Homeowners Insurance Rates Increase Explained

Has a spike in your homeowner insurance premium this year left you wondering about the reason for the increase?   You may think that your premium is only influenced by what happens here in the Miami Valley or with your own personal claim history. Those are only part of the equation. While it is true that Ohio was whipped in 2011 with the second highest number of tornadoes since 2006  and we have had our share of damaging flood waters, those alone would not explain the jump in homeowner insurance premiums. The reason for the increase in premiums can literally be attributed to something more global.

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                Your premium could actually be affected by events in places around the world as far away as Japan, Thailand, and New Zealand.  As reported by Best’s Review, a leading source of insurance industry news, out of the top 40 insured loss events from 1970-2011, six occurred in 2011, three here in the US and 3 in the countries listed above.  To understand why an earthquake triggered tsunami in Japan could raise your homeowner premiums here in our little ole mid-sized Midwestern town, it is helpful to know the background of how the insurance industry works.


                Let’s talk about this from a few different perspectives, starting with insurance from the average consumer’s point of view. Let’s pretend, you’ve just purchased a new home whose replacement value is $200,000. The process as you see it is simple. You talk with your agent about your needs. He or she processes your request, and then gives you a quote that you accept. Voila, your home is now protected with insurance.


                From your local independent insurance agency’s perspective, they handle your request for insurance by putting it through a rating process. Numerous factors as diverse as your credit score, your recent claim history, and the insurance industry’s projected claims risk will be evaluated and the premium you are quoted will reflect the findings of the rating process.


                Then another step removed, there is the insurance that happens from a more global perspective in the insurance world that the average person doesn’t even know about. It is called re-insurance. To protect their own financial well-being, the insurance company that your independent insurance agent represents will turn around and get insurance on your insurance policy through a re-insurance company. That re-insurance company most likely will have insurance holdings in numerous countries across the globe. See where this is going?


While normally, insurance industry’s premiums are calculated by taking into account the US national average frequency of one major claim every 8-9 years, per client, last year’s record number of claims has caused a shift how premiums are determined.  The $116 billion in insured losses paid out by insurers last year ranks 2011 as the year with the second-highest total of insured losses since 1970. This has put the ratio of claims to premiums way out of balance.  The coffers have been greatly depleted and projected catastrophic events both natural and man-made are on the rise.  To put things back to a more even balance, premiums have risen, in part, because of the unusually large number of catastrophic events of the recent past and the prediction that the catastrophes will continue.


                Don’t take this as all bad news, though, there are still ways within your control to minimize how much your premiums may rise.  Here at Barker, Beck, Collins, & Kronauge we pride ourselves on being your trusted advisor in these changing times. Call us to discuss in detail your specific situation.