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Pivot Point

April 12, 2012

Chris Garlasco, Owner & Managing Partner – Founders Insurance Group

I was at an insurance meeting this past week that required me to fly to the meeting destination. Now, I fly far less often than I once did, but I still find myself flying three or four times per year. As I was getting body scanned yesterday, not once, but twice I couldn’t help but think about that terrible day in September of 2001. It was a day that changed America’s view of the world and of our own security. September 11th was a pivot point that redefined how we travel. It’s now nearly eleven years later and as I found myself removing my shoes, taking off my belt and being searched I realized that it is very unlikely that we will ever experience the good old days when flying was a different kind of adventure than the kind of adventure it has now become.

We are, in my opinion, reaching a pivot point in the home insurance market they may mark the permanent end of one era and usher in an era that may not be to our liking. Before going any further, I am not comparing the horror of September 11th to the insurance business in any way other than to say it was a moment in time where everything changed.

The past ten years have brought unprecedented weather and catastrophic losses to the home insurance industry. In the decades that insurance loss data has been gathered, the industry has reached uncharted waters. Companies are struggling to keep up with billions of dollars in new losses. Unfortunately, it doesn’t end there. While the home market has been slumping, the cost of building a home continues to increase. Any materials that are related to petroleum products are really on the rise, namely roofing shingles. We have also seen a shift in the demographics when it comes to the number of American’s that now live in high risk coastal areas. Home insurers have been playing with tight margins for some time. In the past, the company’s investment returns have helped to buffer those margins. Today, it’s no secret that investment income is near an all-time low. Insurance carriers seeking to remain financially healthy are facing a tough regulatory market that may benefit consumers in the short run, but will only serve to create bigger problems down the road. It has all become the “perfect storm,” (pun intended).

We are at a “pivot point” in the home insurance business. The change has already begun. Insurance carriers, large and small, are tightening underwriting guidelines and often raising rates to the tune of 10% or more with no short term relief in sight. Larger companies with access to more sophisticated data may seek to take further action.

We may see a return to the home insurance policy design from decades ago. Home insurance used to be designed for catastrophic loss. Over the years, companies have added a significant number of “bells and whistles” to policies that helped to shift the policy coverage to extend to non-catastrophic losses as well. The days of those additional coverage options may be reaching an end in the near future.

Customers need to be weary of companies that sell through agent-employees or directly to the consumer as coverage cuts to keep pricing in line may be even more common than it is currently. If customers see an offer of home insurance coverage that appears significantly less expensive, a red flag should immediately be raised. If it looks too good to be true, it most likely is! Customers living paycheck to paycheck are particularly vulnerable to this type of company behavior.

What happens in 2012 will play a large role in the future of home insurance as we know it. For many, the winter was a mild one and that’s a good thing. However, tornadoes have again played a significant role in the weather thus far. The mild winter has led to unusually warm waters in the Atlantic and Gulf of Mexico. It could be in indictor of dangerous fall weather.

We are keeping our fingers crossed and hoping for the best. In the meantime, understanding your home insurance policy has never been more important.

Chris Garlasco

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