INTRODUCTION
In the past decade, the homeowners’ insurance market has transitioned from relative stability to significant anxiety and dispute. In the early 1990s, several sections of the country experienced heightened awareness of the risks associated with natural catastrophes prompted by earthquakes on the West Coast and hurricanes in the East and Gulf Coast regions. Insurance costs increased markedly, while coverage accessibility diminished in the highest-risk regions. These changes unaffected other areas, and market conditions began to stabilize in disaster-prone regions by the late 1990s.
Nonetheless, several states’ new issues were linked to the rise of hazardous mold claims, weather-related damages, and other economic variables. The escalating expense and decreasing accessibility of homeowners insurance has emerged as prominent issues in numerous regions of the country.
Several factors have been attributed to the negative trends in price and availability, with insurers and consumer organizations presenting differing views on the underlying causes. Among the asserted causal factors are:
• Escalating claims costs;
• Under-pricing by insurers during the mid to late 1990s;
• Poor investment decisions by insurers;
• Loss shocks that have diminished insurers’ surplus and capacity; and
• Ambiguity regarding emerging risks such as mold.
THE EVOLUTION OF HOMEOWNERS INSURANCE
It is beneficial to commence with a succinct overview of the homeowner’s insurance policy, including current adjustments to coverages and other customer options. The primary innovation of the home multiperil policy, introduced in the 1960s, was the consolidation of liability and property perils, offering more extensive coverage that had previously required separate policies and endorsements.
The notion of bundling risks and expanding coverage has propelled product development for the past forty years; however, the threat of catastrophes and emerging risks may compel insurers to reconsider this approach. Simultaneously, customer perceptions and legislative limitations may hinder insurers’ attempts to amend homeowners’ insurance policies, including the unbundling of wind danger in the absence of state wind pools.
Homeowners’ plans often encompass only abrupt and unintentional property losses. Mold infestations typically do not result from abrupt and inadvertent water releases; hence, most Mould claims will likely be rejected from coverage. This has resulted in conflicts between insurers and insured parties, prompting insurers to elucidate coverage parameters.
PRICING AND AVAILABILITY OF COVERAGE
Our investigation centres on homeowners’ multiperil insurance, the predominant type of residential property coverage. We initially examine homeowners’ insurance pricing trends, highlighting numerous recent reports of insurers enacting rate hikes across multiple states. Subsequently, we analyse various indices of coverage availability. The cost and availability of homeowners insurance have emerged as critical concerns in several states. This section assesses trends across multiple national, state, and sub-state market outcomes.
PRICES
To ascertain the price of a commodity or service, it is essential to define its nature. Initially, as outlined in Section II, there are various fundamental policy types for homeowners’ insurance, with the HO-3 form being the most prevalent. The premium for insurance will fluctuate based on the value of the insured property and the selected policy limits.
Specific endorsements (which enhance coverage) and exclusions (which restrict coverage) may alter individual plans, both of which will influence the premium. Certain pricing metrics apply across various policy types and coverage quantities. As a result, these measurements will be influenced by alterations in policy types and coverage quantities acquired, in addition to fluctuations in the actual price of coverage.
AVAILABILITY
The second component of the equation is the accessibility of insurance. Availability is more subjective and challenging to quantify than pricing. For most homeowners, the issue may pertain to the quality of available options rather than an inability to secure insurance from any provider. A homeowner may encounter challenges in securing coverage from a preferred insurer and/or obtaining the desired extent of coverage. A limited selection of insurers may lead to increased premiums, as those with less rigorous underwriting criteria typically establish higher pricing to mitigate the elevated risk associated with their portfolios.
FACTORS AFFECTING THE SUPPLY OF INSURANCE
Several factors are anticipated to affect the availability of insurance, some more apparent than others. This section examines changes in three factors anticipated to significantly influence the supply of homeowners insurance: claim costs, profitability, and market structure. It also addresses further challenges and changes related to market conditions.
LOSS COSTS
We initially examine the loss costs or claims expenses spent by insurers, which should be the primary determinant influencing the pricing and accessibility of insurance. Assessing loss cost trends in homeowners’ insurance poses a unique problem due to the impact of weather-related incidents. A single storm or a succession of storms might result in a surge of losses in one or multiple states. Consequently, homeowners’ losses may fluctuate considerably from one period to another. It is essential to differentiate long-term trends from short-term fluctuations in losses attributable to homeowner’s risks.
PROFITABILITY METRICS
Insurers analyse the fundamental trend in loss costs when establishing rates and make necessary modifications to ensure that premiums collected over time adequately cover the expenses of providing coverage. Insurers may occasionally postpone substantial rate increases when the underlying trend in loss costs is ambiguous. Competitive pressures may inhibit substantial rate rises, at least temporarily.
Regulators may also impose limitations on rate hikes. Consequently, insurance costs frequently trail behind the escalation of claim expenses. Nevertheless, if insurers incur substantial operating losses (i.e., negative income) across multiple years, there will be mounting pressure to restrict the availability of insurance and elevate rates. Insights can be derived by analysing frequently employed metrics of insurer profitability over time.
This paper examines various measures outlined below.
• Loss Ratio: the quotient of losses and premiums
• Combined Ratio: the sum of losses and expenses divided by premiums
• Operating Ratio: the sum of losses and expenses, less investment income, divided by premiums
• Profit on Insurance Transactions: net income divided by premiums
Return on Equity: net income divided by Equity, usually called surplus or net worth.
MARKET STRUCTURE CHANGES
Analysing the homeowner’s insurance market structure is crucial, as it may provide insights into competitive pressures on insurers to reduce or refrain from raising rates, even if such prices are insufficient to cover all expenses. Existing firms can influence prices and contract conditions in a highly concentrated market with hurdles to entry for new enterprises.
Although homeowners’ insurance is generally a uniform product, contracts’ specific terms and conditions differ slightly among companies and states. Insurers exhibit other disparities in their distribution and insurance servicing. In a competitive landscape, no one firm or coalition of firms acting together will possess the authority to dictate contract terms or prices. The capacity to establish contract conditions is significantly crucial. Certain insurers may impose more stringent limitations on Mould coverage in a competitive market than their counterparts. The buyer would determine the optimal combination of coverages and pricing that maximized their satisfaction. If insurers wielded market power, they could systematically limit Mould coverage, diminishing consumer options.
