HUD Rule Could Step On The Toes Of Homeowners Insurance Companies Meaning Higher Rates For You

Pity the North Carolina homeowners insurance marketplace.  The past year has been pretty rough.  The huge storm losses from 2011 have forced most insurance companies to dramatically raise their rates and limit which homes they are willing to insure.  Trying to buy insurance for your home without the support of your auto policy is rate suicide now.  And even with the auto insurance as support, many homeowners have had to sign the dreaded consent to rate form, giving their insurance companies the right to raise their home insurance rates far above the maximum rate allowed by the state.    And now, the home insurance marketplace faces another ratemaking hurdle – The new HUD rule and the unkown impact that it might have on the insurance industry’s underwriting practices.

This new HUD rule is called the disparate impact rule, and it would expand the Fair Housing Acts discriminatory effects standard and how it applies to actions that have discriminatory effects on minority groups.  Simply state, this new rule would hold companies responsible for policies that result in discriminatory effects on minorities whether or not there was ever any intention to discriminate against them as minorities.  What this could mean, is that home insurance rates might be held to be discriminatory and if so, then this could have enormous impacts on homeowners rates in North Carolina.

When it comes to pricing a homeowners insurance policy for your home, your insurance company will study many different factors that are individual to your specific house and you as the owner.   These factors can be as diverse as the quality of fire protection services are offered in your area to your credit score to your past claims history.   The very nature of insurance rate making is to isolate the high risk home from the lower risk ones in order to price each policy most appropriately.  By their very nature, many of these rate making tools could be seen to have a discriminatory effect on all kinds of different groups of people. All of these factors along with many others that are unique to the house itself as well as the life and attitudes of the home owner go into the process of determining a specific price for insurance for that home and that customer.  But what if the insurance company was unable to use some or all of this information to determine their rates for a home because their methodology could be seen as discriminatory against some particular minority?

  

A rule of this nature could limit the ability of insurance companies to provide more risk specific rates and this could result in an insurance marketplace with two flaws that will force upward pressure on pricing for all insurance buyers.  First of all, if we strip the insurance company’s ability to underwrite a specific location or area for risks that are unique to that location or area, then we will be forcing them to raise the rates on all other homes in order to subsidize those that deserve a  higher rate due to their higher risk factors.  The second flaw in this approach of insuring with more unknowns is that if you limit the information that an underwriter has to evaluate the risk of a home, then the underwriter will have to overestimate the risks, and thus the rate to cover this gap in knowledge about the home or its owner. In the end, this will mean that all homeowners will face higher rates.

At this point in time, we will have to wait for lawsuits to work their way through the system before we know for sure what impact this new rule will have on insurance companies and their home insurance rates.  Some feel that this rule could run afoul of the McCarran-Ferguson Act which gives states the power to regulate insurance.  Perhaps McCarran-Ferguson will protect the insurance companies and allow them to continue to discover the information that they need to create a fair rate for a specific home.   At this point we will have to wait and see what the higher courts rule as challenges to this new HUD rule wind their way through the court systems.

Clinard Insurance Group is an independent insurance agency located in Winston Salem, NC.  We insure thousands of homes all across North Carolina and it is important to us that all buyers of insurance products to be informed consumers.  If you have any questions about your home insurance, your auto insurance or your business insurance, please feel free to call us, toll free, at 877-687-7557.  We will take as much time as you need to help you understand the insurance products that buy.