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How Advisors Can Help Clients Understand Rising P&C Insurance Rates

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What You Need to Know

  • Those who own properties worth more than $1 million saw average rate increases of personal lines insurance of 8.2%.
  • COVID-19 reduced driving but oddly, of those who did, fewer people wore seatbelts.
  • Climate change, and the rise of wildfires and hurricanes, have increased property damage claims.

After the onset of COVID-19, financial advisors were faced with an unprecedented challenge: help clients navigate economic uncertainty brought on by a global pandemic. Amid all the unknowns, advisors became trusted confidants and relied on their knowledge of previous market volatility to guide clients through uncharted territory.

Now, just over a year later, financial advisors are stepping up to the plate again, helping clients understand their fiscal outlook in a post-pandemic world. To help maximize clients’ financial futures, it’s critical for financial advisors to maintain a holistic view of the factors that can impact their clients’ overall wealth management strategies — including insurance coverage and associated price.

According to a recent report from MarketScout, the composite rate for personal lines insurance — that is any kind of insurance that covers individuals against loss that results from death, injury, or loss of property — increased by 6.3% in Q4 2020. But affluent homeowners seem to be the most impacted, as those who own properties worth more than $1million saw average rate increases of 8.2%.

Depending on clients’ exposure to certain types of losses, for example hurricanes or wildfires, and/or loss experience as well as other rating factors, increases could be much steeper in the current environment.

As advisors look to guide clients going forward, here’s what they need to know about the hardening insurance market.

Rate Increase Drivers

Several elements are contributing to the rate increases in the personal lines insurance market, pandemic-related and otherwise.

To start with pandemic-related behaviors, take recent changes in driving. Due to government-imposed stay-at-home orders earlier in the pandemic, fewer people were on the road — but those who were driving tended to engage in riskier behaviors. According to a study conducted by the National Highway Traffic Safety Administration (NHTSA), people were found to be less likely to adhere to even simple safety measures like wearing a seatbelt during the early days of the pandemic.

Notably, the NHTSA found that the rate of passengers unbelted during a vehicular incident jumped to 41% during Q2 2020, up from around 25% prior to COVID-19.

Such unsafe behaviors have contributed to a rise in severe injuries on the road — namely those involving insurance claims exceeding $3 million. As a result, pressures on excess liability rates for auto have increased.

Home repair costs are another element at play. Over the past few years, supply chain disruptions, spikes in demand, trade wars and other factors have all contributed to increases in the price of source materials.

To illustrate this point, consider the cost of framing lumber, a common home-building material. From 2008 to 2020, the cost per 1,000 board feet of framing lumber increased by nearly 155%, according to Fastmarkets RISI.

That said, home repairs — and cost hikes — involve more than just source materials. The introduction of new technologies into refrigerators, dishwashers, cooktops and the like have contributed to higher replacement costs for home appliances as well.

Exacerbating matters further, natural disasters are becoming more frequent and severe. From extreme weather events — such as Atlantic hurricanes or Pacific wildfires — to smaller, but more frequent events — including wind and hailstorms impacting the Midwest — storms are intensifying and increasing in number across the country.

As a result of these and other factors, property damage-related insurance claims have become more expensive, and homeowners insurance rates have risen in tandem.

As the risk landscape continues to evolve, it more important for clients to secure not only the insurance coverages they need, but also the appropriate limits. While rising rates can add to clients’ policy costs, the financial benefit that is provided by having appropriate coverage in place far outweighs any adjustment in premiums.

With a deeper understanding, advisors can educate clients on the long-term value of securing the proper insurance coverages and limits, despite any increased short-term costs.

Fran O’Brien is division president, North America Personal Risk Services, Chubb. Reach her at [email protected].