Economic turmoil, lifestyle changes, and transitions to remote work amid the COVID-19 pandemic created a “new normal” for personal property insurance that differed in nature and timing from the near-instant effect on many personal auto insurers.
While miles driven dropped a severe 40%-plus in the lockdown of March and April 2020, and policyholder behavior shifted, the property side of personal lines has seen demand increase.1 First-mortgage delinquencies are down,2 and non-catastrophe claim trends have been largely favorable for many insurers.
Now, insurers by and large face a new set of unknowns. Will homeowners continue to stay protected in their nests, or are they edging back toward their regular activities? Will the new normal affect personal property insurers more significantly, just later? The answers aren’t yet clear, but Verisk is closely monitoring trends and analyzing a range of early indicators, from claims experience to housing market trends, for hints as to how personal property’s new normal may unfold.
Loss frequency: assumptions and lessons
Short-term, non-catastrophe loss trends suggest a possible outlook for personal property’s new normal and provide a basis to test early hypotheses on the effects of pandemic lockdowns. Some industry insiders reasoned that with people being home more often, frequency could increase because of more cooking and usage of appliances. This would likely be paired with a decrease in severity because mishaps would probably be spotted faster and somewhat mitigated. Verisk’s analysis suggests that more time spent at home may actually reduce rather than increase frequency for fire and non-weather water.
Second quarter: Year-over-year (YoY) claim frequency for second quarter 2020 was down sharply for theft, medical payments, and liability. YoY claim frequency for fire and non-weather water perils turned somewhat downward during this period as well.
Third quarter: Reopening began in earnest later in the third quarter and continued into the fourth, albeit unevenly as the second wave of the pandemic gained momentum with the onset of colder weather. The third quarter may reflect this second wave, with relative claim frequency for some perils remaining down year over year.3 Liability frequency turned upward during this period, at the same time that many homeowners added potentially hazardous recreational amenities, such as pools and trampolines.
Reconstruction costs take off
During the end of Q1 into early Q2, specifically March and April 2020, insurers on the whole saw reconstruction costs tick upward as the pandemic unfolded. An examination of cost trends at the national and state levels, which supplemented Verisk’s regular 360Value® Quarterly Cost Update, identified short-term impacts of business shutdowns triggered by the COVID-19 pandemic.4
The second half of 2020 brought record highs for reconstruction cost estimates as the surge in lumber prices took hold. Reconstruction costs, including materials and retail labor, jumped more than 9% as lumber costs soared by as much as 60%. Throughout the second half of 2020, lumber costs reflected high demand driven by an increase in building activity and supply shortages stemming from shutdowns related to the pandemic. U.S. tariffs on Canadian lumber also affected third-quarter costs.5
Home improvement may mean changing risks
The heightened building activity that helped to fuel the lumber surge occurred as many homeowners looked to upgrade their existing properties by improving the spaces where they’re spending more time than ever. Maintenance and remodeling activity, respectively, were up 10.1% and 12.9% year over year in December, making the sixth month of year-over-year growth and a far cry from double-digit declines seen at the onset of the COVID-19 pandemic.6
Such activity, as well as hidden risks that may come with do-it-yourself projects, can lead to underinsurance and premium leakage if not accounted for by reassessing and recalculating coverages. Capturing these changes—through reinspection at renewal if necessary—can ultimately help improve policyholder satisfaction by helping to ensure continued alignment of coverage with risk and fewer unwelcome surprises at point of claim.
As many public recreational venues were closed, Verisk research also suggests that more homeowners brought the fun to their backyards in ever-greater numbers. According to Verisk data, pool construction spiked 41.75% year over year between June and August 2020. Year-over-year growth in pool construction had increased marginally in preceding years—2.62% and 3.05% in 2018 and 2019, respectively.5 Pools pose a well-known liability risk, and there’s a good chance many insurers’ portfolios contain more homes with pools than they did a year ago.
All of this has amplified homeowner behaviors with potential liability implications, which also include increases in pet ownership and backyard toys such as playgrounds and trampolines.7 Adding to this increased potential liability risk for insurers, in general, will be the resumption of normal social activities that will likely give guests access to these new recreational amenities. The challenge is identifying these risks to enable appropriate adjustments to coverage and premiums. As with maintenance and remodeling activity, a robust change detection strategy supported by the proper tools can help tame these risks.
Surging home sales raise opportunities
While some homeowners upgraded their existing properties, others rethought their lifestyles more deeply—what home should look like and where it should be. The pandemic kicked off a suburbanization trend as stay-at-home experiences led many families to feel a need for more space.8 Whether for renters becoming first-time homebuyers or existing homeowners “upgrading,” purchase activity can provide unique new business and retention opportunities for homeowners insurers.
