Property Insurers Challenged

by Skyrocketing Inflation and

Natural Disasters
February 2022

Copyright © 2022 by the American Property Casualty Insurance Association 0322 | 3428PRI
 Property Insurers Challenged by Skyrocketing Inflation and Natural Disasters 2

EXECUTIVE
Insurers Struggling AmidSUMMARY
Skyrocketing Inflation and Natural Disasters
Rapid increases in inflation over the last year have spiked property and casualty (P&C) insurance losses and
combined ratios. Insurance claims inflation has been rising even faster than the underlying consumer price
index, far outpacing increases in premiums, while natural disaster losses continue to climb.
es in inflation over the last year have spiked property and casualty (P&C) insurance losses
d ratios. Insurance claims
APCIA’s new inflation has been
report examines somerising even
of the top fastertrends
inflation thanand
thefinancial
underlying
impacts that are creating a perfect
ce index, far outpacing increases
storm for the propertyin premiums,
insurance while natural disaster losses continue to
industry.

report examinesKEY
some of the top
TRENDS ANDinflation trends IMPACTS
FINANCIAL and financial impacts pressuring the
rance industry.
• I nflation. The U.S. inflation rate accelerated to a 40-year high of 7.5% in January 2022. The producer
price index hit 9.7%, the largest calendar-year increase since data were first calculated in 2010.1

Insurance claims inflation has risen even faster, causing significant underwriting losses:
and Financial Impacts
Inflationary Trends and Insurance Impacts
The U.S. inflation rate
ed to a 40-year high of 7.5%
y 2022. The producer price
9.7%, the largest calendar-
ease since data were first
d in 2010.1

e claims inflation has risen

ster, causing significant
ting losses:
Source: Bureau of Labor Statistics

Results. • Financial Results.

te U.S. P&C insurers faced an $11.3 billion net underwriting loss in third quarter 20212.
o Private U.S. P&C insurers faced an $11.3 billion net underwriting loss in third quarter 2021. 2

ance incurred losses and loss adjustment expenses increased by 17.8% in the third quarter
o Insurance incurred losses3and loss adjustment expenses increased by 17.8% in the third quarter of last
t year compared to theyearthird quarter 2020 .
compared to the third quarter 2020. 3

eowners multi-peril o 
direct losses incurred have increased 40.3% over the last two yearsi4,
Homeowners multi-peril direct losses incurred have increased 40.3% over the last two years, 4

ding a 13.9% spike in the third quarter

including of 2021
a 13.9% spike in thecompared
third quarterwith thecompared
of 2021 same period ofsame
with the 2020,period
whileof 2020, while
t written premium fordirect
homeowners only increased
written premium 8.4%only
for homeowners in increased
the third8.4%quarter, far below
in the third quarter, the
far below the rate of
escalating losses.
of escalating losses.
ers’ average return on net worth
o Insurers’ over
average the on
return past
net10 years
worth overhas
the been
past 10less than
years 43% less
has been of the
thanall-
43% of the all-industry
average, with the gap significantly widening over the long term.
5
try average , with the gap significantly widening over the long term.
5

1 https://www.bls.gov/news.release/ppi.nr0.htm.
2 Property Casualty Financial Operating Results at 3Q 2021, APCIA and ISO, most recent available data.
3 Ibid.
4 AM Best Financial Review – January 25, 2022.
5N
 AIC Report on Profitability by Line by State in 2020, 2021 edition; reflects the average of annual returns from 2011-2020 for the p-c industry and for the Fortune
Magazine all-industry average.
ls.gov/news.release/ppi.nr0.htm
lty Financial Operating Results at 3Q 2021, APCIA and ISO, most recent available data

cial Review – January 25, 2022

Property Insurers Challenged by Skyrocketing Inflation and Natural Disasters 3

•C
 ost Inputs Soar. The cost of the materials and labor needed to reconstruct homes and businesses have
skyrocketed, amid ongoing impacts from the COVID-19 pandemic, such as supply chain constraints and
shifts in demand for housing, which are continuing to affect overall supply and demand challenges.

Direct Loss Ratios for Select Personal Lines

2017-2021 (through nine months)
80.0

75.0

70.0

65.0

60.0

55.0
2017 2018 2019 2020 2021
US Private Passenger Auto US Homeowners US All P/C Lines

Source: Insurance Journal, based on data from AM Best January 25, 2022 Report
“US Property/Casualty Top Line Premiums Up, Loss Ratio Deteriorates Through 3Q 2021”

From December 2019 through December 2021 the price of construction materials rose by 44.1%,6
with some lumber prices in mid-2021 up 400%. Conditions have led to significantly higher underwriting
losses.

2021 combined ratios for U.S. home and commercial property lines are expected to reach 109%,
which will exert upward pressure on insurance rates, and may result in reduced capacity and stricter
underwriting in numerous states.

• Natural Disaster Losses.

Economic Injured
o 2021 was the seventh year in a Losses Losses
row the U.S. suffered at least $169 Billion $92 Billion U.S. Total
10 catastrophes causing over a $75.0 B $36.0B Hurricane Ida
billion dollars in insured losses.7 $23.7 B $15.0 B February Polar Vortex
o Natural disaster losses from 2020- $9.0 B $4.3 B Drought
2021 in the U.S. were over $176 billion, $5.1 B $4.0 B Mid-December Tornadoes
the highest ever two-year total.8 $3.4 B $2.6 B TX and OK Hail
o Globally, 2021 was the fourth most Source: Aon 2021 Weather, Climate and Catastrophe Insight

extreme catastrophic loss year,9 led by

Hurricane Ida that was the fourth costliest global insured loss event since 1900.10

o U.S.-incurred natural disaster losses in 2021 were more than double the 20-year average.11

• High-Risk Development. Population, housing, and business growth in hazard-prone areas are
exacerbating the effects of climate change, leading to more frequent and severe catastrophe losses.

• Mitigation is Critical. Insurers are strongly encouraging property owners to harden their homes and
businesses to reduce potential loss and damage. In addition, during the current cycle of extreme
inflation, to prevent underinsurance and financially prepare should disaster strike, policyholders are
encouraged to review their policy coverage and consider potential optional coverage features.

6 U.S. Bureau of Labor Statistics from Federal Reserve Bank of St. Louis (FRED): https://fred.stlouisfed.org/series/WPUSI012011.
7 NOAA.
8 Aon 2021 Weather, Climate and Catastrophe Insight.
9 https://www.reinsurancene.ws/global-insured-losses-topped-100bn-again-in-2021-aon/.
10 Aon 2021 Weather, Climate and Catastrophe Insight.
11 Ibid.
Property Insurers Challenged by Skyrocketing Inflation and Natural Disasters 4

PROPERTY INSURERS CHALLENGED BY SKYROCKETING

INFLATION AND NATURAL DISASTERS

OVERVIEW
U.S PROPERTY & CASUALTY INSURERS FACING STRONG HEADWINDS — page 5

CONSUMERS URGED TO PREPARE NOW — page 7

SUPPLY CHAIN ISSUES CONTINUE TO BE A CHALLENGE

BUILDING TRENDS — page 8

LUMBER COSTS SKYROCKETING … AGAIN — page 9

BOTTLENECKS AT PORTS — page 10

GLOBAL CHIP SHORTAGE IMPACTING APPLIANCES — page 13

2021 NATURAL DISASTERS IN THE U.S.

NATURAL CATASTROPHE LOSS TOTALS — page 13

BILLION-DOLLAR WEATHER EVENTS — page 14

HURRICANE IDA RANKS AS COSTLIEST GLOBAL DISASTER IN 2021 — page 16

SECONDARY PERILS ACCOUNT FOR HALF OF U.S. LOSSES — page 17

ADDITIONAL IMPACTS
GROWTH IN HIGH-RISK AREAS AND CLIMATE CHANGE — page 20

INSURERS EMPHASIZE MITIGATION AS KEY SOLUTION — page 22

Property Insurers Challenged by Skyrocketing Inflation and Natural Disasters 5

OVERVIEW
U.S PROPERTY & CASUALTY INSURERS FACING STRONG HEADWINDS

The U.S. property casualty (P&C) insurance industry is facing significant pressure from rising inflation, ongoing
impacts from the COVID-19 pandemic, elevated natural catastrophes, and other events.

