NC
home insurance rates underwent a 7% rate increase last July and some
customers still haven’t felt this increase if their policy has not renewed
since then. Despite this, the NC Rate
Bureau last Friday requested another homeowners insurance rate increase. This new request is for an increase that
averages 25.3% across the state. Wayne
Goodwin, the current NC Insurance Commissioner, has stated that he will not
approve this rate increase. This will
mean that the process will require a hearing to issue a ruling one way or the
other which could then be appealed to the courts. Even though the overall requested rate
increase statewide is 25.3%, the actual rate increases by territory will
vary. Some territories could see
decreases of up to 2.7% while other territories, especially coastal ones would
see increases as high as 35%.
The struggle between the insurance companies and the NC Insurance
Commissioner over homeowners rate levels is at once political and
economic. From the comments section of
the various news feeds online, I see that the general public is overwhelmingly
in support of the insurance commissioner and his goal of holding down
rates. While this is an expected result,
it does underscore the fact that this is a very political issue. Since most people react to this news by considering
only their pocketbook, then it is only natural for an elected politician to
want to pander to their stance. But I
believe that If consumers were able to better understand the economic equation
that insurance companies face, and also see how the unraveling of what used to
be a stable insurance marketplace negatively affects them, then they might have
a different viewpoint.
To that end, I want to give my readers a different
perspective on the negative impacts on their lives that a distorted and
dysfunctional insurance marketplace can generate. Here
I will share with you here an insider’s view as to what has already
happened and what I think we can expect if we continue down this path of
infighting between the NC Insurance Commissioner’s Office and the NC Rate
Bureau over NC property insurance rates.
You need to know that the NC Rate Bureau is an entity that
is owned by the member insurance companies who sell insurance in our state. Its goal is to pool loss data for statistical
purposes and to use that data to generate rates for many types of insurance
policies. This large pool of insurance
claim and loss data should, in theory, allow the rate bureau to make rate
requests that are more accurate than any one insurance company could generate
with their own partial loss data. And
what the Rate Bureau is telling us is that the losses in our state for
homeowners insurance are far exceeding the premiums that the insurance
companies are allowed to charge to pay for them.
From my perch as an insurance agency owner, I have witnessed
a number of big changes taking place in the home insurance over the past 3
years. Compared to the decade leading up
to 2010, our current homeowners insurance marketplace is currently
dysfunctional and getting worse each month.
The burden of these changes has fallen squarely on the insurance agent’s
shoulders to be sure, but they are also falling disproportionately on the
shoulders of the customers who become caught up in the tangled mess that
inadequate rates leave behind.
The first beginnings of change came in late 2011 when the
largest insurance companies changed their underwriting rules such that they
would no longer write new homeowners insurance policies without the supporting
auto insurance for that same customer.
This is because while the home policy was statistically guaranteed to
lose money for them, there was enough
profit in auto insurance to cover those losses.
Shortly thereafter, smaller insurance companies, not wanting to be left
holding the bag, changed their rules to match those of the big boys. Today
you would be hard pressed to find an insurance company willing to write a new
policy on your home without demanding the insure your autos as well. The
burden of this change fell hardest on the elderly who still owned their homes
but had stopped driving.
Not long after that, insurance companies decided to extend
this no home without auto rule to apply to their existing book of
business. Now they wouldn’t renew a
homeowners policy if they didn’t also write the auto insurance. Suddenly many homeowners who insured their
home and auto policies with different companies were facing a non-renewal of
their home insurance unless they brought their auto insurance to that company
as well. This change dragged quite a few
more homeowners into the vortex of marketplace disorder.
As insurance companies were turned down for one rate request
after another, many chose to use an archaic rule, called consent
to rate as the tool to get their home insurance clients to pay them rates
that are above the state mandated maximum rates that the insurance commissioner
has allowed. This was a way, albeit one
policy at a time, to make an end run around the insurance commissioner’s power
to control rates. But as you can
imagine, asking clients give you written permission to increase their rates,
one policyholder at a time is a very inefficient and costly way to get a rate
increase. Now an additional number of
homeowners insurance customers were drug through a new paperwork mess that even
left some with no coverage at all. I
have no doubt in my mind some homeowners out there who think they have
coverage, do not because they failed to sign a consent
to rate letter in time. With no
signature, their policy would not have renewed and if they didn’t notice that
they didn’t pay a bill recently, they may not realize that they have no
coverage.
One of the more dislocating gyrations of this dysfunctional
market occurred when several insurance carries simply stopped doing business in
NC. They non-renewed all of their
policies and moved on. This kind of
action reduces competition between insurance companies, and puts additional
upward pressure on pricing. In addition,
when they leave, they leave all insurance markets, so we see reduced
competition and higher pricing in other areas like auto insurance, business
insurance and workers
compensation insurance.
More recently we see insurance
companies reducing the coverage provided under their homeowners insurance
policies. If they can’t raise rates
then they need to reduce losses and that means reducing coverage under the
policies themselves. The most dramatic
of these are special, higher deductibles for wind and hail claims and reduced
coverage for roof damage. If you don’t read the fine print, you may not
realize that your policy has changed and perhaps now you have a $5000 wind and hail deductible,
or a deductible equal to some percentage of a wind and hail loss. Worse
yet, we are also seeing a number of insurance companies reducing the coverage for
damage to roofs from a full replacement cost protection to a depreciated value
protection. This could cause serious
cash flow issues for homeowners with a damaged or destroyed roof. Imagine that your roof is damaged in a
hailstorm and you must replace it.
Assume that you have a 30 year roof on your house and it is 20 years
old. If the cost to replace the roof is
$15,000, then with depreciated value protection, you will only receive 1/3, or
$5000 for this insurance claim. You will
have to come up with the other $10,000 to replace your roof out of your own
pocket.
All of these results are generally negative for the consumer
and they hit consumers unevenly. If
insurance is to do anything at all, it is to pool assets among a large group of
people so that everyone suffers just a little and no one suffers a lot. And
while many consumers will tell you that insurance companies are out to screw
them over, they should understand that these insurance companies are operating
in competition with each other and none of them are getting rates high enough
to make a profit so they are stripping down the policy or putting consumers
through the consent to rate process in order to attempt to make a profit and
stay in business. Only a diehard
conspiracy theorist would believe that this many insurance companies would take
this much drastic action in a competitive environment if they didn’t feel they
had to in order to survive. If our
insurance commissioner would allow the free market to operate then insurance
rates will go up right away, but over time competition will allow rates to stabilize
and settle at a level that allows for a more stable insurance market. I know no one wants to pay more for their
insurance but blindly supporting a politician’s goal of keeping rates below
profitable levels will generate more pain and agony for all consumers over the
long haul.
At Clinard Insurance Group, we insure thousands of families
all across North Carolina. We want all insurance buyers to be informed
consumers. If you would like help with
your home or auto
insurance, life
insurance or business
insurance, please call us, toll free at 877-687-7557.
