Homeowners insurance companies are implementing rate increases, largely driven by anticipated rises in reinsurance rates and reinsurance attachment points, according to KBW analysts.
These adjustments are contributing to heightened volatility in earnings and varying impacts on individual insurers, against the backdrop of a challenging year of domestic weather events.
KBW analysts have identified a departure from the norm, as homeowners insurers augment premium hikes that typically respond to rising estimated replacement costs. The anticipated surge in reinsurance rates and attachment points is emerging as a primary driver of this trend.
The impact of these changes is expected to differ significantly among insurers, potentially impacting earnings volatility.
KBW anticipates that the enhanced spending on reinsurance coverage by national homeowners insurers may precede the eventual implementation of higher premium rates.
This financial strategy may exert short-term pressure on net margins as insurers recalibrate their risk management approaches.
Analysis by KBW reveals a consistent pattern across the top-10 homeowners insurance carriers, as July 2023 written rate levels exhibited year-over-year increases. These adjustments ranged from State Farm’s modest +2.6% to a substantial +23.0% for Farmers Insurance.
The wide range of rate changes is suspected to reflect the operation of “inflation guards” – mechanisms that automatically adjust premiums to approximate repair and replacement cost inflation, without requiring explicit rate changes.
The driving forces behind these rate adjustments are twofold. KBW attributes the accelerated rate increases to mounting apprehensions about climate change and the anticipation of heightened reinsurance costs. The recent spate of challenging weather events has underscored the industry’s need to reevaluate risk mitigation strategies.
Notably, nine of the top-10 insurers, based on their 2022 direct written premiums, witnessed renewal rate changes in July 2023 that surpassed their respective April 2023 adjustments.