The U.S. inflation rate accelerated to a 40-year high of 7.5% in January 2022, while the producer price index hit
9.7%, the largest calendar-year increase since data were first calculated in 2010. However, inflation for property
insurance claims has risen even faster, causing significant underwriting losses.

Quarterly Inflation Trends, Year-over-Year Changes

15%
13%
10%
8%
5%
3%
0%
2018-Q1

2018-Q2

2018-Q3

2018-Q4

2019-Q1

2019-Q2

2019-Q3

2019-Q4

2020-Q1

2020-Q2

2020-Q3

2020-Q4

2021-Q1

2021-Q2

2021-Q3

2021-Q4

2022-Q1
Total Property Reconstructi on Cost (incl uding materials & retail l abor)
Consumer Price Index - All Items
Source: Verisk ‘360Value Quarterly Reconstruction Cost Analysis’, Bureau of Labor Statistics

Continued record low interest rates throughout much of 2021 sustained increased demand for new home
construction and mortgage refinances to help fund home remodeling projects. The additional effects of higher
rebuilding costs in the wake of major disasters – a phenomenon known as demand surge – combined with
inflation associated with pandemic-driven supply chain disruptions is unprecedented. The resulting impact has
pushed up the price of construction materials by 44.1% between December 2019 and December 2021.

Additional pressures weighing heavily on property insurers include increasing social inflation (particularly
litigation), continued challenges from civil unrest, and rising property theft impacting commercial property
lines, such as organized retail theft. In addition, insurers are facing significant upward pressure on reinsurance
rates across all property lines of business, as reinsurers are similarly forced to respond to rising global natural
disaster costs.

Direct Loss Ratios for Select Personal Lines

2017-2021 (through nine months)
80.0

75.0

70.0

65.0

60.0

55.0
2017 2018 2019 2020 2021
US Private Passenger Auto US Homeowners US All P/C Lines

Source: Insurance Journal, based on data from AM Best January 25, 2022 Report “US Property/Casualty Top Line Premiums Up,
Loss Ratio Deteriorates Through 3Q 2021”
 Property Insurers Challenged by Skyrocketing Inflation and Natural Disasters 6

This
This unusual combinationofofchallenges
unusual combination challenges hashas created
created a perfect
a perfect stormstorm resulting
resulting in a signficant
in a signficant deterioration in
This unusual
deterioration combination
in personal of challenges has created a perfect storm resulting in a signficant
personal lines loss results inlines
2021, loss results to
according in 2021, according
S&P Global Market toIntelligence.
S&P GlobalThe Market
directIntelligence.
incurred lossThe ratio
deterioration
direct incurred
for homeowners in personal
loss ratiolines
multiperil for
rose loss results
homeowners
to 75.6 inmultiperil
percent 2021, according
for the rosethree
first toquarters
to 75.6 S&P Global
percent Market
for
of 2021, the Intelligence.
first
after thethree The
quarters
loss ratio of
for the
direct
third incurred
quarter loss
jumped ratio
to for
90.2 homeowners
percent, versus multiperil
89.9 rose
percent into
the75.6 percent
third quarterfor
of the
2021, after the loss ratio for the third quarter jumped to 90.2 percent, versus 89.9 percent in the third
2020.first
In three quarters
addition, for the of
2021, after
of the
combination
quarter ofloss
2020. theInratio for the
homeowners
addition, forthird quarter
multiperil, autojumped
the combination physical todamage,
of the 90.2 percent,
homeowners versus 89.9auto
and private-passenger
multiperil, percent
auto in thedamage,
liability
physical third
lines,
quarter
the lossof 2020.
ratio In
climbed addition,
to 76.4% forin the
the combination
third quarter –of the
more homeowners
than multiperil,
16 points higher than auto
and private-passenger auto liability lines, the loss ratio climbed to 76.4% in the third quarter – more physical
all other damage,
P&C lines
and private-passenger
16 points higher auto
ex-auto
than
and home.
than liability
all otherlines,
P&C the
linesloss ratio climbed
ex-auto and home. to 76.4% in the third quarter – more
than 16 points higher than all other P&C lines ex-auto and home.
Homeowners Loss Ratio (%) Direct Incurred Loss Ratios
P&C Industry Countrywide for Key P&C Lines (%)

Source: APCIA via S&P Global Market Intelligence

The U.S. P&C insurance industry is projected to run at an estimated 101 combined ratio for all lines in
The U.S.according
2021, P&C insurance industry
to Insurance is projected
Information to run at
Institute an estimated
(Triple-I) 101 P/C
/ Milliman combined ratio forProjections:
Underwriting all lines in
The
2021, U.S. P&C
according insurance industry
to Insurance is projected to run at an estimated 101 combined ratio for all lines in 2021,
2021-2023
according12 to .Insurance
12
Combined ratioInformation
results
Information Institute
Institute (Triple-I)
for property
(Triple-I)lines
/ Milliman
in particular
/ Milliman
P/Cbeen
have
P/C Underwriting
Underwriting
very elevated
Projections:
Projections:
following
2021-2023. 12
2021-2023
multiple .
years Combined ratio results for property lines in particular have been very elevated following
Combined ratioof extreme
results catastrophe
for property lines losses, resulting
in particular havein multiple
been years exceeding
very elevated following100%,
multiple and recent
years of
multiple years
projections of extreme
from Triple-I catastrophe
and Milliman losses,
estimate resulting in multiple
2021exceeding
will further years to
climb exceeding for100%,
109%projections and recent
each homeowners
extreme catastrophe losses, resulting in multiple years 100%, and recent from Triple-I
projections
multiperil
and Milliman
from
and Triple-I
commercial
estimate
andmulti-peril
2021 will
Milliman estimate
(CMP)
further climb
2021Results
tolines.
109% for
will further
each are
climb tomultiperil
forecasted
homeowners
109% forand
to remain each
above homeowners
100% in the
commercial
multiperil
multi-periland
immediate (CMP) commercial
years ahead,
lines. asmulti-peril
loss
Results trends
are (CMP) lines.
are expected
forecasted Results
to remain toabove are
outpace forecasted
100% adjustmentsto remain above
to premiums.
in the immediate years 100%
13
ahead, asin the
Significant
loss
immediate
trends are
fourth years
expected
quarter ahead, as loss
to outpace
catastrophe trends
are are
adjustments
losses expected to outpace
to premiums.
expected to push
13 adjustments
Significant
underwriting resultstofurther
premiums.
fourth-quarter catastrophe
13
Significant
into negative losses are
fourth quarter
expected
territory. to pushcatastrophe losses
underwriting are
results expected
further intotonegative
push underwriting
territory. results further into negative
territory.

