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Costly catastrophes threaten to raise insurance rates for homeowners

Homeowners beware. As Hurricane Irene churns toward the East Coast, 2011 already has been a banner year for natural disasters. It’s been rough on property insurers such as Allstate, Chubb, Progressive and Travelers. And now they’re probably going to make it rough on you by raising homeowner's insurance rates.

Marsh, the world’s second largest insurance broker, announced Aug. 23, 2011, that U.S. property insurance rates had stopped falling after 18 months of declines.

Buyer beware

home insurance rates disaster

Some property insurers, reeling from disaster losses, have said they plan to file for rate increases as soon as possible. The country’s largest publicly traded insurer, Allstate, reported catastrophe losses of $2.3 billion in the second quarter of this year. Jay Fishman, chairman and CEO of Travelers, grumbles that the latest catastrophe losses are higher than those of Hurricane Katrina in 2005 and says Travelers plans to “seek rate gains on a measured basis.”

Midwesterners have borne the brunt of this year's nine major natural disasters, each costing $1 billion or more and tying the record set in 2008, according to the National Weather Service. All told, insured damages have added up to more than $35 billion in 2011, the weather service says, with four months remaining this year.

Pain quotient

How much you may be hurt by rising insurance rates depends on where you live, as insurance laws and rates vary tremendously from state to state. Residents living in a state subject to catastrophes and whose policies cover those specific catastrophes will pay more than a resident in a state where those catastrophes are less likely to occur, says Donald Light, a senior analyst at Celent, which does research on the insurance business.

In hurricane-prone Florida, rates have been rising between 5 percent and 18 percent, although the country’s largest home insurer, State Farm, was able to get a hike of as much as 62 percent.

“But an insurer whose capital (money) has been hit badly by catastrophes in certain states may be more aggressive in its planned and requested rate increases in other states,” Light says.“Human judgment does play a role.”

Disastrous tale

For those states hit hard by acts of God, insurance rate hikes can seem almost as bad as the disasters that preceded them. A Wichita, Kan., retiree recently was socked with a 19 percent increase in her home insurance premium, even though she had just increased her deductible to $1,500. The Wichita Eagle quoted an official of the Kansas Insurance Department as saying that the state's property losses of the past few years “are working their way through the system.”

Some states try to fight nature and property insurers, but aren’t always successful. Storm-prone Florida resisted insurers’ requests for rate increases for years. The result: State Farm threatened to leave, and Florida officials backed down.

Uncertain future

According to Munich Re, which provides insurance for insurers, the number of natural disasters has tripled in the past 20 years, culminating in the previous record-breaking year of 2010. But Munich Re says weather isn’t the only factor. Population growth and a tendency to settle in high-risk areas, like the Florida coast, have intensified insurance losses.

home insurance rates disasters

For right now, insurers can afford to pay. “The industry entered 2011 in comparatively good shape,” says Michael Barry, vice president of the industry-backed Insurance Information Institute. Policyholders’ surplus -- the pot of cash that insurers can tap -- rose to $557 billion in 2010.

While individual insurers could face a cash crunch, the industry as a whole can probably cope with any natural disaster, although a hurricane making a direct hit on Miami could trigger insured losses as high as $100 billion, according to the Insurance Information Institute.

Be prepared

Disastrous weather, like death and taxes, is inevitable. Insurance rate increases, particularly big ones, are not.

So what can homeowners do about big rate hikes?

• Find out whether it’s justified. A nearby state may have been hit by a tornado, but if you were unscathed, the insurer can’t take this problem across state lines. However, events that affect property insurance aren’t always obvious. A hailstorm that shatters windshields across a state could cause more damage than a small tornado. In many cases, you can file a letter of appeal or can appear at a public hearing to oppose a proposed hike.

• Remember that insurers can’t jump from one type of policy to another to seek increases. The Texas drought is expected to cost more than $5 billion, but claims from farmers and ranchers are likely to be against their commercial policies and shouldn’t affect homeowners.

• Beware of “predictive modelers.” Some state regulators allow insurers to use predictive modeling from statistics-based companies to anticipate when a disaster will hit and how much it will cost. This may help insurers get ready for a problem, but consumer advocates say it shouldn’t factor into your rates. In many states, insurers are allowed to push through automatic increases without a public hearing if the rate requests aren’t too excessive.

• Watch out for percentage-based deductibles. Insurers no longer use dollar deductibles for windstorms and earthquakes in states like Florida and California, but instead insist on percentage-based deductibles based on the value of the home. The difference is obvious. If a hurricane levels a $200,000 home and the deductible is 20 percent, the homeowner already is out $40,000 even before collecting a claim payout. In some cases, a consumer can ask for a dollar deductible instead, but he or she may have to pay higher premiums.

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