Property insurers were already looking for rate hikes prior to Hurricane Ian hitting the Gulf Coast of Florida last month and big losses from the storm look likely to make a difficult renewal for commercial policyholders even worse.

While many of the losses from Ian, which various modelers say could result in more than $50 billion in insured losses, will hit auto and homeowners insurers hard, commercial insurers operating in Florida are also expected to pay significant amounts in storm-related claims.

In addition, reinsurers, which support insurers operating nationwide, are expected to see big losses and will pass on some of those costs to insurers and ultimately policyholders through higher rates at Jan. 1 renewals, according to insurance industry executives attending the Insurance Leadership Forum in Colorado Springs last week.

The conference, organized annually by the Washington-based Council of Insurance Agents & Brokers, is a key market meeting that draws top executives from insurers, brokers, reinsurers and other industry companies.

“The property market, particularly property cat, was already in a massive transition where everyone was expecting 1/1 to be a difficult date,” said Mike Karmilowicz, New York-based CEO of Everest Insurance, a unit of Everest Re Group Ltd.

Changes in terms and conditions for reinsurance will likely have a negative effect on available insurance capacity, he said.

Prior to the storm, property rates were expected to rise, said Mike Rice, CEO of CAC Specialty.

“A lot of people were saying they thought rates probably were going to go up 10 points, but after Ian maybe it’s 20 points,” he said.

“There’s clearly a prognosis that the market is going to get more disruptive as we go into 2023,” said Kevin Smith, president of global risk solutions, North America, at Liberty Mutual Insurance Co. “Capacity is going to be very, very valuable and who’s going to deploy it and where is yet to be determined, but it’s fair to say it’s going to be a tumultuous market.”

Year-end renewals were looking difficult before Hurricane Ian struck and losses from the storm likely mean that renewals will be even tougher for reinsurance cedents and primary insurance buyers, said Mike Kerner, CEO of Munich Re Specialty Insurance, a Princeton, New Jersey-based unit of Munich Reinsurance Co.

Higher demand for catastrophe coverage as valuations have increased due to inflation, the strength of the dollar reducing available U.S. capacity for some overseas insurers, and climate concerns were already putting pressure on the market, he said.

Already some insurers are making changes in pricing, said Neil Kessler, Dallas-based president and chief operating officer of CRC Insurance Services Inc.

The property market will continue to be challenging in all states, said Paul Smith, Parsipanny, New Jersey-based senior vice president, carrier relations, at H.W. Kaufman Financial Group Inc.

Little new capacity is entering the market, he said. In addition, “Existing insurers are looking to make sure that they deploy their capital in a very careful and methodical way,” he said.

Most people know about insurance industry terms such as premiums (the money a policyholder pays every month or every year for an insurance policy) and claims (the money an insurer must payout when the policyholder gets in a car accident, has a medical operation, etc.).

But do you know what happens to your paid premiums once they’re actually sent to the insurance company?

Insurers don’t pay out all the money they collect right away. Rather, an insurance company will collect money in the form of premiums, invest that money, and then pay out claims as needed at some future date. The difference between premiums collected and claims paid out is called the insurance float.

It’s a lot like how a bank will collect deposits, invest that money (through loans to other people or companies), and then will repay your money at some future date when you eventually make a withdrawal.

Insurance float has been a huge contributor behind Warren Buffett’s success with Berkshire Hathaway. Because premiums received are essentially like loans from policyholders (that only need to be paid back when a claim is made sometime in the future), Buffett has been able to use insurance float as leverage when investing in stocks and private companies, which has a significant (positive) impact on the company’s return for its shareholders.

It’s part of the reason why Berkshire Hathaway’s book value and market value have grown at ~20% per year since 1965 compared to just 10% per year for the S&P 500 (including dividends)!

So, let’s dive a little deeper into what insurance float exactly is and how Warren Buffett uses it to his advantage.

Warren Buffett and Berkshire Hathaway’s Insurance Float

The insurance float represents the available reserve, or the funds available for investment once the insurer has collected premiums but is not yet obligated to pay out in claims.

In his 2002 Berkshire Hathaway Shareholder Letter, Warren Buffett explains:

To begin with, the float is money we hold but don’t own. In an insurance operation, float arises because premiums are received before losses are paid, an interval that sometimes extends over many years. During that time, the insurer invests the money. This pleasant activity typically carries with it a downside: The premiums that an insurer takes in usually do not cover the losses and expenses it eventually must pay. That leaves it running an “underwriting loss,” which is the cost of float. An insurance business has value if its cost of float over time is less than the cost the company would otherwise incur to obtain funds. But the business is a lemon if its cost of float is higher than market rates for money.

So insurance float is the difference between premiums received today over claims that must be paid many years in the future. During that time, the insurer invests the money. Insurance float is so valuable that insurance companies often operate at an underwriting loss – that is, the premiums received are not enough to cover the eventual losses (hurricanes, car accidents, etc.) that must be paid and the expenses required to resolve those claims, operate the business, etc.