Homeowners Net Combined Ratio and Change in NWP CMP Net Combined Ratio and Change in NWP

Source: Underwriting Projection: A Forward View (Nov 2021), Triple I and Milliman.
12 https://www.iii.org/insuranceindustryblog/category/industry-financials/
https://www.iii.org/insuranceindustryblog/category/industry-financials/
1213
Underwriting Projection: A Forward View (Nov 2021), Triple I and Milliman
13
Underwriting Projection: A Forward View (Nov 2021), Triple I and Milliman
February 2022 5
February 2022
12 https://www.iii.org/insuranceindustryblog/category/industry-financials/.
5
13 Underwriting Projection: A Forward View (Nov 2021), Triple I and Milliman.
Property Insurers Challenged by Skyrocketing Inflation and Natural Disasters 7

While the industry remains positioned to meet its expected obligations, the unusual combination of losses
and future uncertainty is weighing heavily on property lines, pressuring insurers and reinsurers to implement
stricter underwriting discipline across all personal and commercial property lines.

CONSUMERS URGED TO PREPARE NOW

In response to increasing natural disasters and costs, the insurance industry is continuing to encourage
property owners in high-risk areas to take steps now to mitigate potential losses by hardening homes and
businesses. Property owners can help bend the loss curve down, which may help ease some of the pressure
on costs.

For homes or businesses that do sustain losses, property owners should anticipate higher than normal costs
and longer timelines needed to rebuild. In light of the continuing inflationary pressures, insurers are strongly
encouraging policyholders to review and consider increasing their coverage, as needed.

Key items to review:

• Replacement cost coverage – pays an amount necessary to rebuild the home with construction
materials of like kind and quality and replace your personal belongings, without deducting
depreciation.

• Automatic inflation factor – automatically adjusts your coverage amount at each renewal time to
help keep up with rising costs; however, during periods of extreme inflation, it remains important
to review coverage limits.

• Home additions or renovations – ensure the policy has been updated to reflect any new features,
such as increased square footage or an upgraded kitchen.

Consider additional optional features:

• Building code/ordinance coverage – increases coverage to help comply with any new building
code ordinances.

• Extended replacement cost coverage – increases coverage available to rebuild your home when
labor and material costs skyrocket after a natural disaster.

• Additional living expense (ALE) coverage – optional higher limits may help cover hotel and food
costs if a longer timeframe is needed to rebuild your home.

COVID-19 created unprecedented challenges in numerous industries, including the property insurance market.
However, as the industry works to stabilize these impacts, these additional policy features may provide
insureds significant value and added financial protection should a loss occur.
Property Insurers Challenged by Skyrocketing Inflation and Natural Disasters 8

SUPPLY CHAIN ISSUES CONTINUE TO BE A CHALLENGE

The COVID-19 pandemic has continued to weigh heavily on the property insurance market. COVID-19 led to a
major reduction in manufacturing of key construction materials in early 2020 just as consumer demand shifted
from services to goods. Demand for lumber crashed in the Great Recession as homebuilding screeched to a
halt, thus the lumber industry anticipated a similar slowdown and cut production and unloaded inventory in
fears of a looming crash. However, demand quickly swung in the opposite direction, catching homebuilders
and lumber producers off guard.

BUILDING TRENDS

A shift to remote work during COVID-19 drove up demand for larger space, sending city dwellers searching for
larger homes in the suburbs. With record low interest rates, rising home equity, and plenty of time on hand,
existing homeowners rushed to stores like Home Depot, Lowes, and others to begin remodeling projects as
they looked to take advantage of refinancing opportunities while 30-year mortgage rates dipped below three
percent. In a market already severely short on inventory, homebuilders also responded to the surge in demand
for housing by cranking up production in autumn 2020, sending single-family starts (seasonally adjusted) to
their highest level since 2006.

HOUST
Home Construction Reaching Highest Levels since 2006
2,400 New privately owned housing units started

2,000
TECH BUBBLE GREAT RECESSION COVID-19 RECESSION

1,600

1,200
Thousands

800

400
2000 2002 2004 2006 2008 2010 2012 2014 2016 2018 2020
Source: Census, HUD | fred.stlouisfed.org (data ending Dec 2021)

Demand for skilled contractors and construction materials to build new homes and complete home
remodeling projects in 2020 collided with the end of a record-breaking year for catastrophe losses when
thousands of homes across the U.S. would also need to be reconstructed following devastating hurricanes,
wildfires, and other natural catastrophe events. Materials and labor supply were further strained as natural
disasters remained elevated in 2021, sharply increasing costs and outpacing homeowners insurance premiums
collected.
Property Insurers Challenged by Skyrocketing Inflation and Natural Disasters 9

Chart Title
Home Construction Reaching Highest Levels since 2006
80%
New privately owned housing units started
70%

60%
PPI Residential Construction-Trade Services
50% PPI Residential Construction-Goods
40% 39.5%
35.7%
30%
20%
10%
0%
Jun-17

Sep-17

Jun-18

Sep-18

Jun-19

Sep-19

Jun-20

Sep-20

Jun-21

Sep-21
Dec-16

Dec-17

Dec-18

Dec-19

Dec-20

Dec-21
Mar-17

Mar-18

Mar-19

Mar-20

Mar-21
Source: U.S. Bureau of Labor Statistics | fred.stlouisfed.org (data ending Dec 2021)
Producer Price Index by Commodity: Inputs to Industries: Net Inputs to Single Family Residential Construction,
Services and Goods.
Data not seasonally adjusted. Data as of Jan 13, 2022.

An analysis from the National Association of Home Builders (NAHB) published in mid-January 2022 indicates
the aggregate cost of residential construction materials has increased almost 19% since December 2020.14

LUMBER COSTS SKYROCKETING … AGAIN

Lumber has been among the most affected materials, Random Length Lumber Futures
in terms of cost and longer lead times to secure Per Thousand Board Feet
materials.15 The NAHB had previously reported the
increase in cost from lumber added $36,000 to the
cost of building the average single-family home after
lumber peaked in the summer of 2021 at over $1,600
per 1,000 board feet – an increase of over 400%.16
While lumber costs moderated some in the latter half
of 2021, lumber futures are once again spiking ahead
of the spring building season.

In January, Trading Economics noted lumber futures

were “near the highest since the beginning of June
2021, amid supply disruptions and a hot housing
market. From the demand side, an aging millennial
population is reaching a homebuying age of 30, with
Source: Trading Economics, as of Feb. 11, 2022
data already showing 37% of homebuyers accounting
for this segment. Also, construction companies are
hoarding material to avoid shortages, while unseasonably warm temperatures are allowing homebuilders to
keep their activity. In addition, the tariffs on Canadian lumber doubled [in 2021] putting additional pressure
on the prices as half of the major producers of lumber are located in British Columbia and the US imports
50% of its output. Meanwhile, supply disruptions remain after record rainfall in Canada in November disrupted
the transportation network, at the same time that the price of timber – lumber’s raw material – has been
increasing by 10% – 20%.”17

14 https://www.nahb.org/news-and-economics/industry-news/press-releases/2022/01/builder-confidence-edges-lower-on-inflation-concerns.
15 https://www.usatoday.com/story/money/markets/2021/06/23/home-building-lumber-prices-renovations-delayed-amid-covid/7768522002/.
16 https://www.cnbc.com/2021/05/18/home-construction-sees-biggest-drop-since-pandemic-hit-heres-why.html.
17 https://tradingeconomics.com/commodity/lumber.
 major producers of lumber are located in British Columbia and the US imports 50% of its output.
Meanwhile, supply disruptions remain after record rainfall in Canada in November disrupted the
transportation network, at the same time that the price of timber – lumber’s raw material – has been
increasing
Property by Challenged
Insurers 10%/20%.”17by Skyrocketing Inflation and Natural Disasters 10

