Recent headlines have raised some reasonable questions about homeowner insurance rates and coastal property.
Here is a list of frequently asked questions, and answers that help give consumers a better understanding of the current marketplace.
What is insurance?
Insurance is a product that protects against significant financial loss by transferring risk.
Natural disasters, accidents, and other unexpected occurrences can put you at risk of losing your most important assets and/or investments. Insurance accepts this risk in exchange for your premium, and provides you with protection and peace of mind for the duration of the policy term.
Insurance companies are in the business of preparing for and predicting future losses.
Why is insurance necessary?
On an individual level, insurance serves one primary purpose: to protect you from financial loss. While that protection is the product insurers offer their customers, the industry makes a more significant impact to the economy in aggregate.
The insurance industry is a vital contributor to this state’s economy. Not only does the industry provide thousands of jobs and pay millions in state taxes, but it also helps consumers recover quickly after a loss.
Insurance companies help businesses, individuals, and families rebound after a catastrophe, which makes our communities and our economy more resilient.
We live in an environment where most American families depend on loans to purchase cars, homes, and/or to start a business. If insurance were not available to protect those assets, banks and other lenders would be less willing to offer loans. Insurance really provides a necessary lubricant that provides protection for that collateral and helps stimulate our credit-based economy.
What happens to my premium if I don’t make a claim?
Your insurance premium is not simply collected by and retained by your insurance company. The premium you pay protects you against the unpredictable risks associated with catastrophic events such as hurricanes, and non-catastrophic events like kitchen fires, thefts, and liability. In addition to protecting your assets, premiums help support the state’s economy and pay claims for other customers.
In 2011, the insurance industry provided over 30,000 jobs, paid about $158 million in state premium taxes, and contributed about $3.6 billion to South Carolina’s gross state product (about 2.2% of the total). Of perhaps greater importance, insurance companies in 2011 paid almost $4.4 billion in claims to help individuals and businesses recover from losses.
Can my rates increase even if I haven’t made a claim?
Rates are based on future risk. While individual claim history is one factor that helps indicate risk, it isn’t the only one. Some other factors that are included in determining rates include population growth, exposure, reinsurance costs, and construction costs.
There are several factors that can contribute to increased pressure on rates: population growth (especially in catastrophe prone areas), increases in catastrophe exposure, increases in loss frequency (the number of losses) and severity (the cost of losses), and a lack of investment income for insurers (investment returns are often used by insurers to subsidize rates).
How much profit do insurance companies make in South Carolina?
In 2011, a year in which we did not have a hurricane, property and casualty insurers paid out $4.4 billion in claims and homeowners insurers had a loss ratio of 79.2 (for every dollar that your homeowners insurance company collected in premium, it paid 79.2 cents in claims). Loss ratios do not include administrative and operational costs, which typically average around 25%.
So, when the 79% loss cost ratio is added to a 25% administrative/operational cost ratio, that formula equals 104% (or $1.04 paid in expenses for every $1.00 collected in premium)and means homeowners insurers (even the most efficient companies) experienced a loss in a year that did not include a mega-catastrophe, such as a hurricane, in South Carolina. 2011 helps demonstrate how low-severity and non-catastrophe claims (house fires, thefts, and liability claims) can add up very quickly.
However, South Carolina has a competitive marketplace, with more than 100 property insurance companies vying for business. Competitive markets offer consumers the opportunity to find the best possible rate for their individual risks.
Why do coastal residents in South Carolina, on average, pay more than our neighbors in N.C. and G.A. for homeowners insurance?
South Carolina has exposure to catastrophic hurricanes that cause significant damage well beyond their specific point of landfall. Hurricanes’ damage is not limited to part of a city, or a specific neighborhood. These massive storms often span hundreds of miles and cause widespread damage.
Our state has more than 187 miles of direct exposure to hurricanes with $229.6 billion in insured property along the coast. That coastal exposure represents 28% of the state’s total insured value (neighboring states NC and GA have only 9% and 5% of their total respective exposures along the coast).
With increased development along the coast, risk analysts estimate that if Hurricane Hugo hit today, there would be about $10.9 billion in insured losses (Hugo caused $4.2 billion in 1989). Insurers must prepare now to ensure their ability to pay claims after a hurricane devastates our coast.
How does my home’s market value affect my insurance rate?
Since insurance provides protection against the costs of repairing and/or rebuilding your home, property values are not among the factors that help determine rates. Property values include the land value associated with a home, which is not covered by insurance. Insurance protects against losses to the actual dwelling or structure so must be based on what it will actually cost to repair and/or rebuild.
How does the Department of Insurance (DOI) protect my interests as a consumer?
The mission of the State of South Carolina Department of Insurance is to protect the insurance consumers, the public interest, and the insurance marketplace. The DOI is charged with ensuring the solvency of insurers, enforcing and implementing the insurance laws of this state, and by regulating the insurance industry in an efficient and equitable manner.
