Rate Increase = (Non-cat Loss ratio + Non-modeled Cat loss ratio + modeled Cat Loss ratio + Fixed Expense Ratio)/(1 - Variable Expense Ratio- Profit Provision) - 1
That's the basic rate increase formula. You'll get territorial and other classification adjustments like roof type if the rate afterwards.
Inflation tells part of the story for non-catastrophe losses but the loss trend is higher than inflation - it's exploded since COVID as other costs have increased by more than inflation with shifts in the supply curve. Variable expense isn't affected by inflation. Fixed expense is affected by it. Catastrophe losses are another thing.
Catastrophe loads are put into the ratemaking process. Depending on the company it takes somewhere from a 10 to 20 year average of the losses incurred adjusted for inflation and other trends. Recently, there's more tornado activity/damage along Tornadao Alley and Dixie Alley, which both reach into Texas, as well as more hail damage recently than in the past - this effects the state non-modeled cat loss ratio. This portion isn't just hit by inflation, but there's an exposure adjustment as well as with the suburbs pushing outwards, as well as similar loss trend as the non-catastrophe losses..
Previously, it seemed like the Gulf Coast was taking a major hit every 10-15 years. From 2005 until now, there's been a huge uptick in major storms making landfall along Katrina, Ike, Harvey, Irma, Matthew, Michael, Laura, etc. This has caused a shift in modeled cat results, much larger than inflation adjusted as the models get adjusted to account for similar hurricanes than anticipated storms. These results get aggregated down to the state, county, and zip code level, so only the state losses get used in the rate indications. The county and zip code results will can effect the territorial adjustment factors, so the coastal counties bear most of the cost.
Combine that with the tight reinsurance market, companies are retaining more risk (or paying more in fixed expenses to maintain the same risk tolerance). One of the reasons for reinsurance is to stabilize loss results. With the lack of stability, more profit has to be made to cover for the instability. So we have a larger numerator and smaller denominator for a much larger rate increase than usual.
Insurance companies can get away with a lower profit provision IF the market is doing well, so they have some investment income, but that's not the case at the moment. This is how workers comp can be profitable because they depend on investment income to support that line of business since it's long tailed. Property lines are short tailed so not as much investment income. Also, inflation would totally eff over companies that got hit with a big loss and needed to sell some of its portfolio. The bonds are priced at book value on the balance sheet, but they're worth less because of inflation, so companies would be taking loss if they needed to sell bonds.
So you could see a decent rate increase of 20%-50%.
That's only part of the story though. Most companies require you to be insured at least 80% of the market value of your home and Premiums = Rate * MV with market values about doubling recently, so that just about gets you 3x the previous premiums.