Bottlenecks at Ports

Backlogs in ports
BOTTLENECKS ATare another concern, adding pressure and leading to higher costs and lead times.
PORTS
Throughout
Backlogs in ports the COVID-19
are another pandemic
concern, ports
adding pressure and leading to higher costs and lead times.
have been setting records moving cargo for
Throughout the COVID-19 pandemic, ports have
goods. Cargo ships today, often referred to Container-Ship Freight Rates Soar
been setting records moving cargo for goods. Skyrocketing costs to ship a container of goods
as “mega-container ships” are double or
Cargo ships today, often referred to as “mega- mirror the climb in charter rates for container ships
triple the size of ships from 10-15 years ago.
container ships” are double or triple the size of
These take years
ships from 10-15 longerago.
to unload andlonger
These take require
moreand
to unload trucks, trains
require andtrucks,
more warehouses to store
trains, and
the cargo.
warehouses
18
to store the cargo. 18

S&P S&P Global

Global Market
Market Intelligence
Intelligence reported
reported on on
December
December 15 the15 the freight
freight rate of rate of a 40-foot
a 40-foot container,
container,
on average, onfrom
went average, went
less than fromtoless
$1,500 than
nearly
$10,400 as of
$1,500 tomid-September,
nearly $10,400according
as of mid-to Drewry,
a maritime research consultancy, before dipping
September, according to Drewry, a maritime
back below $9,300 in December, though remaining
research consultancy, before dipping back
5 times higher than pre-pandemic shipping costs.
below
Shipping $9,300
costs frominAsia
December, though
to the U.S. West Coast,
whichremaining 5 times
include Long Beachhigher thanAngeles
and Los pre-pandemic
which
shipping
together costs.
handle Shipping
about costscontainer
40% of U.S. from Asia to
the U.S.
imports, haveWest
spikedCoast, which include Long
even higher. Note: Data show the cost to ship a container from Asia to the U.S. West Coast
Source: Freightos Baltic Index
Beach and Los Angeles which together
The shortage of materials due to manufacturing
handle about 40% of U.S. container imports,
slowdowns and shipping delays has impacted nearly every aspect of construction. A Wall Street Journal
have
report spiked even
highlighted abouthigher.
90% of home builders surveyed by housing-market research firm Zonda in November
said they were experiencing supply disruptions, up from 75% in January 2021, and went on to note home
The shortage of materials due to manufacturing slowdowns and shipping delays has impacted nearly
builders have built up a huge backlog of uncompleted homes. The number of single-family homes currently
every aspect of construction. A Wall Street Journal report highlighted about 90% of home builders
under construction surged 28.3% in November 2021 from a year earlier to the highest seasonally adjusted level
surveyed by housing-market research firm Zonda in November said they were experiencing supply
since 2007, according to the Commerce Department.19
disruptions, up from 75% in January 2021, and went on to note home builders have built up a huge
According to the Producer Price Index, since the start of the pandemic, steel mill products have climbed
nearly 140%, lumber is again up 74% and climbing while ready-mix concrete is up 10%. Earlier in the year,
17 https://tradingeconomics.com/commodity/lumber
reports
18 indicated prices for gypsum, also known as drywall, were up significantly while copper was hitting
https://www.businessinsider.com/cargo-ships-waiting-to-dock-california-contributes-supply-chain-crisis-2021-4
record high prices.20 By year end, shortages persisted for windows, garage doors, appliances, and paint after
February freezing
February 2022weather and power outages in Texas led to a shortage of resin, which is used in many home- 9
building products.

18 https://www.businessinsider.com/cargo-ships-waiting-to-dock-california-contributes-supply-chain-crisis-2021-4.
19 https://www.wsj.com/articles/supply-chain-issues-leave-new-homes-without-garage-doors-and-gutters-11641724201.
20 https://www.cnbc.com/2021/04/30/soaring-lumber-prices-add-36000-to-the-cost-of-a-new-home.html.
Property Insurers Challenged by Skyrocketing Inflation and Natural Disasters 11

Chart Title
Cost Indicators: Commodities
Producer Price Index, Cumulative Price Change

1 50%
Softwood Lumber 139%
1 20% Steel Mill Products
Ready-Mix Concrete
90%
74%
60%
30%
10%
0%

-30%
Dec-19 Mar-20 Jun-20 Sep-20 Dec-20 Mar-21 Jun-21 Sep-21 Dec-21
Source: U.S. Bureau of Labor Statistics | fred.stlouisfed.org (data ending Dec 2021)
Producer Price Index by Commodity: Inputs to Industries: Net Inputs to Single Family Residential Construction,
Services and Goods.

In their May survey, the NAHB asked builders to evaluate the availability of two dozen different construction
materials. They found shortages of materials were “more widespread than at any time since NAHB began
tracking the issue on a regular basis in the 1990s”. Further, appliances were listed as the top reported product
shortage in the survey, which builders had not mentioned on the 2020 list.21

Source: https://eyeonhousing.org/2021/05/record-numbers-of-builders-report-material-shortages/.

21 https://eyeonhousing.org/2021/05/record-numbers-of-builders-report-material-shortages/.
Property Insurers Challenged by Skyrocketing Inflation and Natural Disasters 12

In the NAHB’s October 2021 Housing Percent of Builders & Remodelers Reporting
Market Index (HMI) survey, severe labor Shortages of LABOR (Directly employed)
shortages were also noted by builders Framing Crews
and remodelers.
Carpenters-rough

When averaged across the 9 trades Carpenters-finished

surveyed in a consistent fashion since
Plumbers
1996, “the share of builders reporting
a shortage of labor hit a record 76% in Bricklayers/Masons

October of 2021. This is significantly Concrete workers

higher than the previous peak of 67%
Electricians
established at the end of the 1990s (when
an extended period of GDP growth above HVAC workers

4.0% had driven down the unemployment Painters

rate under 4.0% and created particularly
Drywall Installation workers
tight labor markets). And it is much
higher than the 45% reached during the Flooring installers

housing boom of the mid-2000s, when

Landscaping workers
the industry needed to find enough labor
Roofers
to build 2 million homes a year.”22
Excavators

Weatherization workers

Builders
Building maintenance manager Remodelers

Source: NAHB Housing Market Index

Housing Starts (area) and Shortage of Labor (bars)

Average Shortage Percentage for 9 Trades*, as Reported by Builders
Starts (000s) Shortage

*9 Trades: Carpenter-Rough, Carpenter-Finished, Electricians, Excavators, Framing crews, Roofers, Plumbers, Bricklayers/Masons
and Painters
Source: NAHB Housing Market Index

22 https://eyeonhousing.org/2021/11/record-share-of-nahb-members-report-labor-shortages/.
Property Insurers Challenged by Skyrocketing Inflation and Natural Disasters 13

GLOBAL CHIP SHORTAGE IMPACTING APPLIANCES

A severe global semiconductor chip shortage is also affecting numerous industries. An increasing number of
home appliances now include smart features, such as doorbells, dishwashers, refrigerators, and lightbulbs,
however chip supplies have been unable to keep up with demand as the limited chips are also needed for
autos, home office equipment, cloud computing and crypto currency mining. Contractors have faced 3-4 week
delays for appliances due to the shipping delays and chip shortage,23 and industry leaders and analysts have
suggested the shortages could drag out into 2023.24

In spite of the trends, do-it-yourselfers never slowed down in 2021, as the Monthly Retail Trade Survey in April
noted home improvement sales hit an all-time high—up 31% from pre-pandemic levels,25 while the National
Retail Federation noted year-end sales between November and December were up 13-15% for key home
improvement items, such as furniture and home furnishings, electronics and appliances, and building materials
and garden supplies.26

The Wall Street Journal similarly noted, “U.S. home prices in May experienced their biggest annual increase in
more than two decades,” pushing some first-time and lower income buyers out of the market. While trends
did force some buyers into retreat, the housing market remained hot throughout the year, as homes received
multiple offers and low mortgage rates continued to fuel demand. This suggests new construction trends will
continue for some time, keeping costs elevated until supply and demand find a new balance.

