We’ve seen this before. Is now any different?
Around the year 2000, homeowners insurers were alarmed at the rising frequency of claims—particularly water-related claims—in a line already plagued with persistently high combined ratios.
Carriers went to work trying to drive down homeowners claim frequency and restore profitability to the line, and their efforts apparently paid off.
Homeowners statistical data reported to AAIS indicates that non-catastrophe claim frequency for owner-occupied policies fell from 5.7 claims per 100 house-years in 2002 to 4.1 in 2006, not counting claims for which no payment was made.
Similarly, data from the Insurance Services Office, Jersey City, N.J., made public by the Insurance Information Institute, shows a decline from 6.8 to 5.1 total claims per 100 house-years over the same period.
Over the same period, the combined ratio for the line, net of reinsurance, improved from 109.3 to 90.4, according to figures from the A.M. Best Co., Oldwick, N.J.
Several factors have contributed to the decline, according to expert observers.
“First of all, the decrease is partly due to increased deductibles,” says Steve Lehmann, president of Pinnacle Actuarial Resources, Bloomington, Ill. “Many companies have rolled up their deductibles, and many consumers have reacted to higher homeowners price levels by selecting higher deductibles.”
“There has been a shift to higher and higher deductibles,” concurs Jeffrey Kucera, a consulting actuary in the Chicago office of EMB America. “As a result, many of the losses are no longer covered under the policy.”
Besides the increased deductibles, which are common in the wake of soft markets, Lehmann and Kucera cite at least two other factors that could have a permanent impact on homeowners claim frequency.
One is the implementation of improved building construction, stepped up in the wake of devastating disasters like Hurricane Andrew in 1992.
“There is improved construction, which results in houses better able to withstand wind conditions,” says Lehmann.
Kucera adds that “as home technology and construction improve, we also have fewer fires and other types of [non-catastrophe] losses.” As a result, Kucera says, weather losses, other than those arising from catastrophes, appear to be declining.
“Another big factor associated with claim frequency is the introduction of previous claim surcharges,” says Lehmann, referring to the systematic implementation of higher rates for insureds and insured properties that had reported losses in the past.
“Over the past decade, most companies have introduced rating for prior losses in the homeowners line,” says Kucera. “This has sensitized insureds to reporting some losses, especially small losses, because they will receive a high premium.
“I think this is one of the very big reasons for the decline.”
Along this line, AAIS has filed a homeowners experience rating plan that allows an insurer to apply two separate premium modifications that reflect an insured’s loss history:
- A premium credit or debit that reflects the policyholder’s claims payment history and tenure with the company. (For purposes of determining the number of claim payments, the plan considers payments totaling $500 or more over a three-year period for certain perils described in the plan. Tenure is the consecutive time that the policyholder has had homeowners or equivalent coverage with the company or group.)
- A claim-free premium credit for qualifying policyholders. A policy is considered claim-free if the insureds had homeowners or equivalent coverage in place over the previous three years and no claims of any kind were paid under it.
Even though new trends may be in play during the recent decrease in homeowners claim frequency, old patterns may yet assert themselves. There have been cycles of claim frequency in past decades, with spikes in frequency followed by sharp declines, then a leveling off before the next spike.
“This long-term decline appears to have bottomed out,” says Lehmann. “We may see some long-term increases in claim frequency, and you need to consider that in your ratemaking.”
Another factor in the mix, one not seen for generations, is the potential for a sustained decline in home values and a depressed market for homebuilders and remodelers.
“In the past, valuations of property by insurance carriers have steadily increased,” says Gregory Jaynes, AAIS chief actuary. “With that, the increases in premiums charged due to increases in valuation of homes have generally outpaced increases in insurable losses per policy.”
According to Jaynes, that has allowed carriers and advisory organizations to file loss cost decreases under their homeowners rating plans in recent years.
“But,” he notes, “what happens if home valuations stall and frequency stops decreasing —or increases due to a recession?
“The current economic environment makes it all the more important to keep a watchful eye on changes in frequency, changes in severity, and changes in property values,” Jaynes says.
“AAIS watches these metrics as it makes changes to its programs.”
A cycle, or not? 
