The Insurance Challenge Is Here

As I travel around the country visiting with clients and making industry presentations, I hear the same from almost every producer about the challenges in their businesses: not enough drivers, fuel costs, and materials cost rising faster than they can pass them on among the most frequent. But there is another shoe about to drop that may impact producers, both in business and personally: the availability and cost of insurance.

The popular business press has written about the insurance dilemma in California, a situation that is approaching crisis proportions as insurance companies have paid out billions for wildfire, mudslide, and earthquake damage. As a result, underwriters are curtailing business, and some aren’t writing new policies, while others are going further and not renewing policies as they expire. State Farm, which insures more homeowners in California than any other company, announced in May that it would stop accepting applications for property and casualty insurance in the state, but would keep selling auto insurance. A week after State Farm’s move, Allstate, California’s No. 4 property and casualty insurer, confirmed that it had “paused” selling new home, condominium, and commercial insurance policies in the state last year. Then No. 2 Farmers Insurance, which is headquartered in Los Angeles, said it put a cap on how many homeowners policies it will write monthly effective July. Geico switched its California operations to online-only last year, laying off branch staff, while Chubb and AIG, which insure expensive homes, said last year they were retrenching.

But California is far from alone. As I am personally experiencing in my home state of Louisiana, the entire Gulf Coast is suffering the same retrenchment in coverage availability as California, with Texas, Louisiana, Mississippi, Alabama, and Florida residents all facing the same issues. 

Take Florida, for example, which is a poster child for the insurance crisis in the southeastern United States. Effective this month, Farmers said it would stop selling Farmers-branded homeowners, auto and umbrella policies in Florida, which account for 30 percent of the company’s policies in the state. Some smaller companies have pulled out of Florida in the past year, and others have gone out of business. And to be sure, these are not just residential homeowners issues; commercial properties, including concrete properties, plants, and improvements, are facing substantial rate increases, if not outright refusals to renew policies.

How did this happen? Several things converged at once, and it is not just climate change. Some of them were beyond the control of either the insurance companies or their regulators. Wildfires in California and hurricanes in Florida produced lots of claims, while housing prices and bills for construction and repairs have gone up, making claims larger. And insurance companies have had to pay more for reinsurance; worldwide, average rates for reinsurance rose by a quarter last year and by another third this year, adding substantially to the premium increases.

Other wounds, though, are self-inflicted. Fraudulent claims pushed several small insurers in Florida over the brink, partly because state law made it easy for professional fraudsters to inflate values and win big claims by suing. The state Office of Insurance Regulation said last year that Florida accounted for 79 percent of the nation’s homeowners insurance lawsuits over claims filed, while making up only 9 percent of the nation’s homeowners insurance claims. The legislature has tightened the rules, but claims are still being filed under the old standards.

In California, the bigger problem has been a culture of keeping rates low at all costs. California is the only state that won’t allow insurers to use rising reinsurance costs to justify rate-hike requests. It is also the only state that won’t let insurers base their requests on projections of rising costs. Regulators look backward at claims experience over the previous 20 years, so even though climate change is likely to cause more losses from wildfires, mudslides and the like, the state excludes it from consideration.

So beware, and don’t be surprised if insurance cost increases become another important driver of producers’ fixed costs over the next couple of years.

Pierre G. Villere serves as president and senior managing partner of Allen-Villere Partners, an investment banking firm with a national practice in the construction materials industry that specializes in mergers & acquisitions. He has a career spanning almost five decades, and volunteers his time to educating the industry as a regular columnist in publications and through presentations at numerous industry events. Contact Pierre via email at [email protected]. Follow him on Twitter – @allenvillere.