Are home insurance policyholders being hit after wave of weather disasters?

Troy Anderson

In the wake of a record-breaking year for extreme weather, a study by the Consumer Federation of America found Americans are paying higher premiums for home insurance as insurers shift more of the financial burdens for hurricanes, tornadoes and floods to consumers.

Record year for disasters

The study, “The Insurance Industry’s Incredible Disappearing Weather Catastrophe Risk,” comes as weather disasters in 2011 affected millions of people, claimed 1,000 lives, resulted in 8,000 injuries and caused more than $52 billion in economic losses. The United States experienced 14 weather catastrophes last year costing more than $1 billion each – making it the most extreme year for weather since accurate recordkeeping began in the 19th century.

John Ewald, a spokesman for the National Oceanic and Atmospheric Administration, says: “The nation experienced Hurricane Irene, five major outbreaks of tornadoes, the Groundhog Day blizzard, Tropical Storm Lee, wildfires and drought in Texas and the Southwest, and flooding along the Mississippi.”

Now, insurers in 11 states – Alabama, Arizona, Colorado, Georgia, Kansas, Kentucky, Maine, South Carolina, South Dakota, Tennessee and Virginia – are requesting home insurance rate increases of 18 percent or more.

“Insurance commissioners should block many of these pending rate increases because they place an unwarranted financial burden on homeowners, many of whom are coping with severe financial difficulties in a bad economy,” says Robert Hunter, the consumer federation’s director of insurance.

‘Premiums reflect costs’

In response, Jim Whittle, associate general counsel of the American Insurance Association trade group, says more damage from natural catastrophes means more money is required to repair that damage.

“Premiums reflect costs,” Whittle says. “When costs and risks increase, premiums may adjust to reflect that reality.”

Robert Hartwig, president of the nonprofit Insurance Information Institute, notes that insurance claims related to natural disasters grew sevenfold as a share of total insurance payouts between 1960 and 2010. The trend has accelerated over the past 20 years, with hurricanes and tropical storms accounting for 44 percent and tornadoes generating 30 percent of insurance payouts triggered by natural disasters.

“I am confident the residents of Tuscaloosa, Alabama, and Joplin, Missouri, as well as other disaster-stricken communities, are glad their insurers had the resources last year to meet their financial commitments,” Hartwig says.

Is industry ‘overcapitalized’?

According to the industry-backed Insurance Information Institute, property and casualty insurers now have a surplus of $539 billion — the amount of money remaining after an insurer’s liabilities are subtracted from assets. The federation’s study claims that the industry is “significantly overcapitalized.”

The study found insurers achieved the bulk of this surplus by boosting deductibles and capping the amounts they pay for home damage or destruction caused by natural catastrophes. Insurers have significantly raised rates over the years, sometimes using questionable computer “models,” Hunter wrote. Insurers also have used “fine print tricks,” such as the “anti-concurrent causation clause,” which lets insurers refuse to pay for wind losses if any flood damage occurs around the same time, Hunter wrote.

“They have shifted the risk away from themselves in ways that have severely hurt consumers and taxpayers,” Hunter says. “In the meantime, they have continued to raise rates significantly. As a result, they have built up huge amounts of surplus, way more than they need. They are just making too much money. In the aggregate, they are continuing to pile it up and to raise rates every time there is a storm.”

Whittle refutes Hunter’s claims, saying the industry has been hit by a slew of weather catastrophes in recent years, paying out hundreds of billions of dollars in claims. Whittle points out that the insurance industry is highly regulated and is required to maintain substantial reserves “precisely because they want us to be able to pay claims when they come in.”

“If we have a Category 5 hurricane — which we have seen repeatedly in the last seven or eight years — hit Miami, our projections are for a quarter of a trillion dollars in potential storm-related losses,” Whittle says. “So when you consider figures like that, and then you have to add in the remaining exposure from winter storms, flooding, tornado activity, hail, windstorms, fires and other things the industry has to face, (insurers) need to be adequately capitalized.”

Looking ahead

In light of the study’s findings, Hunter recommends Congress limit the federal government’s exposure to terrorism risk to only extreme events, such as nuclear, chemical or biological attacks, that result in more than $100 billion in losses. He also cautions state insurance regulators to be on guard against unwarranted attempts by insurers to use natural catastrophe losses as a rationale to jack up rates.

“We are calling on states to look at these results and be more careful in approving rate increases,” Hunter says. “We are asking the federal government to back off some of the risks they have taken on, like flood insurance and terrorism. Some of that could be taken – maybe not all of it – by private industry. Terrorism is now covered 100 percent by the federal government. That makes no sense.”