The impacts of inflation: uncertainty and unmodeled losses

This post is part of a series sponsored by CoreLogic.

Insurers affected by the damaging track of Hurricane Ian in Florida in late September 2022 faced operational, regulatory, and legal requirements to make accurate projections of the ultimate financial cost of damage. Accustomed to using catastrophe risk models to project their ultimate losses, the uncertainty limits on their loss estimates were considerably higher for this event. While hurricane loss models are capable of estimating damage and insured losses to buildings and assets with some known degree of certainty, there are other sources of loss that are less certain.

These uncertainty factors are called post-loss amplification factors. These include a demand surge factor, i.e. a short-term rise in prices driven by the extraordinary costs of importing outside workers and materials, and cost inflation factors arising from regulatory issues such as the allocation law benefits (AOB) in Florida. . These post-loss amplifying factors have plagued the Florida insurance market for many years and have gradually worsened, culminating in a seemingly endless upward spiral of Hurricane Irma claim costs in 2019.

Recent levels of historically high inflation fueled by tight material supplies and high energy costs have contributed to significant increases in the cost of everyday goods and services, with consumer price inflation peaking recently. less than 10% earlier this year. Labor shortages also remain a problem, with National Federation of Independent Businesses reporting that hiring is as difficult as ever.

The costs of construction materials and labor used for reconstruction have risen faster than headline inflation, with levels just below 15% in early 2022. We can see in the chart below that these costs have experienced an even steeper increase in Florida.

CoreLogic loss estimates were calculated using the most recent values ​​for rebuild costs. The problem is that insurers or brokers may be looking at calendars or values ​​from twelve months or more ago that could be undervalued with little or no future inflation built into the calendar. Costs to insurers are incurred once the repair is complete. As of November 22, 2022, almost 50% of insurance claims were still open and 25% were still open to January 20, 2023. More expensive claims take longer to repair, and inflation drives up final costs. This delay is even greater for reinsurers.

In 2017, Florida had a significant building code change for existing buildings that required an entire roof section to be replaced when 25% or more of a roof section was damaged and where there were errors with permits, installation, or the inspection.

Assignment of benefits is an established Florida practice that allows a property owner to hire a contractor to repair their property and assign the benefits of their insurance policy to the contractor in lieu of direct payment. Designed to provide agility and speed for homeowners seeking repairs to their property, the addition of attorney settlement fees to the claim has increased settlement costs for insurers and ultimately increased costs. for homeowners. In May 2022, the Florida legislature implemented amendments to the AOB laws, and the effectiveness of these amendments has not been proven.

Revised 2017 regulations on AOB, such as reduced claim windows, cancellation pricing, and contingent fees, will have a significant cost-reducing impact only if insurers can prevent dubious actors from contacting their customers and start proactively to handle claims resolved early. Other reforms enacted by the emergency legislative session have now (at least in the future) prohibited the ability of policyholders to allocate their policy benefits to 3^rd parties and restricted the ability to recover legal fees. However, the legislation is not retroactive, so Hurricane Ian claims could still be subject to AOB inflated losses.

Hurricane Ian and housing: in numbers

CoreLogic estimates that nearly 900,000 homes were subjected to hurricane force winds, and 600,000 of those were subjected to strong Cat 2 or Cat 3 wind speeds. According to the Florida Office of Insurance Regulation, approximately 475,000 residential claims were filed as of 20 January 2023, compared to 440,000 claims registered in November 2022.

The continued stabilization of these claim numbers may be evidence of improvements made to building code regulations for home hardening in the years following Hurricane Andrew (1991). This high volume of claims will be a test not only of the adequacy of recent AOB reforms in reducing overall repair/insurance costs for homeowners to repair/insure their homes, but also a test for insurers and reinsurers in handling claims. the uncertainty of determining the ultimate cost of Hurricane Ian.

For more information on the impacts of Hurricane Ian 6 months after landfall, see a recent CoreLogic webinar exploring the findings of a damage survey in Southwest Florida, including a detailed breakdown of modeled losses and what made this hurricane event so unique.

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