2021 NATURAL DISASTERS IN THE U.S.

NATURAL CATASTROPHE LOSS TOTALS
On the heels of a record-breaking year for natural disasters in 2020, 2021 was yet another very active and
costly year for insurers. Aon reported global natural catastrophes would reach $328 billion in economic costs
– the third costliest year on record, while global insured losses would reach $130 billion – the fourth highest
annual insured loss on record,27 behind 2017 ($161bn USD), 2011 ($160bn USD) and 2005 ($140bn USD). Global
insured losses were 76% above the 21st century average, with the highest proportion of insured losses (71%)
recorded in the U.S.28 – the second consecutive year that the U.S. share topped 70%.

Global Insured Catastrophe Losses since 1970

USD billion (in 2021 prices)

Source: Swiss Re Institute

23 https://news.yahoo.com/might-worst-time-remodel-house-133610772.html.
24 https://www.businessinsider.com/global-chip-shortage-could-last-another-2-years-experts-say-2021-5.
25 https://fortune.com/2021/06/10/lumber-prices-2021-chart-price-of-lumber-production-wood-supply-costs-update-june/.
26 https://nrf.com/media-center/press-releases/nrf-says-2021-holiday-sales-grew-141-percent-record-8867-billion.
27 https://www.reinsurancene.ws/global-insured-losses-topped-100bn-again-in-2021-aon/.
28 Aon 2021 Weather, Climate and Catastrophe Insight.
 Property Insurers Challenged by Skyrocketing Inflation and Natural Disasters 14

Approximately 1 in 10 residential properties in the U.S. (14.5 million homes) were impacted by hurricane,
wildfire, winter storms or severe weather in 2020.29 U.S. economic losses from natural disasters in 2021
reached $169 billion, according to Aon, the third highest year on record according to the National Oceanic and
Atmospheric Administration (NOAA).30 Led by Hurricane Ida, which became the fourth costliest global insured
loss event since 1900, Aon noted U.S. insured losses would reach $92 billion, well above of the previous two
years, 2020 ($67bn USD) and 2019 ($26bn USD),31 and 105 percent above the average since 2000. Aon further
noted the combined U.S. insured loss in 2020 and 2021 was the highest two-year total on record for the 50
U.S. states, at $176 billion, surpassing 2004 and 2005, at $174 billion.32

BILLION-DOLLAR WEATHER EVENTS

Between hurricanes, wildfires, and other severe storms, 2021 became the seventh consecutive year in which
the U.S. experienced 10 or more separate billion-dollar weather and climate-related disasters. According to
NOAA, the yearly average is 7.4 events (1980-2021, CPI-adjusted). However, NOAA recorded 20 individual
disasters in 2021, each costing a billion dollars or more, which included 1 drought event, 2 flooding events,
11 severe storm events, 4 tropical cyclone events, 1 winter storm event, and 1 wildfire event.

U.S. 2021 Billion-Dollar Weather and Climate Disasters

Source: https://www.ncdc.noaa.gov/billions/

29 CoreLogic, 2021 Climate Change Catastrophe Report.

30 https://www.ncei.noaa.gov/news/national-climate-202112.
31 https://www.munichre.com/en/company/media-relations/media-information-and-corporate-news/media-information/2022/natural-disaster-losses-2021.htm-
l#&gid=1&pid=8.
32 Aon 2021 Weather, Climate and Catastrophe Insight.
 Property Insurers Challenged by Skyrocketing Inflation and Natural Disasters 15

Unlike FEMA, Aon views U.S. wildfires as individual events and their data indicated 3 billion-dollar wildfire
events occurred in the U.S. in 2021, resulting in 23 individual natural catastrophe events that exceeded the
$1 billion dollar threshold. According to NOAA’s data, the number of billion-dollar events was second only to
2020, which shattered the record with 22 separate billion-dollar events, and pushed the most recent 5 year
annual average up to an unprecedented 17.2 events (2017–2021, CPI-adjusted).

NOAA further indicated 2021 was particularly notable for landing in the top 2 or 3 for both frequency of
events and overall disaster costs in the U.S.

1980-2021 United States Billion-Dollar Weather and Climate Disasters (CPI-Adjusted)

EVENT COST EVENT COUNT

2017 $346.1 2020 22
2005 $244.3 2021 20
2021 $145.0 2011 16
2012 $142.4 2017 16
2020 $102.0 2016 15
2018 $100.1 2019 14
Average $51.4 Average 7.4

Source: National Oceanic and Atmospheric Administration (NOAA)

2021 was also noted to be the third most active Atlantic hurricane season on record, dating to 1851, with 21
named storms and the second year in a row to exhaust hurricane names in the alphabet, with meteorologists
resorting to Greek letters. Seven storms became hurricanes and four reached major hurricane status of Cat 3
or higher on the Saffir-Simpson scale. Two hurricanes made U.S. landfall in 2021: Hurricane Ida, which arrived
in Louisiana on Aug. 30 as a strong category four storm, and Hurricane Nicholas, which hit southeast Texas on
Sept. 14 as a category one. 2021 also produced the costliest winter storm on record.

Top 10 Global Climate & Weather Events – ECONOMIC LOSSES

ECONOMIC LOSS INSURED LOSS

DATES EVENT LOCATION (USD billion) (USD billion) DEATHS
08/27 - 09/02 Hurricane Ida United States, Caribbean 75.3 36.0 96
07/12 - 07/18 Flooding Western & Central Europe 45.6 13.0 227
06/01 - 09/30 Seasonal Floods China 30.0 2.1 545
02/12 - 02/20 Winter Weather (Freeze) United States, Mexico 25.0 15.0 235
01/01 - 12/31 Drought United States 9.0 1.3 -
02/13 - 02/13 Fukushima Earthquake Japan 8.0 2.5 1
04/05 - 04/08 Weinter Weather Western & Central Europe 5.6 0.4 -
12/10 - 12/12 Severe Weather United States 5.1 4.0 93
06/17 - 06/25 Severe Weather Western & Central Europe 4.9 3.5 7
01/01 - 12/31 Drought Brazil 4.3 0.1 -
All other events 130.0 49.0 9,500
TOTAL 343.0 130.0 10,500

Source: Aon 2021 Weather, Climate and Catastrophe Insight

 Property Insurers Challenged by Skyrocketing Inflation and Natural Disasters 16

Top 10 Global Climate & Weather Events – INSURED LOSSES

ECONOMIC LOSS INSURED LOSS

DATES EVENT LOCATION (USD billion) (USD billion) DEATHS
08/27 - 09/02 Hurricane Ida United States, Caribbean 75.3 36.0 96
02/12 - 02/20 Winter Weather (Freeze) United States, Mexico 25.0 15.0 235
07/12 - 07/18 Flooding Western & Central Europe 45.6 13.0 227
01/01 - 12/31 Drought United States 9.0 4.3 -
12/10 - 12/12 Severe Weather United States 5.1 4.0 93
06/17 - 06/25 Severe Weather Western & Central Europe 4.9 3.5 7
04/24 - 05/02 Severe Weather United States 3.4 2.6 -
02/13 - 02/13 Fukushima Earthquake Japan 8.0 2.5 1
06/01 - 09/30 Seasonal Floods China 30.0 2.1 545
12/30 - 12/31 Marshall Fire United States 3.3 2.0 -
All other events 133.0 45.0 9,500
TOTAL 343.0 130.0 10,500
Source: Aon 2021 Weather, Climate and Catastrophe Insight

HURRICANE IDA RANKS AS COSTLIEST GLOBAL DISASTER IN 2021

Hurricane Ida became the costliest global disaster of 2021, and the fourth costliest global insured loss event
since 1900, after it made landfall not far from heavily populated New Orleans, Louisiana as the fifth strongest
landfalling hurricane to hit the contiguous U.S. According to data from the Louisiana Department of Insurance,
as of December 31st, insurers have received 434,633 claims of all types from Hurricane Ida – 144% more claims
than Hurricane Laura and 34% more claims than Hurricanes Laura, Delta and Zeta combined, which struck
Louisiana in 2020.

