Property claim cost drivers

Anyone who has recently completed a home repair or renovation understands that costs continue to rise. As a result, the costs of property claims are also much higher for insurers. Upon closer examination, a few key factors influence the change in the cost of a property claim. These are important for insurers to understand in setting up structures to improve claim management.

Cost of cleanup, repairs, and restoration

Property insurance losses, net of reinsurance, rose to $63.8 billion in 2020 from $54.2 billion in 2019, according to S&P Global Market Intelligence. This follows several years of increasing losses resulting from significant hurricane and wildfire losses. According to the Insurance Information Institute, both cleanup and repair costs involved in property claims rose significantly between 2012 and 2020. Water cleanup costs increased to an average of $4 to $7 per square foot. Most notably, home repair costs increased by 35.9% during this period. Much of the recent price increases are related to the side effects of the Covid-19 pandemic. As the number of people working from home increased, so did the demand for home renovations. As a result, key home repair materials such as lumber, plywood, drywall, roofing, and others experienced significant price increases. The below chart illustrates the dramatic increase in materials related to home construction over the past two years. Further exacerbating the cost increase is a related labor shortage among home repair contractors. The same increase in demand for contractors that led to the price increases also led to a shortage in available labor.

Cost of temporary housing

Temporary housing represents a significant portion of costs insurers bear in a property claim. With shortages in both materials and labor, the amount of time a homeowner needs temporary housing also increases. Temporary Housing inventory and costs have mirrored the overall housing industry by tightening in rural and coastal areas since the pandemic started due to increased demand. Many landlords of vacation homes have faced inconsistency because of safety regulations and individuals’ ability to travel. Some vacation homeowners have begun transitioning their property into a corporate rental program. These changes put significant pressure on the costs for temporary housing in markets that are very susceptible to large-scale loss events, such as coastal areas. As a result, the overall temporary housing costs for insurers increased by both cost and time duration.

Insurer mitigation strategies

The increasing cost of claims should cause concern for insurers. As prices increase and labor availability decreases, insurers face claim cost uncertainty. Therefore, it is important for insurers to have access to real-time price changes and develop as many contractor relationships as possible. Working with construction consultants can help mitigate some of the cost uncertainty with these times. Having artificial and predictive intelligence tools also helps insurers identify both trends and outliers. These tools help find fraud and ensure consistency in prices across property claims. Without taking action, over time, insurers will see premium profits eroded by claim costs.

As the Covid-19 delta variant continues to spread throughout the US, supply chain and labor disruptions will likely continue. Managing insurance claims in this turbulent environment is challenging. In hopes of stabilizing the claim management process, insurers must equip adjusters with as many tools as possible. Finally, it is important to keep customer service in mind. While the cost of property claims may increase significantly in the short term, insurers that prioritize quality customer service to claimants will most likely retain and gain more clients than competitors.