What Comes Next?

The damage is done.  The winds have calmed and the waters have receded.  The modeling firms rushed to be the first and loudest with their damage estimates.  Adjusters are writing checks, and reinsurers are measuring the dents in their balance sheets.  The financial impact could have been worse, for sure, but the 2017 hurricane season will be bad enough.  Now what happens?

Immediate post-hurricane is something of an uncertain time for underwriters, product managers and strategists.  The claims operation is running wide open handling the massive inventory of storm claims.  But the measures and analysis and planning that go into managing a book of business aren’t helpful in the days and weeks right after a storm. Typical loss ratio measures are, for a time, meaningless.  Even ordinary diagnostic ratios like retention and conversion are disrupted as the daily operations of agents and insureds are put on hold during the recovery.

Most of loss will show up in 2017 Calendar Year financials, either in payments or reserves, but what about next year?  It will take some time before the effects of a major hurricane really affect products and rates. 

In with the New

Think about what happens when 500,000 autos are totaled all at once in just a few counties.  Not now, as the losses are paid, but a year from now when those cars have been replaced with new, or at least newer models.  Business is booming for Houston auto dealers.  Model year drift is going to become model year leap in Texas.

New Cars; New Gadgets

Many of those replacements will be new cars with sensors and cameras and parking assist, all of which is expensive to repair.  Some will be used cars, inflating demand and pushing used values up.  PD and Collision loss severity, already growing, is going to ratchet up even faster in Texas and Florida.

Financial Stress

And what about the car owners? With 84 month financing available on $70,000 pickups, it’s a fair bet that many of those flooded cars were under water financially before the first raindrop.  Unless those borrowers were covered with Loan Gap coverage, their total loss settlements left some of them owing thousands on autos that no longer exist.  The solution for many will be a personal loan to cover the balance, or to roll it into the next auto loan, putting them even further upside down.  Uninsured damage to dwellings and contents pile on the recovery expenses.  Some consumers will resort to credit cards, home equity lines and FEMA loans that take years to pay off.  The added financial stress could rapidly depress credit scores for reasons that don’t necessarily increase auto insurance risk.

Dried out and back in the market

The autos that are properly totaled will be salvaged, dismantled and then crushed.  But more than a few flood damaged cars will be repaired and rebuilt, and will end up for sale on used car lots all over the country.  Vehicles with prior serious damage, a total loss, or other questionable title and ownership history tend to produce higher loss costs.  If you’re not already using a vehicle title history service or title score to underwrite new business, this might be a good time to look into it.

In 2018, long after the claims department has worked through the storm claims, product managers and underwriters will be viewing the impact of the 2017 hurricanes through the lens of trends and rate adequacy.  Some things to watch for:

  • Increased premium trend because of amplified model year drift. Recognize it in 2018, but don’t assume it will keep happening forever.

  • Increased PD and Collision severity because of increased repair costs on newer autos and increased used car values. Anticipate accelerating severity trends.

  • Credit score deterioration that is at least partly due to a weather event as opposed to an increase in risky use of credit. Might be appropriate to recalibrate credit scores.

  • More vehicles with compromised title histories. Don’t be the dumping ground for salvaged cars rejected by other insurers.

If you're not sure what it all means, give me a call and we'll figure it out.