Due to the recent changes in homeowner policies and premiums, we felt it would be beneficial to help explain some of the changes that are taking place. We recently found an article in the SC Insurance News service that best explains what is taking place in the insurance market.
Frequently asked questions on coastal property insurance
Recent headlines have raised some valid questions about insurance rates and coastal property. Here is a list of frequently asked questions, and their answers that help give consumers a better understanding of the current marketplace.
I haven’t had a claim. Why are my rates going up?
First, insurance is a transfer of risk and not a savings account. Your premium is paid to transfer the risk of rebuilding your entire house to the insurer for the policy term. Secondly, rates are based on future risks. While claim history is one factor that helps indicates risk, it isn’t the only one. Some other factors that are included in determining rates include population growth, exposure, reinsurance costs, and construction costs.
There are several factors that could be contributing to an in increased pressure on rates. Population growth (especially in catastrophe prone areas), increases in catastrophe exposure, near-record losses in 2011 (insured losses in the United States totaled $35.9 billion, which was significantly higher than the previous 10-year average of $23.8 billion), increases in loss frequency and severity, and a lack of investment income for insurers.
Your insurance premium is not simply collected by and retained by your insurance company. The premium you pay protects you against the unpredictable risks associated with catastrophic events such as hurricanes, and non-catastrophic events like kitchen fires or theft.
Premiums also help the state’s economy. In 2009, the insurance industry provided nearly 39,000 jobs, paid about $125 million in state premium taxes, and contributed about $3 billion to South Carolina’s gross state product.
Why do South Carolinians, on average, pay more than our neighbors in N.C. and G.A.?
South Carolina has exposure to catastrophic hurricanes that cause significant damage well beyond their specific point of landfall. Hurricanes’ damage is not limited to part of a city, or a specific neighborhood. These massive storms often span hundreds of miles and cause widespread damage.
Our state has more than 187 miles of direct exposure to hurricanes with $191.9 billion in insured property along the coast. That coastal exposure represents 28% of the state’s total insured value (neighboring states NC and GA have only 9% and 5% of their respective exposures along the coast).
With increased development along the coast, risk analysts estimate that if Hurricane Hugo hit today, there would be about $10.9 billion in insured losses (Hugo caused $4.2 billion in 1989). Insurers must prepare now to ensure their ability to pay claims after a hurricane devastates our coast.
My home value has decreased, why hasn’t this lowered my insurance rate?
Since insurance provides protection against the costs of repairing and/or rebuilding your home, property values are not among the factors that help determine rates. Property values include the land value associated with a home, which is not covered by insurance. Insurance protects against losses to the actual dwelling or structure.
What is the Department of Insurance doing to protect my interests as a consumer?
The mission of the State of South Carolina Department of Insurance is to protect the insurance consumers, the public interest, and the insurance marketplace. The DOI is charged with ensuring the solvency of insurers, enforcing and implementing the insurance laws of this state, and by regulating the insurance industry in an efficient and equitable manner.
Part of their responsibility is to keep the insurance marketplace healthy and competitive by focusing on solvency, disclosure, and transparency for South Carolinians. Any rate change requested by a carrier must be filed and reviewed by the SC Department of Insurance. The insurance laws and regulatory environment governing South Carolina’s insurance market serve as a model for other states faced with similar exposures.
In other coastal states where rates are suppressed and capped; customers are faced with less competition, widespread non-renewals, greater subsidies, and mechanisms that will pass disaster restoration costs along to citizens through taxes and or assessments.
There are more than 100 companies currently writing homeowners insurance in South Carolina and some companies have entered the market since the implementation of the Omnibus Coastal Reform Act of 2007. There is availability, competition, and companies continue to enter the market.
Competition benefits consumers, and a healthy marketplace means insurers have enough claims paying capacity to help their customers recover quickly after a loss without unfair subsidies and mechanisms that will pass disaster restoration costs along to citizens through taxes and/or assessments. Since the regulatory changes passed in 2007, rate increases have slowed with increased competition. Premiums in 2008 – 2010 have risen by just over four percent a year, only a little bit faster than inflation. In the three years before the changes went into effect, annual premium increases averaged about 9 percent.
Are catastrophe models, or “black boxes”, simply ways insurance companies justify rate increases?
Catastrophe models are just one tool that insurance companies and reinsurers use to help determine risk. Models help provide more predictability by using events that have actually happened in the past. If companies simply used models to project greater losses, they would risk pricing themselves out of a competitive market. On the other hand, models that show the least amount of damage might position an insurer to have inadequate means to pay for claims. Catastrophe models are used not to justify higher or lower rates, but to justify a rate that is appropriate for a particular concentration of risk.
The term “black box” implies mystery and secrecy. The fact is that the majority of the information contained in catastrophe models is known. However, certain proprietary information that accounts for a small portion (typically between 3 and 5 percent) is protected for competitive reasons. This is not uncommon in any competitive industry. For example, a soft drink company lists its ingredients on the can, but it doesn’t list the proprietary formula that makes the final product.
Why are some companies choosing to non-renew policies?
By looking at the industry’s combined ratios the last five years, companies sometime spend more on claims and expenses than they collect in premiums. When a company is spending more per each dollar in premium that they take in, they protect their policyholders by managing exposure, not by growing. Companies compete for the best risks and work to refine their book of business to sufficiently diversify their exposures so that they are not overly concentrated with any particular type of risk.