Top 10 Costliest Global Insured Loss Events – 1900-2021

ECONOMIC LOSS INSURED LOSS

DATES EVENT LOCATION (Nominal USD billion) (2021 USD billion)
Aug 2005 Hurricane Katrina United States 65 90
Mar 11, 2011 Tohoku EQ/Tsunami Japan 35 42
Sep 2017 Hurricane Irma United States, Caribbean 33 37
Aug-Sep 2021 Hurricane Ida United States, Caribbean 36 36
Oct 2012 Hurricane Sandy United States, Caribbean, Canada 30 35
Aug 2017 Hurricane Harvey United States 30 33
Sep 2017 Hurricane Maria Puerto Rico, Caribbean 30 33
Aug 1992 Hurricane Andrew United States, Bahamas 16 31
Jan 17, 1994 Northridge EQ United States 15 28
Sep 2008 Hurricane Ike United States, Caribbean 18 23

Source: Aon 2021 Weather, Climate and Catastrophe Insight

Hurricane Ida marked the second year in a row that a category four hurricane hit Louisiana, after Hurricane
Laura made landfall in the Lake Charles area in 2020. In addition to Ida’s strength at landfall, the storm
maintained its intensity longer than most other notable storms, and further produced an unprecedented
amount of rainfall after it merged with a frontal system, resulting in historic flooding and strong tornadoes
across the northeast, ultimately causing $75 billion in damages, and $36 billion in insured losses.33

33 Aon 2021 Weather, Climate and Catastrophe Insight.

strong tornadoes across the northeast, ultimately causing $75 billion in damages, and $36 billion in
insured losses.33
Property Insurers Challenged by Skyrocketing Inflation and Natural Disasters 17
Secondary Perils Account for Half of U.S. Losses

Insurers continue to be concerned, however, of the increasing volume of so-called “secondary peril”
events,
SECONDARYwhich include severe
PERILS convective storms,
ACCOUNT FOR HALF wildfires,
OFflooding, winter weather or drought. Such
U.S. LOSSES
events are more frequently driving annual loss years and accounted for more than half the losses in
Insurers continue to be concerned with the increasing volume of so-called “secondary peril” events, which
2021, led by the February Polar Vortex (also known as Winter Storm Uri), tornadoes and wildfires. Such
include severe convective storms, wildfires, flooding, winter weather, or drought. Such events are more
secondary peril events are becoming more impactful and generating an increasingly larger volume of
frequently driving annual loss years and accounted for more than half the losses in 2021, led by the February
insured losses,
Polar Vortex affecting
(also known the bottom
as Winter linesUri),
Storm of personal
tornadoesand
andcommercial lines
wildfires. Such propertyperil
secondary underwriters.
events are
Exacerbating these challenges in the U.S. are continued demographic shifts and population
becoming more impactful and generating an increasingly larger volume of insured losses, affecting growth in
the bottom
coastal
lines of or other catastrophe-prone
personal and commercial linesareas which
property are furtherExacerbating
underwriters. contributingthese
to thechallenges
increasedinmagnitude
the U.S. areof
economic
continued and insured losses.
demographic 34
shifts and population growth in coastal or other catastrophe-prone areas which are
further contributing to the increased magnitude of economic and insured losses.34
The year kicked off with an abnormally severe polar vortex in February, which stretched across much of
Thecentral
the year kicked
U.S. off
andwith an abnormally
severely impactedsevere polar
heavily vortex incoastal
populated February, whichof
regions stretched across much
Texas. Prolonged of
freezing
the central U.S. and severely impacted heavily populated coastal regions of Texas. Prolonged freezing
temperatures in regions not acclimated to such cold caused an unprecedented number of pipes to
temperatures in regions not acclimated to such cold caused an unprecedented number of pipes to freeze and
freeze and burst throughout Texas, resulting in a record breaking $15 billion in insured losses due to the
burst throughout Texas, resulting in a record breaking $15 billion in insured losses due to the winter storm.
winter storm.

U.S. severe convective storms in 2021 generated nearly $27 billion in insured losses, becoming the third-
costliest year
U.S. severe for the peril
convective stormsbehind 2020
in 2021 ($38bnnearly
generated USD) and 2011 ($33bn
$27 billion USD),
in insured andbecoming
losses, topping $20 billion in
the third-
insured
costliestlosses forthe
year for theperil
third consecutive
behind year. USD)
2020 ($38bn Aon noted aggregate
and 2011 loss totals
($33bn USD), at this level
and topping may require
$20 billion a
in insured
shift,
losseswith thethird
for the “newconsecutive
normal” increasing from an
year. Aon noted expected
aggregate minimum
loss totals at $10
this billion annual
level may industry
require a shift,loss
withto
the
instead at least
“new normal” $15 to $20
increasing frombillion. 35
an expected minimum $10 billion annual industry loss to instead at least $15 to
$20 billion.35

According to NOAA, with 1,376 tornadoes reported, the preliminary tornado count for 2021 was above average
33 Aon 2021 Weather, Climate and Catastrophe Insight
across the contiguous U.S. Reinsurance broker Guy Carpenter noted on average there are 1,500 tornadoes
34 https://www.insurancejournal.com/news/national/2022/01/24/650571.htm
per
35 Aonyear
2021inWeather,
the United States,
Climate and with only 25Insight
Catastrophe occurring in December. 36
However, by early January 2022, 193
December tornadoes were confirmed — the greatest number of tornadoes for any December on record and
February 2022
nearly twice the previous record of 97 in 2002.37 17

34 https://www.insurancejournal.com/news/national/2022/01/24/650571.htm.
35 Aon 2021 Weather, Climate and Catastrophe Insight.
36 https://www.reuters.com/markets/europe/us-tornadoes-push-insurers-2021-bill-over-105-bln-climate-change-impact-grows-2021-12-21/.
37 https://www.ncei.noaa.gov/news/national-climate-202112.
 average across the contiguous U.S. Reinsurance broker Guy Carpenter noted on average there are 1,500

2021 Weather, Climate and Catastrophe Insight

tornadoes per year in the United States, with only 25 occurring in December.36 However, by early
January 2022, 193 December tornadoes were confirmed — the greatest number of tornadoes for any 18
Property Insurers Challenged by Skyrocketing Inflation and Natural Disasters
December on record and nearly twice the previous record of 97 in 2002.37

