Homeowners Insurance Claims Cost Rising Rapidly, Study Says

The cost of homeowners insurance claims has been rising rapidly because of the combined effects of rising claim severity and increases in claim frequency, according to an insurance industry report.

A recent Insurance Research Council (IRC) study of homeowners insurance claim trends found that from 1997 to 2011, the average claim payment per insured home countrywide rose 173 percent, from $229 to $626. In 2011 alone, claim costs per insured home rose 27 percent. Over the entire study period, the annualized rate of increase was 7.4 percent.

In the study, “Trends in Homeowners Insurance Claims,” the Malvern, Penn.-based IRC examined separately claim trends for claims that were not related to catastrophic events and those that were related to catastrophic events.

Trends in average claim severity (the average claim payment per paid claim) for both groups were similar in some respects. For both groups of claims, countrywide claim severity rose almost 200 percent and ended the 15-year period in 2011 with similar values–$8,077 for noncatastrophe-related claims and $7,553 for catastrophe-related claims.

Significantly, however, the trend in catastrophe-related claim severity was much more volatile from year-to-year, with dramatic ups and downs over the study period.

Trends in claim frequency (the number of paid claims per 100 insured homes) were very different for the two groups of claims over the 15-year study period.

The frequency of claims unrelated to catastrophic events fell substantially from 1997 to 2005 because of a variety of factors. Since 2005, however, noncatastrophe-related claim frequency has risen at an annualized rate of 2.9 percent. Catastrophe-related claim frequency, while much more volatile, remained fairly flat through much of the period.

The study also examined the relative importance of catastrophe-related claims as a factor in overall claim trends and found that catastrophe-related claims played a significantly greater role in overall claim trends in the second half of the 15-year period.

Catastrophe-related claims made up 25 percent of overall claim costs countrywide from 1997 to 2003, on average, but 39 percent of overall claim costs from 2004 to 2011.

“Insurers face significant challenges in responding effectively to rapid growth in claim severity and increases in claim frequency, and in managing the volatility attributable to catastrophe-related claims,” said Elizabeth Sprinkel, senior vice president at the IRC. The IRC analyzed data from the Fast Track Monitoring System, representing 50 percent of the homeowners insurance market countrywide.