The final article in a four-part look at the Commissioner’s Annual Report on Home Insurance in Massachusetts
Since 1996, the DOI has had to produce a home insurance report pursuant to M.G.L. c. 175 Sec. 4A & 4B. Unlike private passenger auto insurance in Massachusetts, there are no laws requiring that a property owner have home insurance. Notwithstanding that fact, however, homeowner’s insurance continues to be the second largest line of property and casualty coverage in the Commonwealth (after private passenger auto insurance).
This final article deals with the previously uncovered sections of the Report including Financial Results, Cancellations and Non-Renewals, and a look at methods of setting Home Insurance Limits.
Quick recap of this year’s report
This year’s report cites a 1.3% increase in the total number of home insurance policies between the years 2014 and 2015. While representing the second increase in a row for this marketplace, it is lower than the previous year which saw the number of policies rise by 2.1% from between 2013 and 2014.
According to the DOI, as of 2015, there were 1,926,172 home insurance policies in force in the Commonwealth. In Massachusetts, the home insurance market covers non-commercial property, which includes risks of damage to structural and personal property, and for risks involving personal property claims. In comparison, in 2013, there were 1,863,049 policies while the number was 1,901,864 in 2014.
Total and Average premiums by coverage for 2015 for Homeowner, Tenant and Condominium policies
Massachusetts consumers purchased $2.2 billion dollars worth of home insurance in 2015, as measured by premium paid. The Division says this amount represents a 4.2% increase over 2014. As is apparent in the following chart, the vast majority of premiums comes from traditional home insurance, which increased by approximately $83 million in 2015, representing approximately 93.1% of the total amount of premium paid by coverage.
As for average premium by type of coverage, the average premium for a condominium increased just $2 from 2014 to 2015 from $456 to $458, while decreasing by $3 dollars for tenant coverage. Traditional homeowner insurance coverage increased to $1,388 in 2015 from $1,334 in 2014.
Claim numbers, costs and types of losses
As many will remember, the winter of 2015 was the record-breaking year for snowfall in the state. The year 2015 saw the Commonwealth hit with six weather-related catastrophes. The Division estimates that Massachusetts property damage at $1.2 billion for the year stemming claims involving flooding, freezing, hail, ice, tornadoes and wind damages. In comparison, the Division estimated property losses in 2014 at just $81.1 million.
As a result, the year 2015 saw a 200.4% rise in home insurance claims, or 64,237 more claims than in 2014. Out of the 192,979 claims filed in 2015, 91% of claims, or 174,884, were filed on traditional homeowners insurance policies. The remaining nine percent were split between condominium claim—up to 15,561 claim in 2015 from 6,638 claims in 2014—and tenant coverage claims—up less than 200 claims from 2014.
The average claims sizes in 2015, were $14,626 for traditional homeowner’s policies, $5,570 for condominium, and $4,894 for tenant.
Water continued to be the claim filed by most policyholders in 2015
Non-Flood Related Water damaged continued to be the claim most filed by policyholders in 2015, with approximately 142,656 claims filed. This represents 74.3% of all the total claims filed in 2015 reflecting water damaged associated with winter snow events and ice dams. As for the remaining claims, the second largest category for submitted claims by policyholders was for the “All Other Losses” category with 28,131 or 14.6% of all claims filed. Claims for damages involving Wind constituted 9,215 claims or 4.8% of all claims filed, while the Fire category had 4,936 claims or 2.6% of all claims filed, followed by the remaining Theft and Liability claims categories with 4,683 claims and 2,418 claims, respectively.
The following chart illustrates the dollar cost of claims and shows that relatively less frequent types of claims (E.g., fires) have a higher average claim cost. In 2015, however, the Division noted that fire losses saw a notable decrease from 33.8% of all the total losses in 2014 to just 10.8% in 2015. The severe winter of 2015 was the likely cause of this decrease as both water damage along with freezing saw notable increases in their percentage of losses for 2015, with water representing 70.5% of the causes of loss that year.
Ice dams were a major cause of loss for Massachusetts homeowner during the 2014-2015 winter. To get a clearer picture, the Division queried the top 25 home insurance companies and the FAIR Plan to provide details on payments involving ice-dam claims. Taken verbatim from the Report, the Division was advised:
- As of July 1, 2016, Massachusetts policyholders filed 125,631 ice dam claims with the top 25
home insurance companies and the FAIR Plan and of that total:
- 113,181 claims (90.1%) have been fully paid;
- 1,610 claims (1.3%) have been partially paid as carriers negotiate claims amounts or
await completion of repairs or the confirmation of supplemental damage;
- 10,561 claims (8.4%) were not paid because damages fell below policy deductibles,
claims were withdrawn or denied, or claims were found to be duplicates;
- and 278 claims (0.2%) are under litigation, or involved in divorce disputes, condominium
master policy disputes or other appeals.