Why would an insurer operate at a loss? Again, because the insurer can invest the insurance float and make even more money. In this sense, insurance float is like a loan and the underwriting loss is like the interest rate on that loan (i.e. cost of capital).

Now, for most insurers, the cost of float is usually a few percentage points. Berkshire Hathaway’s insurance operations, however, are so well run that the company’s historical cost of float has actually been positive… meaning Berkshire Hathaway is actually being paid to take other people’s money!

Here’s an even more in-depth explanation of insurance float from Warren Buffett’s 2016 Berkshire Hathaway Shareholder Letter:

“One reason we were attracted to the P/C [Proprty & Casualty] business was its financial characteristics: P/C insurers receive premiums upfront and pay claims later. In extreme cases, such as claims arising from exposure to asbestos, payments can stretch over many decades. This collect-now, pay-later model leaves P/C companies holding large sums – money we call “float” – that will eventually go to others. Meanwhile, insurers get to invest this float for their own benefit. Though individual policies and claims come and go, the amount of float an insurer holds usually remains fairly stable in relation to premium volume. Consequently, as our business grows, so does our float…

We may in time experience a decline in float. If so, the decline will be very gradual – at the outside no more than 3% in any year. The nature of our insurance contracts is such that we can never be subject to immediate or near-term demands for sums that are of significance to our cash resources. This structure is by design and is a key component in the unequaled financial strength of our insurance companies. It will never be compromised.

If our premiums exceed the total of our expenses and eventual losses, our insurance operation registers an underwriting profit that adds to the investment income the float produces. When such a profit is earned, we enjoy the use of free money – and, better yet, get paid for holding it.

Unfortunately, the wish of all insurers to achieve this happy result creates intense competition, so vigorous indeed that it sometimes causes the P/C industry as a whole to operate at a significant underwriting loss. This loss, in effect, is what the industry pays to hold its float. Competitive dynamics almost guarantee that the insurance industry, despite the float income all its companies enjoy, will continue its dismal record of earning subnormal returns on tangible net worth as compared to other American businesses.

Nevertheless, I very much like our own prospects… Moreover, our P/C companies have an excellent underwriting record. Berkshire has now operated at an underwriting profit for 14 consecutive years, our pre-tax gain for the period having totaled $28 billion. That record is no accident: Disciplined risk evaluation is the daily focus of all of our insurance managers, who know that while float is valuable, its benefits can be drowned by poor underwriting results. All insurers give that message lip service. At Berkshire, it is a religion, Old Testament style.”

At the end of 2016, Berkshire Hathaway’s insurance float totaled $91.6 billion! And because Berkshire Hathaway’s insurance operations are run at an underwriting profit, the company’s insurance float is essentially like a $91.6 billion interest-free loan that Berkshire is actually being paid to take (Buffett says Berkshire earned $28 billion of pre-tax income over 14 years – in other words, the Company was basically paid $2 billion a year to borrow $91.6 billion, which it could then use to invest).

Now, compare this investing model to that of private equity firms or hedge funds, who also use leverage to invest… but instead of cost-free insurance float, these PE funds and hedge funds usually use high yield loans with interest rates of 7%+ per year.

Moreover, Berkshire Hathaway’s insurance contracts are structured in such a way that it will never have to pay back more than 3% in any one year – while a high yield loan might have to be paid back in full if a private equity company or hedge fund’s performance falls below a certain level.

Viewed in this light, the Berkshire Hathaway insurance float model is clearly genius.

It’s really no wonder that Warren Buffett is one of the richest people in the world.

We purchase our automobile, homeowners and umbrella coverage around this time each year. With two relatively inexperienced drivers on our policy, it can be a bit nerve-wracking when it’s time for insurance renewal. Even though the four drivers in our household have clean driving records, the premiums can get pretty steep. Surprisingly, the renewal was pretty close to last year’s amounts.

Regardless of the rates, I make a point to “shop” the rates at least every other year. I won’t pretend to understand how insurance underwriting works in detail, but I do know that over time carriers adjust how they punish or reward certain types of risk.

For example, when our older daughter first became licensed, the insurance carrier we had at the time immediately jacked our rates significantly higher. Their underwriters judged the risk to be sufficient to warrant such an increase.

We decided to immediately change to another insurer that didn’t “punish” us quite as much. We didn’t even wait for the renewal date that year!

At the end of this post, I’ll share how much we saved this year by going through these steps.

Insurance Renewal Tips & Strategies

But first, here are a few tips to consider when renewing your various policies:

1. Use an Independent Agent

Some insurance companies use “captive” agents, meaning they can only write coverage for that one particular company. It’s my understanding that companies like Nationwide, State Farm and Allstate (among others) use captive agents.

On the other hand, independent agents represent many companies simultaneously. With one call, I can request my agent obtain quotes from many other companies. He/she will then do the work necessary to obtain the quotes. This saves me the time of calling each insurance company and going over the same information time and time again.

When we changed our policy mid-year as mentioned above, I made one call and within a few days I was able to review many quotes, including one from a company that was a bit kinder to new drivers!

