Couple at Insurance Consult"We have not had a hurricane in South Florida in a long time, so why are my insurance costs going up?"

I get this question all the time. Insurance rates are not all about if we have a hurricane or not, although it plays a part in the rate calculations. Lately, we are seeing rapidly escalating home insurance rates. Let me see if I can give you some insight into how and why this is happening.

For several years, your insurance costs were declining due to the low priced reinsurance rates the insurance company was able to obtain. (Reinsurance is the backup protection insurance companies buy to protect the carrier from disasters like hurricanes.) Since we went so long in Florida without a hurricane, the rates got cheaper and cheaper, and the lower rates were passed on to you — the consumer. But, there is a base rate for reinsurance and the industry has hit that rate.

Now the insurance companies are experiencing a much more severe problem that isn't predictable by charts, forecasters, meteorologists, scientists, mathematicians — or frankly, anyone. The problem is over inflated losses. In an earlier blog, I talked about water losses and public adjusters and the terrible outcome for many of our clients who ended up unable to get insurance. All of this was caused by over-inflated claims. But now, after years of this activity, the losses have come home to roost — so to speak. Claims have driven rates up with every carrier, and everyone is going to feel the pain of increased premiums due to the actions of a few.

To emphasize this, let me give you a specific example. Insurance companies expect that there will be losses and they have calculated that into the rates they charge for their policies. The losses in this example group of policies has remained fairly stable at about $300,000 per year against the $700,000 in premium the policies take in each year. Once you add the company's overhead in, and cost of marketing and distribution expense, the carrier probably makes a modest 5% to 7% profit on this book of business. This is considered a profitable book of business.

In 2014, the total losses with this group of policies was $314,000. But in 2015, they ballooned (for no specific reason other than a massive drive by public adjusters in South Florida) to $641,000. More than $400,000 of the losses were water losses! So, you can very quickly see that once the insurance company adds its overhead and marketing and distribution costs on, they are losing money on this group of policies. The only choice they have is to file for a rate increase. In fact, the State of Florida requires the carrier to raise rates to remain solvent and collect a premium that will allow it to maintain the proper reserves to pay future claims and losses.

When losses and expenses go down, rates go down — which we saw from 2009 through 2013. When expenses and losses go up, we see rate increases. We represent 27 home insurers, and most — if not all — of them are at various stages in the process of increasing their rates.

So what can you do?
  • My advice is to look to the longer term. Jumping around might provide you one year's savings, but you might also give up some coverage or benefit you didn't plan to give up. Many companies have now begun excluding coverage for water damage completely for older homes, so you have to be very careful and work only with knowledgeable agents. You will also find that the cost savings will be negated by an increase at the next renewal and it may be much larger.
  • If you have a claim during the year, it will be impossible to move to a new carrier as guidelines are getting tougher and tougher by every carrier. When you buy a new home, some carriers now look at the losses at the home you are moving from, at the home you are purchasing, as well as at any other home you own (such as a rental property or vacation home) in deciding if they will insure you. Some have a guideline that if you have ever had a loss, you are ineligible. So, you can very quickly surmise that filing a claim is not to be taken lightly. If you have a loss, you should always call your insurance agent to discuss the loss before you report anything to your carrier as even a loss with zero dollars paid out counts as a loss against you. Many people call a claim in without thinking that their deductible is larger than the amount of the damage.
If you have any questions about your home insurance policy or filing a claim let us help you. Call Fulton Agency, Inc. at (954) 752-8610.
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