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Determining Rate Adequacy

Spring 2022 Issue

By Greg Gonnering, Vice President of Mutual Assistance

Rate adequacy and rate making are hot topics in the insurance industry. These terms relate to the determination of rates that insurance companies charge to make sure they are setting fair and adequate premiums.

It is no surprise that we are seeing a shift in the market with high inflation rates, increased costs of construction, and elevated claim and operation costs. How do you know if you’re rate adequate on your book of business? If your mutual consistently has an underwriting profit, you’re in good shape. However, you should still consider an annual rate increase to keep up with inflation. A general rule of thumb is that you want to see an underwriting profit in eight out of 10 years.

If you have not been seeing yearly underwriting profits, the good news is that you still have time to act.

Examine Current Construction Costs

One of the first steps the mutual should take is to examine the current construction costs and determine if your replacement costs policies are really showing current replacement costs on your homes. If they are not, you will want to adjust these coverages through larger inflation guard increases or by adjusting Coverage A to show at least 80% of the replacement value of that policy.

This is important because most insurance claims are partial losses and with the increased costs of construction, your claim costs have risen 20% or more. If you don’t adjust the value of the property, your mutual will pay more for partial losses, but won’t take in any additional premium to offset those costs.

Rate Review

Once you have your coverage set properly, then it is time to begin your rate review. The first and the easiest step is to examine your 10-year financials to see if your mutual has consistently made money or lost money. If you have more losses than profit, you should raise rates.

You also should determine why you are losing money. For that process, we recommend that you break down your losses by line of business to determine which area has been affected the most. WRC is here to help you in this process.

Take Action

Once you have determined how much you have lost and the main area affected, it is time to take action. With inflation, soaring construction prices and high costs of claims, many carriers are taking much larger rate increases than normal — some up to 15%. While that number may seem high, it is what some carriers believe is needed to remain competitive.

In addition to rates, you can impact your bottom line with deductibles and deductible credits. The industry is seeing a shift in the base deductible of $1,000 to $2,500, depending on the type of policy.

Wind and hail losses are the most common in the industry. With repair costs to these losses increasing 20% to 30% over the last few years, it is important that you increase your deductibles to reflect these changes.

A few recommendations for deductibles are:

  • Set a minimum of $2,500 deductible for wind and hail.
  • Set a minimum of 1% to 1.5% of Coverage A as your deductible for wind and hail.
  • Set a minimum base deductible at $1,000 or 1% of Coverage A.

We want to see your mutual succeed now and into the future. For assistance with these changes or to discuss your options in more detail, feel free to reach out to me and I will be happy to meet with your board.