Consequences of Depreciation: Uncertainty and Model Loss

This post is part of a series sponsored by CoreLogic.

Insurers affected by the destructive path of Hurricane Ian through Florida in late September 2022 faced operational, regulatory and regulatory requirements to ensure the accuracy of the final financial cost of the damage. Accustomed to using risk models to project large losses, the uncertainty limits on their loss estimates were too high for this event. Although hurricane damage models can estimate damages and insured losses to a reasonable degree, there are other sources of loss that are not certain.

This uncertainty factor is called the post-loss amplification factor. These include increased demand, for example, short-term inflation driven by the extraordinary cost of sending foreign workers and equipment, and rising costs from legal provisions such as the assignment of benefit law (AOB) in Florida. . Post-loss conditions have plagued Florida’s insurance market for years and have gotten progressively worse, culminating in Hurricane Irma’s 2019 rate hikes.

Recent inflation caused by supply shortages and higher energy costs have helped to push up prices of everyday goods and services, with consumer price inflation below 10% earlier this year. Labor shortages continue to be a problem, with the National Federation of Independent Businesses reporting that hiring has become more difficult.

The cost of construction materials and services used in the reconstruction has been rising faster than inflation, with rates of less than 15% at the beginning of 2022. We can see in the graph below that these costs have seen a significant increase in Florida.

CoreLogic’s valuation has been calculated using current prices for rebuilding costs. The problem is that insurers or agents may look at schedules or values ​​from twelve or more months ago that may be overlooked with little or no future increases built into the policy. Pricing for insurance is done after the repairs are completed. As of November 22, 2022, approximately 50% of insurance claims were still open and 25% were still open as of January 20, 2023. The most expensive claims take the longest to be fixed with the inflation of the most expensive car. This is a long way for borrowers.

In 2017, Florida had a major change to existing building codes that required the entire roof section to be replaced where 25% or more of the roof section is damaged and where there were defects in the permit, installation, or inspection.

Shared benefits is a practice established in Florida that allows homeowners the ability to hire a contractor to repair their property and distribute their insurance benefits to the contractor instead of paying them directly. Designed to give energy and speed to homeowners who want to rehabilitate their property, the increase in attorneys’ fees in the affected area has increased the cost of insurance to settle and, ultimately, has increased the cost to the home owner. In May 2022, the Florida legislature enacted changes to the AOB laws and the effectiveness of these changes has not been tested.

The revised 2017 rules on AOBs such as claims reduction windows, cost restrictions, and provisional fees will have a significant impact on cost reduction unless insurers can prevent suspicious people from contacting their customers and take immediate action. Another reform introduced by the emergency law section now (advance) has restricted the ability of policy holders to distribute the benefits of their policy to 3.^rd parties and prevent the possibility of recovering legal costs. However, the rules are not retroactive, so Hurricane Ian claims would still be AOB losses.

Hurricane Ian and Houses: By the Numbers

CoreLogic estimates that nearly 900,000 homes were damaged by the hurricane, and 600,000 of those were Cat 2 or Cat 3 hurricanes. According to the Florida Office of Insurance Regulation, approximately 475,000 residential claims were on file as of January 20, 2023, from causes 440,000 on file as of November 2022.

The continued stability of these claims numbers may be evidence of changes made to strengthen building regulations in the years following Hurricane Andrew (1991). The number of these claims will be a test not only of the adequacy of the recent changes to the AOB in reducing the total cost of repair / insurance for homeowners to repair / insure their homes and the test of insurance and insurance in managing the uncertainty in determining the final cost of Hurricane Ian.

To learn more about the effects of Hurricane Ian 6 months after landfall, see CoreLogic’s latest webinar that looks at the findings of the damage study in Southwest Florida including a detailed breakdown of the loss model and what made this storm unique.

©2023 CoreLogic, Inc. The words and information of CoreLogic® contained in this article may not be reproduced or used in any form without written permission. Although all CoreLogic statements and information are believed to be accurate, CoreLogic makes no representation or warranty as to the completeness or accuracy of such statements and information and assumes no responsibility for such information and statements or any reliance thereon.

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