Intense hurricane season could translate into ‘expensive year’ for American insurers

Insurers in the United States may need to brace for a significant amount of loss costs this year due to the degree of severe weather events expected, according to the experts.

Hurricane Beryl kicked off the hurricane season with bang, hitting Texas harder than expected Monday with high winds and heavy rains, and leaving a wake of more than 2.7 million without power.

Weather projections indicate a potential for more wildfires during a particularly hot summer, while the National Oceanic Atmospheric Administration warned that the 2024 Atlantic hurricane season could be one of the worst in decades.

“We expect 2024, unfortunately, to be an expensive year, and that’s being driven by a couple things,” Kelly Rush, home risk director at data analytics firm LexisNexis, said.

While the financial impact of severe weather events is a “critical concern” for insurers every year, Scott Shapiro, KPMG U.S. insurance sector leader, added that other economic factors are exacerbating that.

“Insurers face compounded volatility in weather-related exposure, a term at KPMG we describe as the combination of near-term risks, such as geopolitical and technology-driven disruption, and longer-term structural changes to the U.S. economy, such as the energy transition and sticky inflation,” he noted.

Insurers are expected to be more conservative about risks as a result, and they may further increase rates — a major pain point already leading many Americans to forgo coverage altogether.

Weather severity getting worse

LexisNexis’ 2024 Home Trends Report points to an upward trend in loss cost, coinciding with increasing frequency and severity of severe weather events, over the past seven years. This includes hurricanes, wildfires, hailstorms and other “near-catastrophes” and weather-related high-loss events that “really put a strain on insurers’ financial resources.”

Although LexisNexis found that catastrophic loss costs for all perils decreased between 2021 and 2022, both Rush and Shapiro noted that the overall trend points to overall losses.

“We’re actually working on next year’s Home Trends Report as well, and we’re seeing similar results because both the loss costs and, in particular, severity have been increasing at such a high rate that has implications to the operations for insurers,” Rush added.

Ripple effect

With the “inflationary lost-cost environment” the United States currently finds itself in, some carriers run the risk of being “unprofitable to a certain extent,” Rush said.

“The problem is…the amount of rate being taken has lagged the actual loss costs that are being increased. The impact to a carrier is a drain of some proportion on their capital,” he noted.

A high loss and high catastrophic year, especially as inflationary pressures drive up replacement costs, can result in carriers becoming more cautious and seeking to take additional rate.

“Insurers diligently monitor losses through designated catastrophe codes and address uncertainties through various measures, including reinsurance, rate changes, coverage changes and portfolio management,” Shapiro said.

However, Rush noted that they may also reduce their capacity in high-risk areas such as California and parts of Florida, and this in turn causes consumers to have a more difficult time accessing insurance coverage.

“There’s a tendency for, when carriers have reduced capacity, [them] to increase certain deductibles, such as increasing a wind deductible or a hurricane deductible, and that actually adds additional risk exposure to a consumer,” Rush said. “So, what you see is an increasing cost that is being spread around in different ways.”

Prepare for the worst

Rush noted that with the way climate change is trending, increasing loss cost is something the insurance industry will “just have to prepare for.”

“It’s just the future of insurance, probably within the next 25, 50 years at the least,” he said.

However, he suggested carriers can brace for this in two ways: through financial preparedness and advanced analysis that help them to better understand the risks.

“One way to prepare is by doing catastrophic modeling,” he said. “There are various techniques that reinsurers [use] and various data vendors such as LexisNexis can provide data that helps a carrier run massive numbers of simulations to see what the impacts could be and what types of homes would be at most risk.”

Additionally, more carriers are beginning to use “extremely sophisticated, AI-driven machine vision inspection of a home” to understand the risk in extreme detail.

“But, over the next 25, 50, 100 years, I would expect the world to see increased weather phenomenon to result in increased insurance costs on average over the time period. Carriers either have to adapt or they’re going to be faced with some very difficult financial situations,” Rush said.

However, Shapiro emphasized that the onus is not on the American insurance industry alone.

“Addressing this complex situation requires collective efforts beyond the insurance industry, involving society as a whole… Prevention and mitigation efforts require the integration of technology, non-insurance specialists, and advanced analytics, while alternative solutions can include parametric insurance and investments in resiliency efforts,” Shapiro said.

The LexisNexis 2023 Home Trends Report sourced data from the firm’s internal proprietary sources, encompassing data from between 88 to 91 million homes in the USA.

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Rayne Morgan is a journalist, copywriter, and editor with over 10 years' combined experience in digital content and print media. You can reach her at rayne.morgan@innfeedback.com.