There's good reason to believe that homeowner insurance rates will increase next year. U.S property insurers have been unable to justify rate increases in recent years due to a lack of severe storm activity, but that has dramatically changed in 2011.
Although insurers aren't publicly proposing rate increases, Don Griffin, vice president of the Property Casualty Insurers Association of America (PCIAA) trade group, is confident that property insurance rates will rise in 2012, especially in coastal areas.
"Irene, combined with the other major disasters we hcave experienced this year, both in the U.S. and globally, will lead to rate increases in many areas in 2012," he says.
Gregory Locraft, an industry analyst with Morgan Stanley, agrees. "Irene alone does not raise rates, but when added to the $70 billion in insured [global] losses for the year, rates are bound to go up," he says. "Irene is just another log on a fire that has been burning all year long."
Home insurance losses from Hurricane Irene
While it is too early for exact figures, most property loss projections for Irene are coming in at around $7 billion. Jan Vermeiren, CEO of Kinetic Analysis Corporation, forecasts "damages between $5 [billion] and $10 billion dollars with a best estimate of $7 billion. Insured losses would be approximately $3 billion."
"These estimates are based on computer models since there is no real data yet," he adds. "The models have substantial uncertainty regarding flood damage and related economic impact that could add $1 [billion] to $2 billion" to total losses.
The current year is shaping up to have the highest annual property losses on record worldwide, according to Munich RE, a major reinsurer. Globally, total losses for the first six months of the year totaled $265 billion. Insured losses of $70 billion are almost five times the normal average. Losses in the U.S are well above average as well.
In the U.S., "total losses from thunderstorms alone exceeded $16 billion, which is far above the average of $6.4 billion," says Loretta Worters, spokesperson for the Insurance Information Institute (III). It's likely that those totals will continue to grow. The National Oceanic and Atmospheric Administration (NOAA) predicts there will be six to 10 hurricanes this season.
State-funded insurance companies are on the rise
Due to increased risks, many private insurers have abandoned coastal areas. This has led to a dramatic increase in state-funded home insurance companies in the last decade. These companies are often referred to as "insurers of last resort" because they are the only insurers willing to cover coastal properties. In Florida, the largest property insurer is the state-run Citizens Property Insurance Corp. A dozen states now have state-funded insurance companies.
According to the recent III report, "Residual Market Property Plans: From Markets of Last Resort to Markets of First Choice," these state-funded insurers have become concentrated pools of risk. The report warns that problems can arise when these plans run deficits. They are required to pass the cost on to all participating insurers in their market, who in turn pass it on to consumers in the form of surcharges. This leads to rising rates for everyone, not just coastal dwellers.
Conditions are favorable for home insurance rate hikes
Insurance companies are reluctant to talk about the potential for rate hikes in the wake of Hurricane Irene. "Our top priority at this point is helping our customers through the claims process so they can rebuild or restore their property as quickly as possible," says Allstate spokesperson Laura Strykowski.
While insurers must receive regulatory approval to raise rates, Irene has the potential to tip the scales in their favor. Storms like Irene tend to remind people of the need for home insurance and the extensive news coverage preceding Irene will help insurers make their case to government regulators.
Supply and demand may play a part as well. According to Locraft, "both customers and insurers will reevaluate their risk after a catastrophic storm, such as Irene. Homeowners will value the protection that insurance offers more and insurers, looking to realign their risk, may pull back in certain markets. Higher demand combined with less supply results in higher prices."
Reinsurers such as Munich RE insure insurance companies against major losses due to catastrophes. They do not need regulatory approval to raise their rates and industry groups such as the PCIAA expect that they will raise premiums in January.
"Reinsurers have suffered large losses this year due to the extraordinary number of natural disasters globally and they will be looking to raise rates in 2012", says Griffin. "Those increases are usually passed on to consumers."
Tips for keeping home insurance affordable
Where does all of this leave you as a homeowner? In many cases, a higher home insurance premium could be coming your way. This is especially true if your home is located in a coastal area that was hit by Irene. However, there are things that you can do to help keep your insurance rates down:
- Shop around. This is the best way to lower your rates. There can be dramatic price differences in home insurance quotes . If your home is located in a coastal area, consider contacting a state-operated insurance company. They often have the best rates due to subsidies from the state.
- Raise your deductible. While you will be responsible for a larger portion of damage costs if a major storm hits your community, raising your deductible can be a big money saver.
- Prepare your home for harsh weather. Adding storm shutters and reinforcing your roof can lower your homeowner insurance premiums. Contact your insurance company and ask if they offer discounts for disaster-proofing your home.
- Move inland. While this may seem extreme, coastal development is a big factor in rising insurance rates. NOAA predicts that four of the five fastest growing counties between 2011 and 2025 will be in coastal areas. Insurance costs in these areas are high for a reason: They are prone to flooding and windstorm damage. Moving inland can dramatically lower your insurance costs.
Courtesy: Community.nasdaq.com