I also like the idea of having an agent to help me when I need to file a claim. Instead of having to deal directly with the insurance company’s claim adjuster, I have an advocate to help me with the process. The relationship I have with my local, independent agent is invaluable in times like these.

💡 Independent agents are typically paid by the insurance company so this service costs you nothing, but saves you a lot of time!

2. Start Looking in a Timely Manner

Don’t wait until your renewal date is just a few days away. I start around 30 days before my renewal date in order to have enough time to get and compare other quotes. I will usually receive the renewal quotes from my current carrier about this time so it’s a great reminder to jump on it as soon as they are received.

3. Consider Higher Deductibles

One way to save on your premiums is to consider higher deductibles. Basically, this is the amount you have to pay for a covered claim before the insurance company will begin paying.

Raising your deductible lessens the amount the insurance company will be obligated to pay in the event of a claim, so they reduce your premium.

Make sure you understand the premium savings associated with increasing the deductible, though. For example, raising your auto insurance deductible from $250 to $1,000 will probably save enough in premiums to make it worthwhile. Raising the deductible from $1,000 to $2,000 probably will not. All of the insurers I’ve dealt with have had limits as to how high of a deductible they will offer.

Within a reasonable period of time you should save enough in premiums to cover the increased cost you’ll incur in the event of a claim.

To better explain this concept, let’s consider the following example.

☝️ Important point: Make sure your emergency fund is sufficient to pay the higher deductible! If you don’t have adequate savings, you won’t be able to pay the increased deductible without going into debt! Let this inspire you to beef up your emergency fund as quickly as possible.

4. Consider Dropping Add-Ons You May Not Need

Most insurers offer many different add-ons to their quotes – for an additional fee, of course – to cover various special and often unlikely types of claims.

For example, many automobile policies offer optional coverage for things like full glass replacement, trip interruption coverage, and coverage for discs and media lost in an accident. They may be nice to have, but are they worth the extra cost? I generally think they are not and none are included in our policies.

We don’t purchase medical coverage on our automobile policies as we cover those potential costs elsewhere. If you have health insurance, why do you need to pay for more medical coverage on your auto policy? If you have AAA, do you really need towing coverage on your policy? We have an extra vehicle available so we don’t pay for rental car reimbursement coverage.

These “little” extras can really add up over time. Make sure you really need them. Again, having a fully-funded emergency fund makes these extra coverages less necessary.

5. Make Sure You’re Getting All The Discounts You’re Entitled To

There are many, many discounts available. Multi-policy, recently built home, smoke detectors, low mileage auto use, alarm systems, flood prevention devices, good student discounts, students away from home discount….yada, yada, yada.

The list of discounts goes far beyond the scope of this post. Here’s the point: Review your discounts with your agent. Don’t be shy about asking if there are any other discounts available. It’s your money! Discounts don’t affect the coverage; they just affect what you pay for it!

Don’t forget, too, that some groups to which you belong may offer discounts. Alumni associations, AAA, credit unions, even Costco, and some employers are excellent places to seek out additional discounts when completing your insurance renewal.

6. Check for Discounts for Paying a Full Year Upfront

We pay our annual premiums in full at renewal. For doing so we received an additional discount of over $200 this year! To smooth the cash flow, we use a sinking fund to set aside money throughout the year so it’s ready and available at renewal.

Making sure you have the funds saved in time is another big benefit of preparing a monthly budget.

7. Review Your Homeowners Coverage Limits

If you keep your homeowners coverage in place for many years, it’s easy for the value of your home to eventually exceed your coverage limit. Also, if you have made any renovations or additions to your home, the new and improved house value could easily be above your coverage limit. You don’t want to find out at the time you’re filing a claim that you’re under-insured!

I don’t like paying premiums anymore than you do, but understating the value of your property to save a few bucks is foolish. The marginal savings are incredibly slim compared to having your claim reduced due to being underinsured.

Review your coverage levels with your agent to make sure you’re adequately insured!
If you have any high-value jewelry or collectibles, make sure you understand the coverage limits and purchase additional coverage riders if necessary. Don’t assume all of your personal property is covered as there are limitations for certain property types.

8. Protect Your Credit Score to Get the Best Rates

Whether it’s fair or not, most insurers consider your credit score when determining your premiums. They believe there is a direct relationship between how well you manage your credit and pay your bills with the likelihood of you filing an insurance claim.

This relationship is so important to insurers that, as CNN reported, drivers with a poor credit history pay 91% more than those with a great credit score. Ouch.

Closing Thoughts on Insurance Renewal

Remember, it’s the job of the independent insurance broker to provide advice and expertise that we don’t possess. Be open and honest in your discussions with them. Yes, they are paid by the insurance company, but they only continue to earn commissions if they take care of you!

If they are hesitant to shop your coverage among many different insurers, perhaps it’s time for you to find a new agent who will!

Never just assume you’re getting the best rates year after year from your current carrier. The only way to make sure you’re getting the best rates is for you to take action and shop your coverage at least every other year.