The Courant ran an article on the trials and tribulations of coastal Connecticut homeowners seeking or renewing their property insurance.
The bulk of the story isn’t particularly surprising. For the past couple of years, insurers have been faced with some hefty reinsurance bills, have started paying more attention to their aggregations of exposure, and have been forced to face the likelihood that a major hurricane in the northeast, though extremely unlikely, would also be incredibly catastrophic.
Bob Hunter provides one of the consumer advocate opinions for the article…and part of it expresses a sentiment I agree with:
J. Robert Hunter, director of insurance for the Consumer Federation of America, [...] noted that reinsurance rates are coming down, so “I think the insurance commissioner has to look hard” at insurers’ rate increases and ask whether they can be lowered by getting a better reinsurance deal.
Speaking from first- and second-hand knowledge, in the past couple of years, getting a better reinsurance deal has been tricky. When challenged with some seeming irrationalities in treaty pricing, the feedback has been essentially, “we’re charging this because the market will bear it”. It’s an annoying answer, true, but it’s a necessary artifact of a free market. As a result, insurers have been forced to give some real thought to the risk loading in their rates and the economics and risk theory associated with purchasing cat cover.
However, reading between the lines in Bob’s comment, you can see an implicit criticism that could be made about insurers’ ratemaking processes. At many companies, ratemaking and reinsurance buying are discrete, mostly unlinked procedures. Because of timing issues (mismatch of implementation of rate changes versus the timing of treaty negotiations and the lag time in preparing rates, getting them approved, and getting them implemented), reinsurance costs are not always as tightly linked in insurance rates as they could be. In some cases, an insurer could be finally realizing increased treaty costs 9, 10, or 11 months after the treaty price was finally set.
That’s a problem given the expectation of some volatility in treaty costs.
I have the pleasure of working with one business whose products are mostly unregulated. Essentially, once we know what the new treaty costs are, I can plug in the updated figures into a set of spreadsheets, and generate all-new rates reflecting that revised expense assumption. The organization is flat enough that I can discuss the marketing/sales impacts of those proposed changes very quickly with the relevant parties. There are no rate filings to speak of…and so we can usually get revised rates in place at about the same time as the new treaty takes effect.
That’s a handy ability to have in environments when reinsurance costs are rising rapidly, as they were until recently, or when they start to ease, as should happen in a year or two if we continue to be lucky.
You’d think that insurance regulators in cat-prone areas would see the value of such responsiveness, and would work to streamline the rate approval process and encourage insurers to quickly act upon such revised assumptions as quickly as possible.