In the aftermath two utterly destructive hurricanes, ongoing wildfires, and the end of the first year of a tumultuous administration, 2018 stands to see some interesting changes in the way insurance companies choose, or are forced, to go about insuring their clients. Shaped by climate change, regulatory actions, and more, here are four insurance trends that might affect consumers in the year to come.
A Possible Narrowing of Factors To Determine Car Insurance Rates
The car insurance premiums you pay every month are based on a host of familiar considerations—the value of the car you drive, your accident history, whether you've ever had a DUI. But then come the less obvious factors, which insurance companies say align with risk level, and so are justified for use in setting rates. Two of those data points have just been banned from consideration in New York state, and that move could have national repercussions in the year ahead.
This December, New York Financial Services Superintendent Maria T. Vullo disallowed insurance companies from using education and occupation as factors that affect auto-insurance rates, contending that their use unfairly discriminates against consumers who have low incomes, low levels of education, or both. Insurers have 180 days to comply with the new ruling, and Allstate and Liberty Mutual Insurance have already taken steps to eliminate the use of these factors in their risk assessment processes.
What To Look For: Some New York consumers may see insurers in the state, reduce their premiums, or at least raise them less than might otherwise be expected. But the move could also have a ripple effect across the country, according to Maxime Rieman, ValuePenguin’s Senior Insurance Analyst. “The discussion regarding which factors are permissible to use when setting rates has been active in a number of regions, and New York’s new regulation may cause other states to reassess their policies regarding insurance pricing,” she says.
After Wildfires, Restrained Premium Increases, But A Risk of Losing Insurance
Insurance companies are still digging out from $10 billion or more in claims from rampant wildfires in California, not to mention other weather-related losses in 2017.
Since many of those conflagrations have set records for losses and claims, the expectation might be for an immediate and sharp rise in premiums, especially in areas that are expected to remain prone to fires and other weather-related disasters.
However, a single year alone is not an allowed data point to raise homeowners’ rates, at least in California. Instead, insurance companies in the state must consider losses for a 20-year assessment period, over which they'll estimate the long-term risk associated with insuring homes in a given region and adjust rates accordingly. This means homeowners in areas at risk of fires should certainly expect higher rates in the coming years, albeit less drastic than they may have feared.
What To Look For: First, what Californians, at least, don’t need to look for are hikes in their rates attributed entirely to the 2017 wildfires in their state. That doesn’t rule out such hikes, but to make them regulators will require a case that involves decades of data.
That said, homeowners (in any state) affected by wildfires or other such events may not be out of the woods, so to speak. While state insurance regulators across the country can and do limit how much insurers can increase your rates in a given year, they don't prohibit insurance providers from dropping your coverage altogether.
In the words of ValuePenguin’s Rieman: “Premiums are just one method by which insurers can adjust their risk profile. If an insurer feels it’s over exposed to risks in a certain city or county, the company may also decide to not sell new policies or renew existing coverage in that region.”
If, for example, they determine that they're overexposed to losses in a specific region, say, southern California, they may refuse to renew their policies in that region. If a large insurer in a region decides to drop coverage, residents will be left scrambling to find coverage from another provider, and that new provider probably won't come with lower rates.
The effect these fires will have nationwide is still unclear. However, if the nation sees homeowners lose coverage due to fires outside of their control, we may see homeowners across the country fighting for regulation on rate increases and dropped policies.
Continuing Uncertainty Around Flood Insurance
Damage from the hurricanes that hit Florida, Louisiana, Texas and Puerto Rico helped create the costliest hurricane season on record, with some $370 billion in damages. Those costs, in turn, have created claims in the billions of dollars to the The National Flood Insurance Program (NFIP), the federal program that provides regulated flood insurance to residents in flood-prone areas.
This unusually severe year for flooding coincides with a deadline to renew the NFIP’s funding and premiums, which are controlled by Congress. And even before 2017’s Harvey, Irma and Maria struck, the program was troubled, mired in more than $20 billion of debt from claims in 2016 and earlier.
Efforts to renew the program have been stunted by its challenging politics. Legislators from flood-prone states want reforms that will limit the program’s premiums and prevent the restriction of coverage to high-risk areas. Some also promote a bigger role for private insurers. Meanwhile, environmentalists contend that the program encourages irresponsible construction along floodplains, which in turn leads to further damage.
What To Look For: As we went to press, Congress was facing a December 22 deadline to renew the program, the second such extension in which to do so, and many expected that no agreement would be reached on that date. If that indeed is the case, it sets into motion a complex web of provisions and stopgap measures.
While federal law doesn't mandate the purchase of flood insurance in moderate-to-low-risk areas, lenders still may. “Homeowners that are currently required to purchase flood insurance as a condition of their mortgage may be concerned," says Rieman, "as changes to the NFIP could cause coverage to become unattainable, either due to price or geographic restrictions.”
Where homeowners will turn for affordable flood insurance if the NFIP expires is still unclear. If private insurance companies are allowed to enter the market, homeowners may see premiums significantly higher than those offered by the NFIP. Furthermore, residents in the highest-risk areas may be unable to find any coverage at all, if private insurers are unwilling to expose themselves to those regions' levels of risk.
Confusion And Questions Around Autonomous Cars
From Mercedes to GM, Volvo to VW, nearly every car manufacturer is testing autonomous vehicles, and building autonomous features (such as self-parking and lane-change assistance) into conventional cars.
Among many other implications, the development of autonomous vehicles is creating uncertainty for the auto insurance industry—and that unease will be reflected in an unclear scenario for those who seek to buy and drive these vehicles. Since such an overwhelming majority of insurance claims, and therefore premiums, are due to human-error, it's logical to assume that the proliferation of autonomous vehicles will justify lower monthly premiums for drivers.
But don't count insurance companies out of the fight just yet. With a little adaptation to the autonomous market, could insurers justify even higher premiums? Autonomous cars come with expensive new software, and what might have been a $500 fender bender with a traditional vehicle could require a $5,000 replaced sensor with a high-tech car.
However, the auto insurance market is even further complicated by how both insurers and car manufacturers handle liability. If your autonomous vehicle causes a collision, are you to blame, or is the manufacturer that designed the software? Rieman says, “While autonomous cars have had an impressive safety record, with fewer crashes per mile driven than the national average, there’s an open question regarding who is liable when a crash occurs because of the vehicle’s decision-making engines.” While no legislation yet exists to tilt the responsibility one way or the other, some manufacturers have already started claiming liability for any accidents their software might cause.
What To Look For: Broad adoption of autonomous vehicles is likely several years away, but with more companies and testing and using autonomous vehicles for their services, you should expect to see the insurance industry rework the way it approaches packaging and pricing driverless car insurance policies in the following year.