While home sales and housing starts alike had hit bottom in May and June, by September, new and existing home sales were up sharply. And by November, housing starts were up more than 9% year over year, marking the fourth consecutive month of growth. The rebound of new and existing home sales seems to have translated into homeowner policy shopping behavior, with a correlating trend in new replacement cost estimate activity. 9
CARES Act considerations
While some people were able to pursue home purchases or improvements, unemployment—which spiked to nearly 15% amid lockdowns—put pressure on many individuals’ ability to pay their mortgages.10
The CARES Act enabled loan accommodations for mortgages, prohibiting foreclosures before December 31, 2020. The measure also allowed homeowners to seek forbearance from lenders for a period of 180 days. Thus, most forbearances will not end until April or May 2021. Loans under possible accommodation accounted for 9.5% of mortgages in June, declining to 6.7% in October, and holding steady with just a minor peak of 7% in early December.11 Those accommodations appear to be having a measurable effect. Trends from the Great Recession show how an increase in unemployment can lead to an increase in mortgage delinquency. Data from Equifax, however, shows that first-mortgage delinquencies—at only 1.1%—actually decreased during 2020.12
Once CARES Act protections expires, many insurers could see a wave of delinquencies, foreclosures, and potentially fraudulent claims. And another potential challenge for insurers, in general, could be housing condition issues and related underwriting risk. With foreclosure activity, affected homeowners are often unable to maintain their homes, which may lead to identifiable condition issues.
Five things to watch as we navigate 2021
- The pandemic accelerated online shopping behaviors with 75% of people who used digital channels for the first time saying they won’t go back when things return to “normal.”13
- Ownership changes may occur over time, including foreclosures or vacancies that can negatively affect a property’s condition.
- Pandemic pets, pools, and backyard toys may lead to increased liability risk.
- Remodel and renovation projects can increase property values and lead to underinsurance for policyholders—and simply indexing at renewal may not be enough to capture the changes.
- Policyholders who were first-time homebuyers in early 2020 are retention-strategy targets as they approach their first renewal date.
Risks taken on at the height of the disruption period from lockdown orders are important considerations for approaching renewals. Much has changed in the intervening months. The effects of the pandemic are still unfolding toward the uncertain “new normal” of 2021 and beyond, and it may be time to set a more stable foundation for the future by undertaking a portfolio review.
Contact your Verisk representative to learn how a targeted assessment of your portfolio can help guide your forward-looking strategy.
- Verisk internal mileage analysis
- Equifax, U.S. National Consumer Credit Trends
- ISO Statistical Plan Analysis Q2 and Q3 2020 for all homeowners forms
- Trish Hopkinson, “Reconstruction costs tick upward as pandemic unfolds,” Visualize, May 28, 2020, < https://www.verisk.com/insurance/visualize/reconstruction-costs-tick-upward-as-pandemic-unfolds/ >, accessed on March 17, 2021. 5. 360Value Reconstruction Cost Analysis, Q4 2020 and Q1 2021
- BuildFax Housing Health Report, November and December 2020
- James Roche, “Rethinking Risk: How the pandemic has affected homeowners insurance,” Visualize, September 17, 2020, < https://www.verisk.com/insurance/visualize/rethinking-risk-how-the-pandemic-has-affected-homeowners-insurance-infographic/ >, accessed on March 17, 2021. 8. Cynthia Paez Bowman, Coronavirus Moving Study: People Left Big Cities, Temporary Moves Spiked In First 6 Months of COVID-19 Pandemic, MYMOVE, February 17, 2021, < https://www.mymove.com/moving/covid-19/coronavirus-moving-trends/ >, accessed on March 17, 2021.
- U.S. Housing Market Conditions, National Housing Market Summary and Data and Verisk Analysis of Replacement Cost Estimate Activity
- St. Louis Reserve Bank, FRED Economic Indicators, December 2020
- COVID-19, the CARES Act, and the Impact on Mortgage Forbearance, JDSupra, November 18,, 2020, < https://www.jdsupra.com/legalnews/covid-19-the-cares-act-and-the-impact-57968/#:~:text=COVID%2D19%2C%20the%20CARES%20Act%20and%20the%20Impact%20on%20Mortgage%20Forbearance,-Bryan%20Neft&text=The%20CARES%20Act%20prohibits%20any,to%20all%20federally%20backed%20mortgages. > accessed on March 17, 2021.
- Equifax, U.S. National Consumer Credit Trends Report, December 2020.
- COVID-19 US Digital Sentiment Survey,” McKinsey, April 2020