Insurance costs aren’t going down anytime soon, Allstate CEO says

Severe storms are increasing and claims costs are rising. Increasing weather volatility and the effects of climate change, along with pandemic-related supply chain issues, rising labor costs and inflation have prompted insurers to significantly increase home and auto insurance premiums across the country.

To get an on-the-ground perspective on what’s driving the price hikes and to explore when Americans can expect some relief, Barron’s I recently spoke with Tom Wilson, Allstate’s CEO since 2007.

An edited version of the conversation follows.

Barron’s:The impact of climate change on home insurance is a slow-moving crisis.And some of your biggest concerns?

Tom Wilson: First, the world is getting warmer and will continue to warm. We are convinced that we will move to a low-carbon economy. But no matter what we do, the climate will continue to deteriorate and natural disasters will continue to increase. These phenomena are not going to magically disappear. So we need to focus on building resilience and working on remediation.

I don’t think the resilience is there. If we don’t coordinate, we’re going to lose the game to China. China has been in this situation for over a decade. It now has about 80% of the world’s solar panel production.

What do you think are the biggest changes that will affect the insurance industry over the next five to ten years due to climate change?

Studies have shown that the most severe storms cause more damage. But there are two other things that are really important. First, we are building bigger and more expensive homes. Second, and this is very important, we are building homes in the wrong places. Part of the reason is that there is no effective mechanism for people to know how much risk they are exposing themselves to. You can build whatever you want, you just have to recognize that you are paying for it.

Most of these factors seem likely to continue. I don’t see people building smaller homes because they like big homes. I don’t see people moving away from high-risk areas. I think there will be more severe storms.

For homeowners, that means costs are going to go up. Last year, average homeowners premiums went up about 12%. But I don’t know if they’ll continue to go up at that rate.

One of the problems today is the availability of home insurance. You can’t get insurance in California or Florida, which is a problem.

Do you also see insurers leaving other states?

You will continue to find that owner availability remains an issue due to the structure of the industry. It doesn’t have to be that way.

In California, they don’t charge high-risk areas. So we stopped writing for 10 years, then we started writing again for about 18 months, and then we stopped again about a year and a half ago. If we can’t charge the right amount, we have two choices. We can charge lower-risk clients more. But I don’t think that’s fair and I don’t think that’s a bad idea. Or the other choice you have is to just lose money. And I’m not paid to lose shareholders’ money.

It’s the same thing in Florida. They’re in a crisis. I’m just saying that neither Florida nor California wants to be a part of this situation.

You mentioned that costs for homeowners will continue to increase. Is this all related to climate change?

In general, home insurance prices are going up. Probably more for other people than Allstate, but here’s why. From 2014 to 2023, the industry lost $28 billion in total on home insurance. In contrast, we made $6.7 billion in profits on home insurance.

Insurers are not going to do that anymore. Some did it because they are mutual companies and they don’t have shareholders. Some did it because they thought things were going to get better. Others just did it. Now the weather is tougher and the regulatory structure doesn’t allow you to change prices. So it’s going to be complicated, it’s going to create availability issues and higher costs. But we think it’s a growth opportunity.

For what?

We make money. Except for last year – and last year was a disaster year, especially in the first half of the year. For the previous ten years, we made money every year. Nobody else makes money.

But the direction we’re going is very different. If you look at what’s happening with the data and the analytics, we’re pretty advanced and ahead of the rest of the industry. For example, roofs are the most commonly replaced item in disasters. We do what we call age-rated roofs. If your roof is brand new and it’s torn off, we’ll give you a brand new one. If your roof is 25 years old, we’ll give you a prorated amount that reflects the cost.

So I’m very optimistic about the future from our perspective. Last year, our auto business declined for the Allstate brand. Total auto policies declined 2.9%, but homeowners policies increased 1.14%. And I think we can improve on that.

Why is last year an exception and not the new norm?

We don’t know. It’s possible. And if it is, we won’t make any money, or maybe not as much money as we think. We’re betting it’s not a radical change.

What’s going on with car insurance price inflation? Have we reached the peak?

Rate increases are lower this year than last year. Last year, auto insurance rate increases were about the same as the year before, about 16% for both years. This year, so far, they are much lower than that figure, about 2.4% in the first quarter.

But remember, these are just the rates we’ve approved. They take 12 to 18 months to get. So you’ll see car insurance prices continue to be higher than inflation this year. By how much? I don’t know.

What is driving the continued need to raise rates at this point?

Several factors are impacting this situation. Used car prices have increased by about 60% in two years, between January 2020 and 2022. But they have started to fall. What has not fallen as much are spare parts, prices and labor.

Is it still a supply chain issue?

No, I can’t prove it. I can just give you my observations, which is that the car manufacturers seem to have a model of selling the blade and giving away the razor. If you look at the price of a new car, the cost has gone up, but it’s gone up much less than the cost of the parts that are required to repair that car. If you’re a car manufacturer, what’s happening is that the car insurers are collecting money from our customers for their parts. So we’re a revenue agent for them.

We have tried to convince people to make non-OEM parts. They fight us all the time. I don’t think the price of spare parts is going to go down much.

The other, lesser-known side of things is what I call fender bender lawsuits. Any time one of our clients is involved in a very small accident, they are sued. In that case, we represent them. That has led to a significant increase in personal injury costs, which is reflected in the increase in rates and premiums that we collect.

All of these things tell me that you won’t see car insurance go below CPI for another 10 years.

What don’t investors know and what should they know about the insurance industry?

People avoid the insurance industry because they think it’s too complicated to understand. I don’t think it’s that complicated.

Overall, the industry has a low return on capital. People think they’re not making a lot of money, but most of that profit comes from the mutual companies. But if you look at Progressive, Allstate and State Farm, we’re all making good returns and good returns on equity. Progressive has a multiple that reflects that, plus growth. That’s what we’re working on to try to get growth in our business.

Yes, we have our problems. But our automotive business is almost always profitable, apart from these two years of Covid-19. Our investment portfolio is rock solid.

If you compare cash flow generation to the S&P 500, we are in the top decile in almost every period. That cash flow generation includes both dividends and share repurchases. So why is $1 of cash flow from the Pillsbury Doughboy worth more than $1 of cash flow from insurance? I don’t know.

Write to Megan Leonhardt at megan.leonhardt@barrons.com