Tuesday, September 14, 2010

I have not had a claim. Why did my insurance go up?

In the last few days I have spoken with clients that have had an increase in their yearly insurance costs. Some folks were mad, some shocked, and some where just concerned. Some of the increases where small, fifteen or twenty dollars compared to last year. Others where higher. Regardless of how much the increase was, all of them wanted to know why the increase in cost. And who can blame them? I work in this business and my insurance went up too. Add to the fact that the housing market has dropped and it can get rather aggravating.

So why the increase? First all insurance carriers change their rates during the year. They must file a rate request with the department of insurance and have it approved before they can increase rates. They have to show good data as to why the increase is justified. This is usually due to losses that the insurance carrier has experienced. They have to have money to pay out claims and meet state solvency requirements. That money has to come from the premiums they collect as well as investments that they make. Remember, a carrier is not considered solvent by the state if they can pay every policy they have out. They must have other reserves in addition to being able to pay all policy holders and operating expenses.

Second, carriers raise the amount of coverage you are getting each year just a little and that also raises your premium each year. They do this to keep pace with inflation, the cost of building materials, fees and labor. If a fire takes out your home and the homes around you for ten blocks, then there can be an increase in the cost of labor and materials to that area since the things needed to rebuild are now in high demand. Supply and demand economics in action.

Last, the rebuild cost of your home is different than the real estate value of your home. In real estate the sale of the home across town as well as the sale of the home down the street affect the value of your home. The land is part of the sale and the value of the land is included in the appraisal. In insurance we are only rebuilding the structure. The square footage, type of materials, location and other factors all influence what it will cost to rebuild your home. Carriers get this information from a variety of sources that collect rebuild data from all over the country. They look at the cost of materials, labor, type of construction, building code upgrades, county and city fees, fire department fees, type of construction and much more. The carrier then applies their formula to the information they receive from their data provider. They may add 20% for a two story home, subtract 5% for newer construction, add  3% due to crime statistics and losses in the area, etc.

The bottom line, if it is a minor increase for more coverage (i.e. $20 a year more for $45,000 more in coverage) I would not be too concerned. You can also change your deductible to lower your premium, but remember that you must have the money to pay the deductible at the time of the claim. Check to see if you are being charged a broker fee. Some of these fees can be over $100. If you have been with the same carrier for 3 years or more, see if switching carriers would help or if your agent can rewrite a new policy with the same carrier. Often times they can. This will cause the policy to be re-rated and the rebuild cost to be reset.

Remember, insurance carriers are like people in a grocery store. Some of them will buy potatoes, others carrots, some want beets, some would not buy a beet at any cost. It all depends on the carriers appetite for risk, in other words what types of customers and properties they want to insure and what type of property and claims history you have. You have options.

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