Insurance Premiums are Decreasing, But Be Very Careful
Because we live in a society where we hear insurance marketing slogans like “15 minutes can SAVE you 15%” and “Switch to (insert company) and SAVE (insert dollar amount)”, we become focused on the annual premium of the insurance policy.
In fact, the national average of homeowners insurance premiums is decreasing according to homeinsurance.com but is it time to really rejoice? The simplest and correct answer unfortunately is “No”. The average annual premiums may be decreasing but that statistic is incredibly misleading. It does not take into account the details of the policy: coverage, benefits, exclusions, deductibles, etc. A better reflection on the “price” of any insurance policy is by the analyzing the “base” rates.
And homeowners insurance “base” rates are increasing.
We know that in Business 101, the goal of any company is to make a profit. A restaurant will bill a customer based on a variety of factors, not just employees’ wages and cost of goods sold (cogs) but local market area factors, building overhead, outstanding debt, product demand, frequency of a returning customer, product reviews, etc. Surprisingly, insurance companies are not that different.
Recently I read an article stating that the 2013 hurricane season is the least active in 30 years. Yet throughout the country insurance rates for homeowner policies are increasing. The national average of homeowner insurance rates will be increasing by 7.7% in 2014. So, of course the question is, why? Why are insurance premiums going up when storms at an all-time low? Why will rates increase by an average 8% in Florida when they are not hit by significant storms in 2013? Why are rates in Texas increasing even though hail storms in 2013 were mostly insignificant?
The answer has multiple layers.
- DELAY IN RATE ADJUSTMENT: Understand the increase in rates is reactive to the storms from 2011 and 2012 which were very significant in terms of both frequency and severity. Carriers are not able to immediately increase base rates after a storm. The current rates must be analyzed from both a catastrophic and non-catastrophic perspective before the claim data is analyzed. Also know that the insurance company must file with the state for rate increases which takes time.
- ECONOMIC CONDITIONS: Insurance rates attempt to remain relatively constant during economic downturns. People who approve rate increases, typically look at the overall state of the economy as a factor in determining whether or not the general population can afford rate increases. What has happened in the past is that small rate increases are approved until the economy can support larger increases. The truth of the matter is, as the economy continues to recover, law makers and Department of Insurance (DOI) personnel will continue to increase homeowner’s insurance rate.
- SEVERITY: Catastrophic storms are no longer considered “outliers”. Outside of 2013, over the past 10 years, there has been a fairly consistent rise in catastrophic claim events in the US. The number of over $1B claims events have also steadily increased over that same period. A catastrophic loss equation is becoming more prominent in how rates are amended.
- MATERIAL AND LABOR: The cost of the repair work and material is increasing faster than insurance rate increases. Carriers are struggling to balance what to charge a homeowner because labor and material prices have increased significantly over the past 10 years.
So if rates are going up, why are the premiums going down? There are three main reasons:
- LESS COVERAGE: The amount of coverage provided to the homeowner is reduced as the home ages. Actual Cash Value (ACV) is replacing Replacement Cost Value (RCV) on “standard” insurance policies. The value of an ACV policy is much less than a RCV policy because the payment will include depreciation of the roof which will reduce the final amount to the homeowner.
- HIGH DEDUCTIBLES: More financial obligations are being transferred to homeowners away from insurance carriers. Deductibles are changing from a “Flat Dollar Value” to a “Percentage of Insured Home Value”. The difference between these two methods is typically hundreds if not thousands of dollars.
- MORE EXCLUSIONS: Flood insurance is already not covered by most insurance policies but there are a number of new exclusions to homeowners and property insurance. The most significant and heavily debated exclusion is for “Cosmetic Damage” to roofing materials.
As a homeowner, my recommendation is to be wary of insurance carriers who talk only about reducing your premiums. As you’ve read above, it’s not the only factor in determining proper insurance coverage for your family and home.