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Premium Increases: What To Expect and Why!
Many of the calls we receive revolve around premiums, and in many cases, a premium increase. Premium increases are never a pleasant or popular subject, particularly in today’s challenging economy. I will touch on both the auto and homeowners insurance lines, what to expect in the coming months, and just as importantly ... why!
The inclement weather over the past two years has led to unprecedented losses for the insurance industry, particularly for anything related to property exposures. Automobiles, boats and other vehicles have unfortunately not escaped the wrath of these storms, nor the resulting damage and devastation.
Weather and Catastrophe statistics:
- The average number of annual “Cat” (catastrophe) events countrywide for the last decade (ending in 2009) was approximately 15, with an average annual “cost” to the insurance industry of 10-15 billion dollars. In 2011, we had over 50 “Cats” totaling over seventy-five billion dollars (Morgan Stanley). To put things in perspective, Illinois had 12 “Cats” of their own in 2011, at a total tab of over four billion dollars.
- Thunderstorm losses (most “non-cat”) totaled over 23.5 billion dollars in the first half of 2011 (New York Times, July 13, 2011).
- The number of Federal disaster declarations set a new record in 2011, with over 110 declared as of December 1, 2011 (A.M. Best data)
- There were a record 1600 tornadoes in the Central, Southern and Eastern U.S. in the first half of 2011, with an incredible 226 tornadoes in one day on April 26, 2011 (New York Times). These tornados caused over 23 billion dollars in damage and over 300 deaths (Roger Pielke, University of Colorado).
Other Factors:
- These catastrophic events have put a huge strain and demand on the building industry for labor and materials, driving up repair and reconstruction costs.
- The economic downturn and depressed investment returns and yields have put additional pressure on the insurance carriers. The investment returns which could once be counted on to subsidize losses are gone. In addition, the toll the economy has taken on the real estate market has not spared the insurance industry. The number of vacant homes is at an all-time high, with vacancy related losses (vandalism, theft of building components and fire) rising almost 600% over the past three years (Insurance Service Office statistic).
Auto Insurance
The auto line of coverage had been fairly stable for the insurance industry over the five years between 2005-2009, with pricing reflecting that for the most part. Both 2010 and 2011 were not quite so kind, unfortunately. While the above “facts and figures” are certainly more impactful on the property side of the equation, vehicles get damaged in these severe storms as well. Fortunately, as a whole, the experience was not as bad as homeowners, with the industry-wide experience about 15-20% higher than the average of the past five years. This translates into a total loss for the carriers of about 10 12%. They paid out $1.12 for every dollar they took in for 2011.
For the Horton “Stable” of carriers, we project an increase of 5-8% on average for our auto insurance clients. We expect the “direct writers”, such as State Farm, Allstate and American Family to increase auto rates on an average of 10%, a process which has already begun. As each of your cases is unique, of course all cases will vary. Following a few years where premiums have been very stable, and taking the unprecedented weather into account, we are currently feeling good about the auto line.
Home Insurance
The Home (property) side of the equation is unfortunately down right ugly. As discussed at length above, the losses occurring in 2010 and most certainly 2011 have been staggering. 2011 broke the single year record for total claims paid by September. Last year FAR exceeded the years where many encountered hurricanes Andrew, and Katrina. The homeowners’ insurance industry paid out $1.64 for every dollar taken in last year. Moreover, over the past 25 years, the ratio is $1.13 paid for every dollar coming in, and over the past 10 years, $1.21 paid for every dollar. So over any period in recent history you choose to look at, property insurance has been a losing proposition.
The weather events, which seemed to be anomalies, are now becoming annual events, and have to be factored into future rates. Our expectation for the coming 12 months for the carriers we represent would be an increase of 13-15%. This will vary by carrier, but we believe most will be in this range with a few in single digits and a few upwards of 20%. The carriers must react responsibly to protect their surplus (which took a major hit over the past few years) and be strong, financially solvent and ready for the claims of the years and decades to come.
On the home side, our expectation for the “direct writers” will be an increase of about 18-20% (we have already seen the start of this, as Allstate announced substantial increases in early January, and we expect State Farm to follow suit soon). While you personally may not have had a claim in the past few years (or maybe far longer), we must all remember that insurance is a business of spread risk. Our (the consumers) premiums are all pooled and the claims of a few are paid by the premiums of many.
No matter what the statistics show or how validated these increases may be, they are no less painful on each of us. Horton fully understands that and has an entire unit dedicated to reviewing our client’s renewals to make certain that their current carrier still represents the very best value. We are proud to represent 25 “A” and A+ rated carriers, and the strength and diversity of that “lineup” of carriers allows us to do the shopping for you, both when you came to us originally, and as long as we have the privilege of representing you. Should we find that there is a potentially better option for you at renewal time, we will contact you well before the renewal to discuss your options. Of course it is never our intent to move you “back and forth” between companies – you were placed with your current company for many reasons and not just their competitive rate. Our review will look at all factors and if there is a compelling reason to look at another carrier, we will reach out to you with specifics. Should you want to discuss your policies before then, or ever have a question or concern, please give us a call. We have a dedicated staff ready to help you!
Please do not hesitate to contact me directly via phone, e-mail or in person. I am here to help and welcome the opportunity to work with you!