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Ill winds threaten home rates

By Jay MacDonald · Bankrate.com
Friday, June 17, 2011
Posted: 9 am ET

How rough have the recent natural disasters been on insurance companies? So rough that they could trigger a climb in homeowners insurance rates not seen since the aftermath of 9/11.

According to a report by Marsh & McLennan reinsurance brokerage, global catastrophes during the past 16 months have cost insurers $100 billion. The losses have already prompted some U.S. reinsurers to increase their property-catastrophe rates by 5 percent to 10 percent, the report says.

The last such spike in commercial insurance rates occurred following the Sept. 11, 2001, terrorist attacks, which cost insurers $22 billion.

The risk modeling firm AIR Worldwide estimates the damage from our violent spring tornados and thunderstorms at between $4 billion and $7 billion. EQECAT, another risk company, places the insurance losses in tornado-devastated Joplin, Mo., alone at between $1 billion and $3 billion.

Insurance losses from large-scale natural disasters such as the earthquakes that occurred in Japan, Chile and New Zealand typically fall to major reinsurers such as Swiss Re and No. 1 Munich Re. Without their backing, many primary commercial and homeowners insurance carriers could not afford to stay in business.

But when a single catastrophic event such as 9/11 or multiple natural disasters such as we've seen this spring occur, even the reinsurance pool can run dry. Insurance giant AIG announced it will take a $4 billion charge this year to rebuild its reserves. Travelers and CNA Financial already have bumped their rates for renewals.

How might this affect your homeowners insurance rates? That depends on a number of factors – some reassuring, some potentially costly.

Homeowners insurance rates are approved at the state level. That means insurance companies must convince your state's insurance commission that their actual and anticipated losses justify popping rates.

The next time insurers file their rates in Alabama and Missouri, two of the states hardest hit by this spring's violent weather, it's reasonable to assume they'll ask for, and be able to justify, an increase in homeowners premiums in those states.

But rate increases don't necessarily follow, cause-and-effect, from catastrophic reinsurance losses. For instance, not all home insurers are heavy purchasers of reinsurance, which means they may not be directly affected by the global catastrophes that are forcing a spike in reinsurance rates.

On the minus side, insurance companies are struggling like the rest of us these days to realize some return on their investments, which together with premiums comprise their two major sources of income. Flat investment returns could put added pressure on insurers to file for a rate increase.

And as residents of Florida, Louisiana and Texas found out in recent years, rate increases aren't necessarily the worst-case scenario. Some insurers simply fold up camp and discontinue writing policies in the face of extreme loss years. Others respond by simply reducing their exposure. That's the case with ALFA Mutual, which recently announced it will not renew more than 73,000 home policies in Alabama over the coming years.

Depending on the market dynamics, sometimes an insurance company without the burden of red ink from past losses will step in to serve those nonrenewed customers.

If your state was hard hit by weather this spring, chances are your home insurer will be looking to rebuild their reserve fund, which could affect your homeowners premium. But don't expect any rate increase to arrive tomorrow -- some states are still adjusting for a decade of hurricane claims.

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