NC Homeowners Insurance Rate Making – Is The Fox Running The Hen House?

The NC homeowners insurance market is in real turmoil.  Rate making for homeowners insurance rates, traditionally the bailiwick of regulators, is being undermined a long forgotten loophole.  This is creating a huge change in the way that insurance companies in NC are pricing their home insurance product.  If the regulators in this state don’t take some action soon, then this creeping process will undermine the rate making process completely and leave us with a sorry hybrid rate making system that means some homeowners will be paying far more than their share for their home insurance and it could create a large population of uninsured homes with the homeowners unaware of their lack of protection.

Homeowners insurance rates in North Carolina have long been regulated by the NC Rate Bureau and the NC Insurance Department.  This process has required insurance companies to file the rates for their products and then wait for them to be approved.  For many years now, the Rate Bureau has established the maximum rate levels that insurance companies could charge for home insurance.  This maximum rate level is called bureau rates.   During the time that home insurance was attractive to insurance companies, the rates that insurance companies filed were at deep discounts to the bureau rate, in some cases as much as 60% below bureau rates.  But in the past two years we have seen a sea change in the appetite for home insurance business from insurance companies operating in North Carolina.  Over the last decade, while they were bidding  down the rates in a competitive feeding frenzy for market share,  the climate seemed to change around them.  The heavy losses of 2011 in our state were a big wake up call.  And when a few large companies take action, it doesn’t take long for all the smaller companies to run scared and follow their lead. So, most home insurance companies in NC have switched their approach from one of seeking more new home insurance business to trying to find ways to get rid of the policies that they have.

A big part of the journey to restore profitability to NC homeowners insurance has led the insurance companies to try to find ways to charge higher rates on home insurance policies.  This strategy pretty quickly ran them up against bureau rates.    But there is a way around the Rate Bureau’s established maximum rate.  The law states that if the insurance company receives a signed form from the homeowner that gives them permission to charge rates higher than the Rate Bureau maximums, then rates can go as high as the insurance company wants to take them.  The form that homeowners can sign to give their insurance company the right to charge them rates above the NC Rate Bureau rates is called the consent to rate letter.

The consent to rate loophole was originally designed to give the insurance companies a way to charge a more appropriate rate to the rare situations where a homeowner has some inherent risk that makes them unattractive to insurance companies.  It is meant as a way to help homeowners with higher risk to be able to obtain some insurance, even if it is expensive.   It was meant to be used only rarely, to solve the one of a kind problems.    

The real problem now is that with our current rate structure in NC, the rates are just too low in the eyes of the insurance companies doing business here.  And the only choices that the insurance companies have are to either cancel policies or have their clients sign consent to rate letters.  They need higher rates for home insurance in our state to continue to write home insurance in our state.  But using the consent to rate letter to attain this goal is a bit like trying to open the battery cover on your cell phone using only a hammer.  In the process you destroy the phone.  The consent to rate letter is a clunky, unwieldy tool to increase rates.  With the current overuse of this technique, the consent to rate letter has just become a way to do an end run around the rate making regulatory power that the Rate Bureau is supposed to control.

So how does this work for the homeowner?  Well, if you are one of the unlucky ones selected by your insurance company to sign a consent to rate letter, then you will receive one with your homeowners insurance renewal bill.  If you sign this form, then you will be agreeing to a huge increase on your premium, one substantially higher than the maximum rates supposed to be allowed by the Rate Bureau.  On the other hand, if you don’t sign and return the consent to rate letter, then your home insurance policy will be cancelled by your insurance company.  So it is sort of an all or nothing approach, and even a bit random.  Some homeowners will escape completely; perhaps because they have never filed a claim or because their auto insurance policy is making enough money for the same insurance company to make up the difference.  Others will pay far more than our current regulatory system of rate making anticipates that they should pay.  This subdividing of the insurance marketplace for homeowners insurance will, over time, put great stress on the system.  In addition, there is the very real risk that many homeowners will not fully understand the consent to rate letter and may fail to return it.  They then will not receive a renewal bill and may only discover their lack of home insurance after a large loss has occurred.  And large, uninsured losses are not good for our economy or our society.

The real solution would probably be to have the Rate Bureau increase homeowner’s insurance rates, particularly the maximum rate, much more quickly than we have seen.  Their slow movement in this direction can be understood when you frame their choices in the light of an election year.  Now that the elections are behind us, I would like to see the Rate Bureau address this issue and take back control of the rate making process, or perhaps just scrap it completely and let insurance companies charge the prices that they want without requiring a consent to rate letter from the customer.  It is clear to me that the hybrid system that we are stuck in right now is not good for consumers or insurance companies.

