US home insurers suffered their worst underwriting losses this century in 2022, as a combination of natural disasters, inflation and population growth in at-risk areas put immense pressure on the vital financial market.
According to figures from rating agency AM Best, insurers providing policies to homeowners experienced a net underwriting loss of $15.2 billion last year. This figure is the worst since at least 2000 and more than double the previous year's losses.
These figures highlight the challenging underwriting conditions that have prompted US insurers to withdraw from disaster-prone areas. This has manifested in the form of insurers exiting markets or raising prices, leading to an affordability crisis for many homeowners.
The report identified rising populations in areas vulnerable to natural disasters as a significant factor, citing census data showing that six states prone to severe weather, including California and Texas, accounted for half of the country's population growth in the 2010s.
"The industry is facing rapidly escalating coverage demands while insured losses are skyrocketing," said Robert Gordon, senior vice-president of policy, research and international at the American Property Casualty Insurance Association (APCIA), a trade body. "Not only are more homes being built in areas that are at high risk for natural disasters, but these homes are increasingly more expensive to repair and rebuild as inflation has driven up the cost of construction labour and materials."
While 2022 saw relatively few hurricanes, it was a particularly bad year for severe rainfall and other extreme weather events deemed "secondary" by the insurance sector. A record 37 separate events globally resulted in over $1 billion in insured losses, with most occurring in the US. Many insurance experts argue that global warming is exacerbating storms, floods and wildfires.
Sridhar Manyem, senior director of industry research and analytics at AM Best, stated that the "increasing frequency and severity of weather-driven losses is a major uncertainty that is influencing both insurance and reinsurance markets".
AM Best's net underwriting profit measure reflects premiums less claims, costs and net of reinsurance. This performance is a significant contributor to insurers' profits alongside investment returns.
Another significant constraint for US insurers is the requirement in certain states, such as California, for their pricing to be approved. Delays in obtaining these approvals are a major concern. In contrast, the UK, where weather damage-related claims hit record highs last year, allows insurers to adjust prices rapidly to keep pace with inflation.
"If insurers cannot appropriately price business in a timely manner, markets rapidly deteriorate," said APCIA's Gordon. He urged all stakeholders to "work together" to ensure the sector's long-term sustainability.
AM Best's Manyem highlighted the challenging situation faced by US state regulators, who are "caught between a rock and a hard place". They aim to attract more insurers or retain the current market to create a healthy marketplace while balancing the affordability issue for consumers.
