Catastrophe and Claims Trends
You can’t turn on the news these days without hearing about a major weather event — wildfires, hurricanes and our new favorite curse word, “derecho.” Our friends from Holborn, Executive Vice President and Branch Manager Tom Frank and Senior Vice President Greg Kaiser, joined us at the WRC 2021 All Manager Meeting to discuss catastrophe and claim trends from a global basis down to what your mutual can do to stay ahead of the trends.
Global Catastrophe Activity
In addition to the August 10 Midwest derecho, 2020 brought a record number of severe convective storm and wildfire losses, as well as a record number of named storms during the hurricane season. 2021 has had three global events alone that aggregated to $50 billion (Hurricane Ida, Winter Storm Uri and European flooding). Not only are we seeing more events, but also these events are occurring in areas with more insured value, such as in coastal and urban areas. The cost of claims is also increasing due to increases in labor, materials and legal costs.
Other Claims Trends
A key trend affecting the insurance industry is social inflation. Social inflation is a term created to explain rising insurance losses above the normal rate of inflation. The growing loss amounts are due to increasing litigation, more plaintiff-friendly juries, and exceptionally high verdicts considering the circumstances of the claim (known as “nuclear verdicts”).
Some of the reasons for social inflation and trends include public opinion, change in environment and the pandemic. Juries are acting more on emotions and often are desensitized to the value of money, resulting in plaintiffs being awarded higher payouts. Advertisements discouraging plaintiffs from accepting settlements or changes in state statutes make for a change in legal landscape. Finally, the pandemic did not see a decrease in cases, however the processing of the cases slowed drastically, leading to additional expenses.
WRC Loss History
Dialing in from the global trends to a more regional view, WRC’s client states and the Midwest in general have seen their fair share of CAT events in the last 10 years. Wind/hailstorms, tornadoes, snow load and dare I say it again … derechos. WRC is a reflection of our clients’ activity, so in these years, WRC relied heavily on our CAT Occurrence and CAT Aggregate reinsurance contracts. WRC, Holborn and our global reinsurance partners looked at where we could adjust our 2021 contracts. In the end, the retention on WRC’s CAT Excess of Loss contract increased from $3 million to $4 million while also adding a $3 million annual aggregate deductible. The CAT Aggregate contract retention increased from $8 million to $12 million. These changes have increased the amount of catastrophe exposure now being retained “net” by WRC.
Stay Ahead of the Trend
Exposure growth, more intense and prolonged weather patterns, and inflation are leading to higher frequency and severity of losses. Demand for claims adjusters and the cost of raw materials is likely to surge post-event. Two ways you can stay ahead of the trend include rate increases and deductible shifts. Continuous small (annual or bi-annual) change is a good goal. We are all part of this interconnected industry. The decisions we make related to our companies filter up, around and all over the global market.
Tom and Greg included many slides and stats in their presentation. We encourage you to look at that information on the WRC secure website (go to Documents > Operation Assistance > All Manager Meeting Materials > 2021 All Manager Meeting) and share with your directors.