- As of July 1, 2016, policyholders have received $1,268,460,937 in payments for damages
associated with the 2014-2015 winter storms with an average payment to policyholders of $11,050
Loss ratios and combined ratios
The Report’s review of the loss data submitted for 2015 on home insurance shows that the 2015 overall loss ratio for all FAIR Plan and insurance company policies was 123.3% for all types of residences (houses, condominiums, rentals). The following chart presents a history of the loss ratios for the entire market since 2005.
The following table from the Report seeks to calculate the combined ratio (the combination of company expenses and incurred claims costs divided by earned premium) as a measure of the generic financial results for insurance companies that operated in the Massachusetts home insurance market for the years 2011 to 2015. A lower combined ratio corresponds with a higher potential profit for the company. The table does not use specific information on insurance company operating expenses. The following chart calculates the percentage of premium that insurance companies paid out for Massachusetts home insurance losses and the percentages of premium that can be attributed to various operating expenses. The result is an “Adjusted Combined Ratio” for the Massachusetts home insurance market for these years.
Adjusted Combined Ratio
The Division notes that weather-related disasters can cause significant fluctuations for the total adjusted combined ratio for the total homeowner’s insurance marketplace. As a result, both the adjusted combined ratios for 2011 and 2015 saw significant increases as a result of the tornadoes, tropical storms, winter storms and ice damming experienced in those years.
According to the data collected by the Division from the top 25 home insurance companies and the FAIR plan, these companies had a total of 67,512 cancellations during 2015 for both urban and coastal areas. Of those, 49,024 were initiated by the policyholder, while 18,488 were initiated by the insurers. Breaking down the insurer-initiated cancellations even further, 1,396 were issued during the first 60 days of a policy, while 13,348 were issued due to non-payment. The remaining 3,744 policies were cancelled for other reasons permitted by Massachusetts law.
The following graph details the percentage of non-renewals in coastal and urban areas of each of the top 25 home insurance companies.
A New Section added to this year’s report
As one reader pointed out after we published the First Look article, the 2015 Home Insurance report includes a new section this year. “Entitled Method to Establish Home Insurance Limits”. The Division said that since the personal residences are not like other “fungible items” which can be replaced “off the shelf” or at will, homes have no obvious replacement price. However, the Division included this new section to aid readers in understanding the methods employed by various home insurers throughout the Commonwealth regarding the establishment of Coverage A Limits. A home insurance’s Coverage A is that section of a policy which represents the coverage limit an insurer will pay for the “full cost of replacing a destroyed home with a new house at the original home’s location.”
This reconstruction cost differs from replacement cost, which would consist of replacing a home with an entirely new construction on a greenfield site. The Division notes that replacement cost includes differing economies of scale from reconstruction cost, particularly in construction timing, flexibility, and location efficiency that may result in reduced expenditures.
The Division also noted that the insurers’ information also shows that Reconstruction cost may vary greatly from a property’s current market price and from the “structure’s depreciated actual cash value.”
Based on the data supplied to the Division, it found that the 26 home insurance companies queried employ a Coverage A amount which represents or reflects the cost to reconstruct a home at the same location and within a timely manner. These companies employ one of three different software products which use site-specific information in order to determine reconstruction costs.
Using these estimator tools, an agent or company sales representative obtains data from a homeowner’s insurance policy, tax records and sometimes a home inspection when combined with current local building code requirements, local labor rates, and construction materials calculates a “virtual contractor’s itemized bid” of the projected total cost to rebuild the home in question. Once this is calculated, the projected total cost is used to establish the Coverage A limit for a home.
The Report notes that what an agent or insurance company inputs as the data on a particular home into these estimator tools can greatly affect the outcome regarding the Coverage A limits and the amount of money indemnifying a homeowner in the event a claim is filed under Coverage A of a policy.
How to obtain further information about this report…
This four-part summary of the Division of Insurance’s report on homeowner insurance to the Massachusetts Legislature covered some of the highlights from the report we thought might be of interest to our readers.
The report also has additional information that we have not included that was of perhaps lesser interest and also the report references the underlying data that the Division used in compiling the report as a statistical supplement. While the Report and its Statistical Supplement can be found on the Division’s web site, feel free to contact Agency Checklists, if you would like to obtain a copy of the report.