As the death toll from the early August wildfires that left much of the Maui town of Lahaina in cinders continued to mount, so too did the estimates for “covered losses” from the fires.
Covered losses are what insurance companies will be on the hook for once all the claims have rolled in. That total bill, estimated to be in the billions of dollars, could lead insurance companies to hike premiums for property owners and drivers far beyond Hawaii, experts have warned.
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Recent fires and other natural disasters in other states could add to premium woes as well.
“We probably won’t know the numbers [from Maui] for a good six months,” Marty Stauffer, owner of the Washington state-based insurance brokerage Stauffer Insurance, told the Washington Examiner. And this could lead to rate hikes down the road.
“Any of those increases, they’ll be hitting in 2024, 2025,” he predicted.
At least 115 people were declared dead in the fires, and over 1,000 were still missing or unaccounted for at press time. Lahaina was an expensive and highly insured area. Stauffer rightly called it the island’s “tourist central.”
Estimates for total insurance liability and claims have climbed as more news of the extent of the devastation has rolled in. Moody’s initially pegged covered losses at about $1 billion. Now, it predicts the total will be more in the $3 billion-$4.5 billion range.
The latest Moody’s estimate could end up being too low. The Hawaii State Bar Association has opened a natural disaster legal hotline to offer free legal advice on how to deal with insurance companies, and the State of Hawaii Insurance Division is throwing its weight around as well. A SHID memo has asked insurance companies to lengthen the claims window by 60 days, for instance.
Lahaina was full of high-value properties, and Hawaiian building costs are, metaphorically, through the roof. A February analysis by the website TheStreet had construction costs in Hawaii as the highest in the nation, with the “total building costs for land, construction & other [at] $551,145” per home. The second highest was California at $494,859 per home, over $56,000 cheaper.
Stauffer said real estate will not be close to the whole bill, from the perspective of insurance firms. Lahaina also had many expensive cars that burned, life insurance claims were mounting, and many businesses insured their income against losses from natural disasters.
Still, one expert said that the total national picture for insurance policyholders might not be so dire as the current headlines would lead us to believe.
When the Washington Examiner asked Jerry Theodorou, director of the R Street Institute’s Finance, Insurance, and Trade Policy Program, if Maui’s fires would lead to higher insurance premiums, his answer was conditional.
“It depends on the magnitude of losses in Q3 and Q4,” he said. “Through the first half of 2023, insured U.S. natural catastrophe losses were under $10 billion, which is below the average in recent years. The quarter with the most losses is historically Q3, and we are still in the middle of Q3.”
Theodorou admitted, “The Hawaii fire and Tropical Storm Harold in Texas are major loss events,” but insisted, “whether there will be rising rates on homeowner insurance policy renewals depends on how the remainder of the year shapes up.”
He spelled out two scenarios: “If the total natural catastrophe loss for the year exceeds the long-term average, there will likely be rate increases, with the Hawaii fire a contributor, but if we have a light September (and end of August) and Q4, it is not a foregone conclusion that there will be rising rates broadly.”
Then there are the wildfires currently blazing in many states and making life difficult for insurance brokers.
When the Washington Examiner interviewed Stauffer in a coffee shop on Aug. 23, he was not allowed to write new policies for PEMCO Insurance, for instance. PEMCO policies were available in some parts of Washington but not his Whatcom County, in the state’s northwest corner, straddling Canada. That’s due to current or recent blazes in the area. And Nationwide was not allowing any new policies at all in the state, he said, until temperatures cooled down.
National disasters aside, Stauffer said that he had actually seen a few encouraging signs for his clients recently, “But what we’re currently in is called a hard market.”
He said many insurance companies are “trying to protect themselves from loss” after having “taken too many years of losses in a row.”
Insurance companies can try to pass some of those losses onto their customers in the form of higher premiums, and many of them are doing that. But they run into problems.
One barrier is state insurance commissioners, who tell insurance companies, “You’re only allowed to make x amount” per year. That can make it harder to offset loss years, Stauffer said.
Still, some states can squeeze insurance companies so hard that their residents suffer from a dearth of insurance providers.
“A lot of companies have gotten out of the state of California for the time being,” Stauffer said.
With that in mind, many states’ insurance commissioners are allowing increases in premiums, sometimes in increments of 25% per year.
In fact, Stauffer was ecstatic when he recently saw that one insurance company was “only asking for a 6% increase” from the Washington state insurance commissioner for next year.
He would like to see prices come down. But in some ways, he thinks that rising insurance premiums are simply catching up to the effects of inflation and other changes in the market.
Take car insurance. “Auto body rates went up and glass rates have gone up,” he said. And these increases in labor and materials are going to be reflected in the size of claims.
Bumpers are a real issue too. With old metal bumpers, small collisions were often dealt with easily, by buffing it out, at a cost that was too low to bother with a claim. That is no longer the case with the plastic bumpers with sensors, and more, on current cars.
“What would have been a walkaway is now, at minimum, a $5,000 to $10,000 claim,” he said.
The price of reinsurance, or insurance for insurance companies, has also been pushing up premiums.
“Reinsurance now costs insanely more than it used to cost,” Stauffer said.
Those costs could either go up or down, depending on how claims for the rest of the year shake out.
“Reinsurance costs are established shortly in advance of Dec. 31, which is when reinsurance treaties renew,” R Street’s Theodorou said. “It is too early to know what will be the result of the Dec. 31/Jan. 1 reinsurance renewal negotiation. If the catastrophe load proves light for 2023, reinsurance rates may go down. But if reinsurers are hit by large, higher than average losses, reinsurance cost may rise, with the rise passed on to primary insurers.”
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If the past is prologue, those insurance companies will then turn around and try to pass an increase onto insurance policyholders, and competition between providers will only do so much to offset the increase.
Looking back over the insurance market of the past few years, Stauffer lamented, “The options to shop around have become more limited and more difficult to obtain.”
