The economy is still leaning against the ropes. People are tightening their belts to buckle down for the next few quarters. And, now people are talking about the insurance industry giants, such as State Farm and Allstate, ?sucker-punching? their customers.
Double Digit Home Owners’ Insurance Rate Increases
Allstate was the first to announce last month that their homeowners rates will increase by 17.3% for all of it customers. State Farm is now following suit and are hiking their rates by 13%. As I glance over the many other insurance companies also requesting to increase their home premiums by double digits, it’s safe to say that the insurance industry is barreling toward a hard market?no questions asked.
The insurance industry is similar to Wall Street?this cycle of growth and decline exists everywhere?the rates go up and down over time. The reason that this news is so disheartening is that the timing couldn?t be worse. We have just emerged from the longest soft market cycle in recent history. A soft market is when insurance premiums are low and companies are actively competing to write as much business as possible. Insurance underwriters allowed the homeowner to have numerous claims, high limits of coverage, flexible policies, and still qualify for the lowest rates. The insurance companies did this for a simple reason: to win market share.
Of course, the soft insurance market is a great time for both the homeowner and insurance company. However, when the insurance companies themselves get too lax and careless, problems begin. This false sense of security leaves companies unprepared for when the insurance market turns towards a hard market.
A hard market is simply the opposite of the soft market: coverages are now limited or even eliminated, underwriting guidelines are more stringent, and the insurance premiums begin to rise dramatically.
There is no one reason that causes a shift to a hard market
The current hard market seems to be driven by the demands of the reinsurers whom started losing millions of dollars with the terrorist attacks of 9/11. One may ask, ?What do terrorist attacks in New York have to do with my homeowners policy in Chicago?? And the simple answer is a lot. Reinsurance carriers provide the insurance policies for insurance carriers such as State Farm and Allstate to provide protection from hurricanes, earthquakes, flood lawsuits, etc. In recent memory, there has been billions of dollars lost, coast to coast, and now the reinsurance carriers who are losing money are now raising the annual premiums they charge insurance companies, which in turn trickles down to the homeowner.
What Can I Do?
As I tell my clients, now more than ever, you want to be taking a proactive approach to protecting your investments and assets. Know what insurance company is covering your property. Are they financially sound? What is their A.M. Best rating? Get to know the agent that sold you the policies, make sure they clearly explain your coverage AND limitations. Make sure your agent understands your concerns and make sure they are addressed. If your agent can?t provide these basic levels of support, team up with a competent independent insurance professional who will help you understand and navigate this hard insurance market?they have the tools and resources to smooth out the cycle.

July 7, 2009
Residential