2013 Homeowners Insurance Outlook
The New Year is bringing some changes and new insurance rates for homeowners. Unfortunately, rates are going up (in some cases sharply) and underwriting is tightening to a degree not seen in years. This is a national, not regional, issue. The bottom line is that insurance companies are experiencing poor results. The graph below shows homeowners loss ratios since 1990. Basically, this represents the amount insurance companies paid out for every dollar they brought in. According to Insurance Information Institute (iii.org), they have lost money over the last four years.
Causes for the Dismal Forecast
The reason for these poor results is the convergence of "the perfect storm." There are many factors at play, including:
- Increase in weather related activity: 2011 insured losses in the United States were $35.9 billion compared to a decade average of $23.8 billion (converted to 2011 dollars). The frequency of major weather events is increasing and hitting all parts of the country.
- Rising reinsurance rates: Unprecedented losses globally have caused reinsurance companies to increase their charges to insurers. That cost is factored into the end retail cost to the consumer. So yes, the tsunami in Japan affects our retail homeowner's rates here in the United States.
- Decrease in companies' return on investment income: Insurance companies collect large amounts of premium in reserve for payment of future losses. Those reserves are invested very conservatively, typically in the bond market. The returns on those investments are factored into the actuarial development of the proper rate.
- Increase in claims settlement costs: Despite the decrease in real estate values and general poor condition of our economy, building materials have been increasing on average 5+% annually over the last few years. This refers to the price of metals (such as copper), sheetrock, plywood, etc. The result is that companies are paying more in the claims process.
- Deferral of home maintenance: With the challenging economic times, some homeowners are deferring home maintenance. For example, they are postponing the replacement of the roof or hot water heater, which can lead to problems and expensive claims.
Impact on Rates and Tightening of Underwriting
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- Rates: Beginning in late fall of 2011, and differing regionally across the country, rates are increasing anywhere from 5% to 25%. Hardest hit are those homeowners with poor credit (most states allow one's credit score to affect the rate), prior losses, and in catastrophe-prone areas. An important point to know is that there are areas of the country that historically were not seen as catastrophe-prone, but are now.
- Underwriting: The market has changed dramatically in the last 60-90 days. Companies do not want unsupported homeowners business. That means they want the account rounded with an automobile policy as well. This is because the automobile product is profitable and offsets the poor results of the homeowner's line.