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Home Prices Down, Insurance Rates Up

May 10, 2011

Chris Garlasco, Owner & Managing Partner - Founders Insurance Group

Over the past several years, the average price of a home has dropped like a rock, yet homeowner’s insurance costs continue to be on the rise. The simple answer is that building costs have not dropped and in many cases they have gone up. Consumers often confuse market value with rebuild costs. As I said, that’s the simple answer. The fact is that behind that answer, things are a little more complicated.

Consumers benefit from fierce price competition in the home insurance market. So much so, that in a good year an insurance company may make as much as five cents on every dollar of premium before investment income, meaning ninety five cents on every dollar is paid out in claims and expenses. As I said, that’s in a good year. Since the margin percentage is so small, and competition is so tight, it doesn’t take much to move those numbers in a negative direction. Today, most home insurance companies are actually paying out as much as $1.08 on each dollar of premium collected.

The question is why? During a difficult hurricane season that question is easily understood, however we haven’t had a bad hurricane season in the past couple of years. Even without a significant named storm, the industry has had unprecedented weather events all over the country. Those events are reaching sums of money that we haven’t seen before. Hail in the mid-west, tornados in the plains, wind on the cost and staggering amounts of snow and ice touching more that forty five states. An active hurricane season could be catastrophic for the industry and the consumer. Sadly, that’s just the beginning. How about oil prices? It’s not just the increased delivery cost of building materials; it’s also materials that are dependent on oil like roofing shingles. Asphalt shingles are made with oil products. How about the ever rising medical costs? A vast number of home liability claims involve medical costs that are outpacing inflation. How about litigation? In a bad economy litigation and fraud are both more attractive to a segment of the public. Lastly, for the purpose of keeping this entry short, investment income is also a major factor. Since companies play so closely to the margins, investment income has often made the difference between profit and loss. Most American’s know that investment income has been down across the board. I want to point out that the items I have mentioned are just the tip of the iceberg.

The fact of the matter is that we are still early in the year and the numbers are not looking so good. So what does this mean for you? Don’t expect to see home insurance rates go anywhere but up as companies continue to struggle to find a rate that matches the risk exposure. Homes in high risk areas can expect the greatest rate increase. This is especially true of homes located near the waters of the Atlantic. Some insurance companies are looking to scale back coverage’s in an effort to keep pricing under control. Sound advice from an independent agent can help you through the coverage jungle. Other companies are seeking to offer greater discounts to homeowners that are willing to accept higher deductibles. Before selecting a higher deductible, be sure that the deductible amount is within reasonable financial reach. Lastly, make sure that you take the time to understand your home insurance coverage. Unlike auto insurance, the range of home insurance coverage can be far wider and more complex. If you are able to find a premium that is significantly lower than your current rate, it should raise a red flag and you should proceed with caution. If it sounds too good to be true, it probably is! There is some good news in that many of these factors that are causing rate pressures don’t have to be permanent. Together, we can “ride the storm out.”

Have a great day!

Chris

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