Another year is officially in the books, and the year 2022 didn’t turn out as we would have hoped. If you might recall, in 2021 Midwest Family incurred a 103 combined ratio driven primarily by deficient reserve development in prior years. Going into 2022, there were a lot of positives signs that pointed to a good year. Storm activity was light in 2021. Our current accident year experience showed a combined ratio in the low 90’s (it was prior year deficiencies that pushed that combined ratio up). Our reserve strengthening positioned us well for 2022. We just needed to have the same kind of loss experience last year as we had in 2021…. And then inflation hit. Despite redundant prior year reserve development in 2022, we finished the year with a combined ratio of 100.4 driven primarily by inflated loss costs. We grew our premiums by 7.3% to $249.3M with our First Class Portfolio and Midwest Family Advantage work comp products playing an integral role in that growth.
Our industry has been dealing with inflation in the casualty lines for years. New plaintiff tactics, an understaffed court system, and litigation funding have been driving progressively higher verdicts and settlements for the past seven years. The industry has dubbed it social inflation and it’s real. For too long, the public has turned a blind eye to nuclear verdicts and the institutional funding of litigation in a way that has created a real cost for society. In fact, businessowners and responsible individuals are often paying twice as much for motor vehicle insurance as they were just seven years ago. But if social inflation wasn’t enough, we now have real inflation in the property line. The headline CPI peaked at over 9% in June of 2022, but that only tells half the story. Construction materials inflated at a much higher rate driven by supply constraints following the global pandemic. In many cases, costs are 50% higher than they were in 2019. That went somewhat unnoticed in 2021 with the dearth of convective storm activity. However, in 2022, there were 11 insurable events worldwide that exceeded $1 Billion. Two of them were in the Midwest. The new severity brought on by inflation was driven home by frequency over the spring and summer season. Top of mind for Midwest Family Mutual was rebuilding those policyholders after significant storms that primarily impacted the states of Minnesota, Nebraska, South Dakota, and Wisconsin. Our claims team did a great job during what was a high volume storm season, and now we’re left to reflect on the financial impact.
The combination of inflationary pressures, and industry wide increases in reinsurance costs as of January 1st require a more defensive posture from Midwest Family going into 2023. Our new business standards in the property, auto, and umbrella lines will be more restrictive as we focus on a continuance of our high service level standards for existing customers. Premium increases will unfortunately be forthcoming. While we’d like to minimize that as much as possible, they’re a necessary outcome stemming from inflationary pressures and higher reinsurance costs. Most premium increases will be driven by increased insurance to value. For far too long, our industry has tolerated inadequacies in insurance limits resulting in policyholders being under-served when they need their insurance partner the most. The cost to replace property is up significantly in the last two years and inflation guards have not kept pace. We will strive to assess all limits as they are renewed in 2023 to protect our policyholders and agents. And yes, rate increases will be necessary. Profit margins are small in our industry. Our goal is to maintain them, not unreasonably grow them. In that sense, we consider our filed rate increases to be prudent and not over-reaching. That said, the impact of inflation on our loss costs are real and are being felt throughout the insurance industry. As a mutual insurance carrier, we have a fiduciary duty to all policyholders to strive for adequate premiums. Many of our Agents are already feeling that impact, and it will continue through the remainder of the year. Thank you for your understanding.
As MFM’s focus turns to rate adequacy in 2023, we continue to improve our way of serving you. In 2022, we introduced a First Notice of Loss portal on our website to provide convenience to policyholders and agents. We’ll be overhauling our Insured Portal in the coming months to better serve you with the information you need. It will be replete with billing and payment options and will provide you with instant access to policy and bill images. We’re also going to offer electronic notification of policy decs and bills for those policyholders who desire less paper. Look for that by the end of the year. We’re leveraging partners like Betterview, PriceDigest, and CoreLogic to enhance our underwriting techniques around roof exposures, auto physical damage valuations, and property values. In that sense, we still strive to innovate and evolve in a way that better serves our Agents and Customers.
And throughout it all, we employ the best Claims, Marketing, Underwriting, and Customer Service personnel in the industry. They strive to serve our Agents so that they might better serve their Customers.
Thank you so much for your business!
Aaron Boyd, MBA, CPCU, CIC
President & CEO