If you find a consent to rate letter from your insurance company with your next renewal, I would advise that you not blindly sign and return it.  There may be other options available to you.  Here’s what you should do. First call your agent and find out exactly why you were on the list to receive a consent to rate letter.  Then ask if your agent has any other options for you that might allow you to buy your home insurance policy at a rate below bureau rates.  If you are still not satisfied, give us a call at 877-687-7557 and we will help you find a solution that works best for you.

At Clinard Insurance Group, located in Winston Salem, NC, we insure thousands of families all across North Carolina.  We will be happy to take your questions on your home or auto insurance and help you better understand just what your options are for the future with these policies.   We can help you with your auto insurance, your home insurance, your life insurance and even your business insurance.  Give us a call; you will be glad that you did.

How Much Money Can You Pull Out Of Your Retirement Account Each Year?

When it comes to retirement savings, most of the buzz that we hear is oriented around how to save the money and how to invest it to generate the largest possible nest egg.  But that part of the process is child’s play compared with trying to figure out how much you can withdraw each year to make that money last for the rest of your life. There are a few ways to guarantee that you will never outlive your retirement money but many of those reduce your monthly payout so low as to make them unattractive to all but the longest livers out there.  But for many people, a new product that combines indexing and life insurance can solve this puzzle and give them significantly more money to live on each month when they retire.  But you have to put this kind of program in action years before you retire in order for it to work for you.   

One way to describe the withdrawal problem, in uniquely southern terms, is to say that you don’t want to run out of gravy before you run out of biscuit and vice versa.  It is a simple concept that we all understand right away, yet the solution is very complicated.  What is the largest amount of money that can you take out of your nest egg each year and not run the risk of running out of money before you die?  Experts have worked on this problem for many years and the the answer itself is an elusive moving target.

Financial analysts have studied this problem trying to come up with a percentage of the total of your retirement funds that you can withdraw each year.  Of course the answer to this question depends on what kind of investment returns your nest egg can collect during the years of your retirement.  And the percentage of withdrawal that they recommend is of course influenced by the recent past investment returns.  These days, most experts will put the range of withdrawal rates at somewhere between 2% and 4%.  So, let’s crunch those numbers just a bit to give you an idea of what that looks like.  Assume that you have been very diligent over your lifetime and have managed to accumulate $1 million in your retirement account.  A 4% withdrawal each year would give you $40,000 per year.  Assuming your retirement funds are not Roth IRA funds, then it is likely that you will have to pay income taxes on that money.  Suddenly, that $1 million doesn’t seem like so much money.    Now imagine if there was a way to safely increase that withdrawal rate to 7%?  Now you would have $70,000 each year to live on.  That extra 3% could make a huge difference in your retirement lifestyle. 

To further complicate this decision though, consider that you just can’t choose a withdrawal number and stick with it with no future adjustments.  Prior to the 2008 market meltdown advisors were telling people that a 7% per year withdrawal was safe.  That is because they were relying on past history of stock market returns to make their calculations.  But this process is like driving a car by looking only in the rear view mirror.  There are many retirees out there who followed the 7% advice from their financial advisors who are now going to have to cut back their lifestyle dramatically after the market meltdown of 2008.   So you will need to constantly adjust your expectations and if you get it wrong early in your retirement, then you will have almost no way of making up the losses.

In the opening paragraph, I mentioned that there are ways to create income streams that you cannot outlive.  Annuities are tools that can do this very well.  The problem with straight annuities is that some are so expensive that they may not generate the monthly income that you need from your nest egg.  However, there is another, rather new solution.  One life insurance company is now offering a cash value life insurance policy that uses indexing to generate guaranteed lifetime withdrawal rates of 7% or more as long as you live.  And if you die early, unlike with straight annuities, the life insurance and cash value amounts return to your estate so that your investment is not lost.  Now these policies are not for everyone, for instance you need to be healthy enough to qualify for the life insurance policy in the first place.  Also, you need to act ahead of your actual retirement and get this in place a few years before you retire.  But once you have set this up and put this in place, you now have a bucket where you can transfer your retirement nest egg, or a portion of it, when you retire.  This will allow you to utilize this investment tool to allow you a much greater withdrawal rate for any funds that you drop into the policy.

At Clinard Insurance Group, located in Winston Salem, NC, we insure thousands of families all across North Carolina.  We can help you with your auto insurance, your home insurance as well as your life insurance or your business insurance.  Please call us toll free, at 877-687-7557 if you would like our help with any of your insurance needs.