In 2012 we expect many insurance companies to take significant rate increases. The reason is simple: they are losing money.
The Facts:
A good metric of an insurance company’s health is their “Combined Loss Ratio”. This figure provides a snapshot of a company’s underwriting profit; i.e., how much they’re paying in losses and expenses compared to the premiums they’re collecting.
Combined Loss Ratio = (Claims Paid + Expenses)/Premiums
A healthy company will have a combined ratio somewhere around 90%. That is, for every $1.00 they collect, they pay around $0.90 in claims and expenses. This gives the company an underwriting profit of 10%, which is healthy but not greedy. A Combined Ratio of, say, 75% would indicate that the company has priced their product too high. They would find it impossible to compete in the crowded marketplace of insurance. It’s hard to turn on the television without seeing geckos, cavemen, Mayhem, or major sports figures like LeBron James and Aaron Rodgers shilling for insurers. Many insurance carriers are reporting Combined Loss Ratios of 110% or more. This means they’re losing money. Ten cents on every dollar. (Of course this ignores the carrier’s investment income, which is also depressed due to record low interest rates. But I’ll save that for another blog post.)
Why?
Climate change is real. The storms we’re seeing are unprecedented. Wind and hail damage is destroying roofs and vehicles alike. This video which was taken in Knoxville, TN and posted on youtube by username: allstokhonda is a perfect example.
Hurricane Irene tore through the east coast of the United States in late August of 2011. One insurance carrier that I spoke with reported that they received 55,000 claims the day afterwards. Just the administrative cost of taking the calls, documenting the claims, sending the claims adjusters on-site, etc. is an enormous expense. The insurance companies aren’t built to absorb these spikes in claims volume, which means the have to outsource the process. That, in turn, increases their costs and typically degrades the service to the customer.
What Actions Should We Take?
If you receive a significant rate increase then call your agent. There are a few courses of action that may be appropriate:
1) Bundle your policies. Shop your home and auto insurance as a package deal. Many carriers are offering as much as a 25% discount on both policies if you place them together. An umbrella and jewelry schedule will add to the discount.
2) Increase your deductible. Small claims cost as much administratively for the insurance company as large claims. Most carriers are trying to get their customers to at least a $1000 deductible. As a general rule a higher deductible makes you a more attractive of a customer for the insurance company. This will yield better rates.
3) Shop around. Every insurance company has a defined “risk appetite”; i.e., a customer they’re trying to target. That target is often subject to change. In general, longevity with a carrier is a good thing. However, it may be the case that at one point you fit squarely within your insurance company’s risk appetite and now that is no longer true. Their risk appetite may have changed. Or perhaps they’ve stayed exactly the same and you’re the one who changed – you got married, bought a bigger home, a boat, etc. Now your risk profile is a better fit for a different company. Talk to your independent agent about what carrier may be the best fit.
