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All State
Allstate seeks a 34% rate increase in California!
Let's investigate if this premium increase request is necessary.
Allstate property & casualty segment has suffered a drastic drop in underwriting performance. As the table shows below, it suffered underwriting losses of between $2 and $3 billion in 2022 and 2023. Such losses are unsustainable. Allstate certainly needs to increase overall premiums to shore up underwriting profitability.
Allstate data is from annual reports.
Risk underwriting performance
Let's compare Allstate's long-term risk underwriting performance vs the industry (data source: US Property & Casualty and Title Insurance Industries 2023).The data indicates that its risk underwriting was better than the industry for the majority of the years during the past decade (lower ratio of claims expenses to premium earned).
However, in recent years Allstate went from over-performing to under-performing the industry. Indeed, from 2020 to 2023, Allstate's claims/premium ratio rose from 60% to over 83%. Meanwhile, the industry's ratio rose only from 70% to 76%.
Efficiency performance
When focusing on efficiency (G & A expenses/premium), Allstate is a strong performer as it runs its operation more efficiently than the industry. Its G & A expenses are on average 3 percentage points lower than the industry as a % of premium.
Underwriting profitability
Allstate's resulting underwriting gain (loss) reflects the deterioration in risk underwriting performance during the four most recent years. As a result, Allstate's underwriting operations went from being much more profitable than the industry in 2020 to suffering far greater losses in 2022 and 2023.
Long-term trends
When visualizing long-term trends, you see Allstate's rapid rise in claims expenses relative to premium (left-hand graph) resulted in an abrupt drop in profitability (right-hand graph).
So by how much does Allstate need to increase premiums?
Let's first figure out how much it needs to increase overall premiums. As shown below, it needs to increase overall premium by 4.5% just to break even and by 9.4% to reach its long-term average underwriting gain (4.5%).
Next, let's figure out how much Allstate needs to increase premiums in California.
Current data from Bankrate.com indicated that California premiums for the same amount of coverage are - 35% lower than the US average and - 23% lower than the US median. Meanwhile, California's risk (wildfire, etc.) is most probably not lower than the US risk.
The model below starts with overall premium increases. And, it figures out how much California premiums should be increased given a range of California premium underpricing ranging from 0% to - 35% (same as the - 35% vs the US average).
The table highlights in red the scenarios resulting in California premium increase of more than 34% (more than requested by Allstate).
As reviewed, we conclude that Allstate request to increase premiums by 34% in California appears reasonable. If this request is not approved, Allstate may leave the State. This would cause an acceleration of homeowners covered by the California FAIR Plan.
THE END
Gaetan Lion is an independent researcher with expertise in economics, econometrics, investments, risk management, statistics, and quantitative analysis. His areas of interest include demographics, economics, investments, Climate Change, health care, sports, and politics.