In general, property insurance is a function of the replacement cost on structures, not their market value. On average, building materials have been increasing at an annual inflation rate of about 4% each year for the past 4 to 5 years. If you carry replacement cost coverage on your home this means that contractually, you are obligated to insure the building for 100% of its projected replacement cost. A 4% inflationary increase in materials will translate to a similar increase in the coverage on the building. (You would not be required to insure to 100% of reconstruction value if you had an actual cash value policy, but that carries its own challenges.) It is important to remember that insurance is the cost of rebuilding, NOT market value.
A second item that comes into play are other inflationary pressures. When fuel runs near $4.00 a gallon, insurance companies have to pay these higher costs just like you are me. Carriers do not escape increasing healthcare costs or wages adjustments. These factors play themselves out in rate increases. These would be in addition to the inflationary impacts of the costs of paying more for losses.
The next item is, in fact, the essence of insurance. This is when carriers pay for losses. For example, in 2009 Travelers handled about 5000 claims for the entire state. Contained within these losses, in addition to the normal fires, broken pipes, etc are Catastrophic losses. These are large weather events that cause collective losses in excess, typically, of $1 million. In 2009, Travelers paid about $5 million in CAT losses. In 2010, the total number of losses was over 17,000 and CAT losses accounted for a total of $34 million. 2011 had over 19,000 claims and CAT loss payments exceeded $41 million. So, 4 times the number of claims and 8 times the amount of CAT loss payments will account for some of the increases as well.
Finally, because the world is a very complicated place, is the issue of what is called re-insurance. This is coverage that insurance companies buy to protect them in the event of large losses. Typically, insurers will buy re-insurance for protection during CAT losses. So, when Hurricane Irene came up the coast, caused damage, the reinsurance coverage could have a $2 million deductible, so the carrier would pay the first $2 million in the loss and then they would collect on their reinsurance. The problem is that there are a limited number of reinsurance companies in the world. According to NOAA, 2011 was the costliest insurance year for losses, with 12 storms in the US causing losses in excess of $1 billion. Events like the tsunami in Japan even affect reinsurance rates.
There are tremendous pressures on rates from all different directions. All of the carriers with whom we do business are experiencing some, or all of these.