Insurance Industry in the USA: Historic Loss for Home Insurers Due to Natural Disasters and Inflation

The US homeowners insurance sector experienced the largest underwriting loss of this century last year, driven by a toxic mix of natural disasters, inflation, and population growth in vulnerable areas, which placed immense pressure on a crucial financial market. Homeowners policies led to a net underwriting loss of $15.2 billion last year, according to figures from rating agency AM Best. This marked the worst loss since at least 2000 and more than double the previous year's deficit. These numbers highlight underwriting conditions that have triggered a retreat of US insurers from disaster-prone areas, either through market exits or price increases, creating an affordability crisis for many homeowners. The report noted that growing populations in regions most prone to natural disasters are a key factor. Census data reveals that six states heavily affected by extreme weather, including California and Texas, accounted for half of the country's population growth in the 2010s. "The industry faces rapidly increasing coverage demands while insured losses are skyrocketing," said Robert Gordon, Senior Vice President for Policy, Research, and International at the American Property Casualty Insurance Association, a trade group. "Not only are more homes being built in high-risk areas for natural disasters, but these homes are also increasingly expensive to repair and rebuild as inflation has driven up the costs of labor and materials." The past year was relatively calm regarding hurricanes but particularly severe in terms of heavy rainfall and other extreme weather events deemed "secondary" by the insurance industry. Globally, there were 37 separate events each causing over $1 billion in insured losses, most of them in the US. Many insurance experts argue that global warming is making storms, floods, and wildfires more extreme. Sridhar Manyem, Senior Director of Industry Research and Analysis at AM Best, stated that the "increasing frequency and severity of weather-related losses present a significant uncertainty, affecting both the insurance and reinsurance markets." AM Best's net underwriting gain measure shows premiums minus losses and costs, and net of reinsurance. Such performance, along with investment returns, significantly contributes to insurers' profits. Another major constraint for US insurers is the requirement in some states, such as California, to have their rates approved, leading to delays. In the UK, where weather-related claims hit record levels last year, insurers can quickly reprice to keep up with inflation. "If insurers cannot correctly price business in a timely manner, markets deteriorate rapidly," said Gordon of the APCIA. He called on all stakeholders to "work together" to put the industry on a sustainable footing. Sridhar Manyem of AM Best said US state regulators are "caught between a rock and a hard place" as they attempt to make insurers' rates more permissive to prevent an exodus from the local market, yet at the expense of households. "They want to attract more insurers or at least maintain the current market and create a healthy market while balancing the affordability issue for consumers.