Several regions in the Northeast, including Pennsylvania, Delaware, New Jersey and New York,
experienced a very active tornado season in 2021, in addition to multiple very strong events in the Mid-
Several regions in the Northeast, including Pennsylvania, Delaware, New Jersey and New York, experienced
Mississippi River Valley. In particular, the Dixie Alley experienced an EF-4 tornado on March 17 and
a very active tornado season in 2021, in addition to multiple very strong events in the Mid-Mississippi River
March 25, while an the
historic severeexperienced
weather event on December 10-11, known as the Quad State
Focus
Valley. Topic:
In particular, Severe
Dixie AlleyConvective anStorms
EF-4 tornado on March 17 and March 25, while an historic
Tornadoes, produced
severe weather two
event on long-tracked
December 10-11, EF-4
known tornadoes
as the Quad across Arkansas,
State Tornadoes,Missouri,
producedTennessee and
two long-tracked
Increased
Kentucky – the Losses
longestChange
of whichFocus for Re/Insurers
stretched nearly 166 miles behind
across 2020 ($38
Kentucky and billion)
a small and 2011 ($33
portion of billion).
EF-4 tornadoes across Arkansas, Missouri, Tennessee and Kentucky – the longest of which stretched nearly
Aggregate loss totals at this level continue to suggest
Tennessee.
The risks
166 miles This
across was shortly
associated
Kentucky andfollowed
with severe by a Midwest
a smallconvective
portion of storms derecho
Tennessee. Thisevent that generated
was shortly followed bymore than 60derecho
a Midwest
this is an increasingly expensive peril for the industry.
eventare well
that documented.
generated more While
than tornadoes
60 tornadoes drive most
tornadoes across Nebraska and Iowa on December 15 and as aItresult
across Nebraska and Iowa of unseasonably warm
on December 15 and as a result
may require a shift in the “new normal” being a
external media coverage, the reality is hailthe
and non-
temperatures became the first derecho event on record in December,
of unseasonably warm temperatures became first derecho event on according
record
minimal $10
in to officials
December,
billion annual withloss
according
industry the
to
to instead at
tornadic
officials with straight-line
the National winds are an increasing portion
Service.Weather Service. 38
National Weather 38
least $15 to $20 billion.
of annual losses for the peril on a global scale.
SCS has accounted for higher annual insured losses There is no question that the U.S. dominates annual
than tropical cyclones in more than two-thirds of SCS insured losses. The number of insured loss
years dating to 1990. As losses continue to go up, events that top $500 million has increased globally in
it is causing a reevaluation of how insurers and recent decades, but the increase is most pronounced
reinsurers view the risk. A December 2021 AM Best in the U.S. The country has accounted for 79 percent
report noted that increasing losses “will lead to of all SCS events beyond $500 million dating to 1990.
insurers re-examining their reinsurance protection After a record 19 events in 2020, another 14 were
and to reinsurers becoming more cautious as they recorded in 2021. The rest of the world had three
look at demand and risk, which may be reflected such events.
through pricing, limits, deductibles, and other Identifying risk and attempting to limit damage via
underwriting tools.” improved building code practices and enforcement
is a pervasive challenge. However, population and
exposure patterns across the U.S. continue to shift
United States
into warmer and more southern climates that have
The United States is the SCS loss capital of the world, increasingly become larger annual loss drivers. With
and 2021 reaffirmed its unofficial title. Public and the most favorable SCS environments shifting a
private insured losses totaled nearly $27 billion and bit further east from the traditional “Tornado Alley”
According
toppedto$20
Aon, insured
billion losses
for the thirdfrom the mid-December
consecutive year, and tornado
acrossoutbreak arethis
the Plains, expected
is also to reachthe
causing $4 insurance
According to Aon, insured losses from the mid-December tornado outbreak are expected to reach $4 billion,
the fourth time in five years. It was the third-costliest
billion, while credit rating agency Fitch estimated insured losses could to
industry rise to $5 billion,
reassess riskrivaling
thethe from a the U.S.and
hazard
while credit rating agency Fitch estimated insured losses could rise to $5 billion, rivaling U.S. Midwest
year on record for U.S.
Midwest derecho event in August insurers with
2020. the
39 peril, only
property perspective.
derecho event in August 2020. 39

Exhibit 37: Total

Total Insured
Insuredlosses
Lossesfrom SCS
from events
SCS thatthat
events caused at least
Caused USD500
Insured million
Losses insured
of $500 loss
million+
Total insured Losses (2021 USD billion) Number of Events

24
54
$71B
36
https://www.reuters.com/markets/europe/us-tornadoes-push-insurers-2021-bill-over-105-bln-climate-change-impact-
18 18
grows-2021-12-21/ 17
37 https://www.ncei.noaa.gov/news/national-climate-202112
14 14
38 https://www.claimsjournal.com/news/midwest/2021/12/22/307716.htm 13 13 13
TOTAL
39 https://www.reuters.com/markets/commodities/deadly-us-tornadoes-cost-insurers-about-3-bln-kcc-2021-12-14/
11 11 11 11
$377B 9
8
February 2022 5 5 5
18
4 4 4
3 3 3
2 2 2 2 2
1 1 1
$306B
1990 1995 2000 2005 2010 2015 2020

Americas, APAC, EMEA United States

Source:
Data: AonAon 2021 Weather,
(Catastrophe Insight) Climate and Catastrophe Insight

38 https://www.claimsjournal.com/news/midwest/2021/12/22/307716.htm.
39 https://www.reuters.com/markets/commodities/deadly-us-tornadoes-cost-insurers-about-3-bln-kcc-2021-12-14/.
 Property Insurers Challenged by Skyrocketing Inflation and Natural Disasters 19

It was also an active wildfire year across the western U.S. with more than 7.1 million acres burned. The L.A.
Times reported California experienced its hottest summer on record and its driest water year in a century,
which by July resulted in more land having burned in the state than at the same point in 2020, a year that
saw more than 4 million acres burn in total — more than any other year in recorded history. Unprecedented
longer, hotter, and drier conditions, combined with significant fuel loads, resulted in the Dixie Fire becoming
the largest single wildfire in California history (2020’s August Complex Fire merged multiple fires together).
Conditions also enabled for the first time ever a wildfire to burn clear across the Sierra Nevada mountains
from one side to the other – first through the Dixie fire, which destroyed the Gold Rush-era community of
Greenville, only to be repeated one month later after the Caldor fire largely destroyed the mountain hamlet of
Grizzly Flats and threatened South Lake Tahoe.40

Fire officials noted what was remarkable about the Caldor Fire was how it burned, how dry the dead trees
that fueled it were and how easily they ignited. Firefighting agencies that study fuel moisture and ignition
probability heading into wildfire season indicated this was the first year that the probability of fuel igniting
was 100%, meaning there was a 100% likelihood any ember blowing ahead of a fire would start a spot fire.41 As
a result, 3,629 structures were destroyed in California wildfires.

Halfway through the summer of 2021, nearly 100 percent of the Western U.S. was in drought – a concerning
measure as the U.S. has never experienced that much land so dry west of the Continental Divide in 122
years of observation. Significant high temperatures further amplified a 20-year megadrought that’s led to
aridification, or drying up, of the region including, most notably, the Colorado River Basin, which has seen its
natural flows diminished by nearly 20 percent since 2000.42

Mega
MegaDrought
DroughtPersists
PersistsininWestern
WesternU.S.
U.S.

