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Twisters uproot home insurance

By Jay MacDonald ·
Friday, April 13, 2012
Posted: 10 am ET

When a tornado approaches, wise homeowners take cover. But lately, it's been the homeowners insurance companies that are sheltering themselves from costly weather-related claims, sticking homeowners and taxpayers with the bill, according to the Consumer Federation of America, or CFA.

"Insurance companies have significantly and methodically decreased their financial responsibility for weather catastrophes like hurricanes, tornadoes and floods in recent years, shifting much of the risk and costs for these events to consumers and taxpayers," says J. Robert Hunter, director of insurance for the CFA.

In his new report, "The Insurance Industry's Incredible Disappearing Weather Catastrophe Risk," Hunter, a former federal insurance administrator and state insurance commissioner, spoke out against proposed rate increases of 18 percent or more in 11 states.

"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," he says. "In the last 20 years, insurers have been so successful at shifting costs to consumers and taxpayers that they are currently overcapitalized and cannot justify higher homeowners' rates."

While allowing that insurers have used traditional techniques such as reinsurance and diversification to ride out last year's torrential storm claims, the study finds that much of the savings has come at the expense of taxpayers and homeowners.

The report says insurers have "hollowed out" the coverage they offer to homeowners by increasing deductibles and capping the amount they will pay if the home is damaged or destroyed. As a result, taxpayers face higher disaster assistance payouts because homeowners have less money available to help themselves.

CFA says in a summary of the report:

Additionally, insurers have significantly raised rates over the years, sometimes using questionable computer rate 'models' developed by other companies. Insurers have also used fine-print tricks ... which allows insurers to refuse to pay for wind losses if any flood damage occurs at about the same time, even if the wind losses occurred first. Finally, insurers have shifted coverage for homes in high-risk areas to state insurance pools.

Michael Barry, spokesman for the Insurance Information Institute, says insurers are re-evaluating their risk in the face of unusually active storm seasons in recent years. Some companies even pulled out of weather-ravaged North Carolina and Alabama rather than risk another year of catastrophic loss.

"Last year was an extraordinary year for natural disasters," Barry told Insurance Journal. "Insurers have taken a step back to assess whether or not they can absorb severe losses."

What can you do? Hunter recommends visiting your state's insurance policy website to see what other owners of comparable properties are paying, as well as comparison sites that include customer reviews of insurers. He also recommends seeking the advice of an independent agent, who, unlike a "captive" agent, sells policies from more than one company.

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