issue to remain contentious, as our industry will continue to insist on the proper role of creditworthiness in overall risk assessment and insurability. We have already seen this in high-value homeowners, where we are using the loss mitigation tools of both a credit history and CLUE (Comprehensive Loss Underwriting Exchange), or similar reports of the insured's loss experience.

In the past, property location, in addition to such givens as valuation and construction specifics, was the major determinant of rates. Now, we are almost underwriting the insured as opposed to underwriting the property.

In some cases, this will drive agents to seek out surplus lines coverages for their insureds, where availability becomes the primary issue over cost of coverage. It will be interesting to see how this controversy settles out. One compromise, or adjustment, on the horizon: scoring systems that make allowance for medical emergencies, recent divorce, a parent moving to a nursing home or other similar issues that impact otherwise creditworthy individuals.

Agents should also consider the business-expanding possibilities in specialty lines.

Industrywide, some trends are nothing to write home about. There has been a decline in insurable units for the mobile home segment, sales of recreational vehicles and watercraft are flat, and personal umbrella sales growth has been modest.

Still, there is a group of high-asset homeowners whose lifestyle includes expensive recreational pursuits. Agents should pursue, as risk managers, the full coverage needs of this group of homeowners, including personal umbrellas.

Overall, personal lines will experience steady growth in volume in the foreseeable months ahead, accompanied by modest growth in premium rates. While exercising caution with respect to distinct risks (coastal areas, mold, EPLI), many aspects of the American quality of life–including newer, better built and higher-value homes and cars–speak well for the future profitability of personal lines coverages.

There are excellent opportunities for aggressive agents who know their insureds and communities well, and who eagerly embrace their role as comprehensive risk management specialists.

There is much to gain in keeping things personal.