As Colorado hadn’t seen substantial

rainfall since mid-summer, in mid-
December during a 100mph+ wind event,
bone-dry grasslands erupted into flames
and quickly engulfed nearby suburban
40 https://www.latimes.com/california/story/2021-12-13/winter-storms-poised-to-end-california-wildfire-season.
41 https://www.claimsjournal.com/news/west/2021/11/29/307277.htm.
communities on the outskirts of Denver
42 https://www.discovermagazine.com/environment/how-the-u-s-megadrought-will-affect-2022-and-beyond.

near the Rocky Mountain foothills. The

Marshall Fire destroyed nearly 1,100
homes in a matter of hours, quickly
becoming the costliest and most
destructive wildfire in state history, with
Property Insurers Challenged by Skyrocketing Inflation and Natural Disasters 20

As Colorado hadn’t seen substantial rainfall since mid-

summer, in mid-December during a 100mph+ wind U.S. December Insured Loss Estimate ($bn)
event, bone-dry grasslands erupted into flames and
quickly engulfed nearby suburban communities on the
outskirts of Denver near the Rocky Mountain foothills. Severe Weather
Earthquake
The Marshall Fire destroyed nearly 1,100 homes in a Tropical Cyclone
Wildfire
matter of hours, quickly becoming the costliest and Winter Weather
Drought
most destructive wildfire in state history, with estimates Flooding
Other
from Jefferies indicating potentially $2.5 billion in
insured losses and Aon noting it will be the mostly
costly U.S. wildfire event outside of California.43 The fire

Long-term average

10 year average

2019

2020

2021
also comes on the heels of the 2020 wildfire season
when the state suffered its three largest wildfires in
recorded history.44

Overall, Jefferies estimated U.S. insured catastrophe

losses in December may exceed $8 billion, which is Source: J
 efferies, Data from Aon Benfield, Munich Re,
Swiss Re and Weather Source
nearly eight times the 10-year average.

ADDITIONAL IMPACTS
GROWTH IN HIGH-RISK AREAS AND CLIMATE CHANGE

These events, whether it be extreme heat, cold, or precipitation levels, proved to be just a sampling of extreme
weather anomalies that are becoming increasingly more common in the U.S. and around the world, leading
to more devastation in communities. As records continue to break and losses accrue from weather-related
disasters, insurers and other stakeholders across the industry are looking to understand the various factors
contributing to increasing losses year after year.

Two main themes have consistently emerged as leading contributors: population growth in hazard-prone
areas such as the Gulf Coast and the Wildland Urban Interface (WUI), in addition to escalating frequency
and severity of weather-related disasters due to climate change. (Weather-related disasters include floods,
hurricanes, tropical storms, tornados, wildfires, droughts, winter storms, and extreme temperatures.)45

43 https://www.artemis.bm/news/december-cat-losses-include-3-9bn-tornadoes-2-5bn-marshall-fire-jefferies/.
44 https://www.insurancejournal.com/magazines/mag-features/2022/01/24/650191.htm.
45 https://www.fema.gov/sites/default/files/2020-11/fema_building-codes-save_study.pdf.
 Property Insurers Challenged by Skyrocketing Inflation and Natural Disasters 21

U.S. Selected Significant Climate Anomalies and Events for 2021

Source: https://www.ncei.noaa.gov/news/national-climate-202112

With climate change impacts showing no signs of easing, the insurance industry has placed a substantial
focus on mitigating future loss costs to ensure the private insurance market remains well positioned to provide
coverage. Recent years have underscored the need for public and private stakeholders across the industry to
work together to make communities more resilient, to withstand increasingly frequent and severe catastrophic
events. This should include better community planning, increased fuels management and higher building code
standards in catastrophe-prone areas, as well as hardening existing homes including supporting programs that
promote community-wide adoption of hazard-resistant building codes.

This National Institute of Building Sciences (NIBS) has shown that every $1 spent on natural hazard mitigation
in new code construction can save $11 in disaster repair and recovery costs. In 2020, FEMA released a report
titled, “Building Codes Save: A National Study”. The study shows that modern building codes lead to major
reductions in property losses from natural disasters and focused on three dominant natural hazards in the
United States: floods, hurricane winds, and earthquakes. The International Code Council shared the following
of the study.
mitigation in new code construction can save $11 in disaster repair and recovery costs. In 2020, FEMA
released a report titled, “Building Codes Save: A National Study”. The study shows
that modern
Property building
Insurers codes lead
Challenged byto major reductions
Skyrocketing in property
Inflation losses
and Natural from natural disasters and
Disasters 22
focused on three dominant natural hazards in the United States: floods, hurricane winds and
earthquakes. The International Code Council shared the following of the study.

FEMA
FEMA reported
reported thatthat
if allifnew
all new construction
construction adhered
adhered to modern
to modern building
building codes,
codes, the thewould
nation nationsave
would
save
more more
than than
$600 $600
billion bybillion
2060. byPer2060. Per the summary:
the Agency’s Agency's summary: "Adopting
“Adopting building building
codes is the codes
single is the
single
most mostthing
effective effective thing
we can do!we
Onecan do! One
change changecodes
in building in building codes
can save livescan
andsave livesproperty
protect and protect
for
property to
generations forcome.”
generations to come."

Source: https://www.fema.gov/sites/default/files/2020-11/fema_building-codes-save_study.pdf
Insurers Emphasize Mitigation as Key Solution

In response to growing climate impacts, insurers believe communities must begin to adapt now, by
INSURERS
adopting EMPHASIZE
and enforcing strongerMITIGATION
building codesAS KEY SOLUTION
in high-risk areas. The insurance industry has long been
atInthe forefront
response of research
to growing to understand
climate how believe
impacts, insurers to mitigate against risk
communities musttobegin
reduce futurenow,
to adapt losses, whether
by adopting
from hurricanes,
and enforcing earthquake,
stronger buildingorcodes
any other naturalareas.
in high-risk disasters. Throughindustry
The insurance the Insurance
has longInstitute for
been at the
Building
forefrontand Home Safety
of research (IBHS), the
to understand how insurance industry
to mitigate againsthasriskdeveloped scientifically
to reduce future proven standards
losses, whether from
that enable earthquake,
hurricanes, homes and or businesses
any otherto withstand
natural increasingly
disasters. Through severe storms,
the Insurance such asfor
Institute a Cat 5 hurricane.
Building and Home
Safety
As more(IBHS), the insurance
communities industry has
are hardened, thisdeveloped scientifically
should result proven standards
in a meaningful decreasethat enablewhich
in losses, homes and
should
businesses to withstand increasingly severe storms, such as a Cat 5 hurricane. As more communities are
translate to more affordable and available coverage for consumers.
hardened, this should result in a meaningful decrease in losses, which should translate to more affordable and
available coverage for consumers.

To further assist, insurers are also investing in more climate-focused tools and strategies, such as real-time
February 2022
and streaming data integration and predictive analytics, to help communicate risk to consumers at critical
22
times when there remains the ability to affect real change. For example, leveraging relevant predictive data,
a growing number of insurers can help identify the potential for a significant weather-related event and
notify customers to take whatever steps are necessary to best protect their lives and their property. And such
predictive data can also be used to help identify affected parties and prioritize the allocation of relief efforts
or resources in the immediate aftermath of a natural disaster.

In the near-term, amid rising inflation, supply chain issues and increasing natural disasters, insurers may need
to address current pressure on loss ratios through rate adjustments and stricter underwriting. However, a
growing body of evidence suggests mitigation provides a strong long-term solution to reduce future losses.

Insurers’ overwhelming priority is to help protect what matters most — families and communities — and will
continue to support communities as they prepare for risks and help their customers rebuild their lives and
restore their property when natural disaster strikes.
APCIA CONTACT:
Karen Collins
Assistant Vice President, Personal Lines
847-553-3695
karen.collins@apci.org