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Underwriting

What’s in a rate increase?

We’ve all heard it before. “Why are you increasing rates?”

Many people, particularly those outside of our industry, assume that insurance rates automatically go up after a catastrophic event. While we of course consider an area’s vulnerability to hurricanes, wildfires or earthquakes when making these decisions, we’re equally attuned to the factors driving more everyday losses and damage.

The metric we use to monitor performance excluding catastrophes is called the attritional loss ratio. Over the past few years, our industry has seen an increase in claim frequency (how many claims we have) as well as severity (how big those claims are). The underlying costs for PCG to manage these claims are also rising. So how do we counteract that?

To start, we can change underwriting guidelines to restrict what is coming in the door. And while we’ve made many changes over the past year, it takes time to see the results in the PCG portfolio. The most impactful line of defense we have is to increase rates.

The reasons for heightened claim costs are varied, and not every factor pertains to a natural disaster. They can be caused by inflation or other factors, like more expensive labor or materials. For PCG, we’ve seen claim costs increase about 4% annually.  To keep up with that trend, we’d need to file a 4% rate increase in each state for each product, each year—which isn’t something that plays out in the real world. This number also doesn’t incorporate the increased costs we incur to conduct business each day, such as purchasing reinsurance or ensuring our catastrophe models stay current.  All of these contributors impact how much capital we need to effectively run our business.

When deciding how much rate is needed, we look at the overall combined ratio for a state or line of business. We account for our expenses, our expectation of natural disasters, anticipated severe losses and how much rate we got in the prior year. From there, we determine an indicated combined ratio that directly leads us to the actual rate indication by product or state.

The loss ratio or combined ratio that you might see in our numbers is a great moment-in-time snapshot, but it doesn’t really give a clear picture of how much rate we need to achieve our target combined ratio and enable AIG to make money.

If you have any questions or would like to learn more, please contact Matt Cliszis, Head of Individual Personal Insurance – U.S.