Part of the DOI’s responsibility is to keep the insurance marketplace healthy and competitive by focusing on solvency, disclosure, and transparency for South Carolinians. Any rate change requested by a carrier must be filed and reviewed by the SC Department of Insurance.
The insurance laws and regulatory environment governing South Carolina’s insurance market serve as a model for other states faced with similar exposures.
What is the purpose of a flex-band rating system?
Any rate change (increases and decreases) requested by a carrier must be filed and reviewed by the S.C. Department of Insurance. However, South Carolina law dictates that a speedy review process for requested overall rate changes within 7% of the current overall rate.
Flex-bands are used to deliver new insurance products and prices to the marketplace in a more efficient manner to help insurers respond quickly to changes in the marketplace and offer new products, prices, and discounts to their customers. A flex-band rating system is one way to ensure a healthy, competitive insurance marketplace that benefits consumers.
How does a competitive market benefit consumers?
A competitive market provides consumer choice, allows companies to more closely match rate to risk and compete for the business of the best risks available without unfair subsidies and mechanisms that will pass disaster restoration costs along to citizens through taxes and/or assessments.
Competition benefits consumers, and a healthy marketplace means insurers have enough claims paying capacity to help their customers recover quickly after a loss. In an unhealthy marketplace, companies without enough funds on hand to pay claims following a catastrophe may become insolvent. In that case, other companies and their policyholders might be required to pay higher insurance costs afterwards to help make up the difference.
There are more than 100 companies currently providing homeowners insurance in South Carolina, and some companies have entered the market since the implementation of the Omnibus Coastal Reform Act of 2007. There is availability, competition, and companies continue to enter the market.
Since regulatory changes passed in 2004, rate increases have slowed with increased competition. Premiums in 2008 - 2010 have risen by just over four percent a year, only a little bit faster than inflation. In the three years before the changes went into effect, annual premium increases averaged about 9 percent, and have dropped from a high of 14% in 2004.
Are catastrophe models, or “black boxes,” simply ways insurance companies justify rate increases?
Catastrophe models are just one tool that insurance companies and reinsurers use to help determine risk.
Models help provide more predictability by combining information about events that have actually happened in the past with current data and future trends.
Catastrophe models do not calculate rates. They are simply one component that helps insurers predict and evaluate probable losses for particular concentrations of risk.
The term “black box” implies mystery and secrecy. The fact is that the majority of the information contained in catastrophe models is known and reviewed by regulators. However, certain proprietary information that accounts for a small portion (typically between 3 and 5 percent) is protected for competitive reasons. This is not uncommon in any competitive industry.
Why are some companies non-renewing homeowner policies?
Companies sometime spend more on claims and expenses than they collect in premiums. When a company is spending more per each dollar in premium that they take in, they must protect their policyholders by managing exposure, not by growing. One way to manage exposure is to “cut back” on the number of policies and amount of exposure being covered. Companies compete for the best risks and work to refine their book of business to sufficiently diversify their exposures so that they are not overly concentrated with any particular type of risk.
Would stronger building codes help lower my insurance rate?
All mitigation efforts help reduce the probable losses that insurance companies protect against. By building structures that are stronger and more damage-resistant, homeowners are reducing their risk of loss so represent a more “attractive” customer to insurance companies. When insurance companies take on less risk, they can pass savings along to their customers.
Just knowing that a stronger building code is in place is not enough for an insurance company to justify rate decreases. The insurer must know the strength of an individual structure to apply any sort of discounts or credits.
The insurance industry supports building codes and enforcement practices that help protect property against loss in a variety of ways. For example, the industry supports engineering research, and offers discounts and premium credits to customers who choose to install certain protections.
While improving building codes and enforcement only affects new construction, retrofitting projects can help existing homes mitigate future losses. The Insurance Institute for Business and Home Safety offers guidelines for homeowners to protect their homes.
What else can I do to help lower my insurance rate?
Prices and coverages vary from company to company, so it pays to shop around. Customers should make sure they are comparing policies with similar coverage when considering price.
Deductibles can also help save money. A deductible is the amount of money you have to pay toward a loss before your insurance company starts to pay a claim. The higher the
deductible, the more money you save on your premium.
Ask about discounts. Many companies offer several types of insurance. Some companies offer discounts for customers who buy two or more insurance policies from them. Other common discounts exist for homes that include smoke detectors, burglar alarms, dead-bolt locks, and sprinkler systems.
Many companies offer discounts, but they don't all offer the same types of discounts or the same level of discount in all states. Ask your agent or company representative about discounts available to you in South Carolina.
For more information, contact the South Carolina Insurance News Service at 803-252-3455 or use our contact form.