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The Daily Press

Homeowners in Virginia are experiencing the steepest increases ever in insurance rates. After years of small incremental increases, the insurance industry has embarked on a new strategy to stay profitable, and that means insured customers are paying far more in premiums. Much of the blame for the record rate increases has fallen on the aftermath of the Sept. 11, 2001, terrorist attacks; huge payouts for toxic- mold claims; small and catastrophic storms nationwide; and particularly the nose dive of the stock market.

In 2001, insurers paid out $8.9 billion more in losses and expenses than they received in premiums, the Insurance Information Institute reported. Losses in the homeowners-insurance line over the past three years are estimated at $19 billion, rivaling the $20.3 billion in insured-property losses from the Sept. 11 terrorist attacks, the institute pointed out.

Trying to recoup losses, insurance companies have enacted rate increases across the board. In Virginia, State Farm Fire and Casualty Insurance Co. raised its rates 26.8 percent in 2002. All of Virginia’s top five insurers raised their homeowners premiums by double-digit percentages last year, so new homeowners who can find a policy — as well as homeowners who’ve had policies for a long time — are paying much higher premiums this year.

After State Farm‘s, the average increases of the state’s next four-biggest insurers include Nationwide Mutual Fire Insurance Co., 16.5 percent; Allstate Insurance Co., 25.7 percent; United Services Automobile Association, 25 percent; and Standard Fire Insurance Co., 14.7 percent, statistics compiled by the Virginia Bureau of Insurance indicate.

Those rate increases are thought to be unprecedented.

“We’re not aware of any (previous) homeowners-insurance increases like this in Virginia,” Katha Treanor of the State Corporation Commission said. “Virginia, in the past few years, has had among the lowest homeowners rates in the country. The Property Insurance Report in 1999 ranked Virginia 45th in terms of homeowners-insurance expenditure. So part of this (increase) may be catchup.”

She agrees that when one company limits the policies that it writes, other companies have to pick up the slack. She advises homeowners to shop around to get the best rate possible.

“Luckily in Virginia, we’ve got about 200 companies writing homeowners insurance,” Treanor said. “So there are a lot for consumers to choose from.”

Some companies are increasing their customer load through attrition: They will pick up a new customer only after they no longer have an old customer.

One industry analyst said insurance companies were using the prerogative of customer selection. He said State Farm Insurance Group started the shift.

State Farm jacked up their rates significantly, and they also stopped writing new policies,” said J. Robert Hunter, director of insurance for the Consumer Federation of America.

“Since they represent about 25 percent of the market, the law of supply and demand has changed. The demand has not changed because banks still require homeowners insurance.

“What’s changed is the supply. That means 75 percent of the market has to deliver 100 percent of the new policies. If companies are planning on growing 5 percent next year, they can be much more selective of who they select — or decide not to select someone.”

Phil Supple, spokesman for State Farm Insurance Group, disagreed about why rates were climbing. “Our rates are driven primarily by our claims,” he said. “If our repairing and rebuilding homes through materials and labor go up, then our costs go up, as well. Across the country, we deal with the mold issue, which was unheard of two years ago and now is a major catastrophic loss for insurers. We have the equivalent of small hurricanes happening every day across America, although a hailstorm in St. Louis doesn’t get the publicity of a (Hurricane) Hugo. The severity of our claims is up dramatically.

“We are still insuring more people than any other insurer in the country. We did not stop selling insurance — we just slowed down.”

Changes in the insurance industry really began the year before Sept. 11, 2001, said Linda Walker, president of the Insurance Center of Williamsburg. “I started seeing 20 percent increases on the commercial side. Homeowners (insurance) is very slow to react because no one wanted to take that first rate increase.”

Homeowners didn’t face steep increases during the 1990s because the insurance industry was extremely profitable, said Doug Heller, senior consumer advocate for the Foundation for Taxpayer and Consumer Rights. Insurers invested their premiums and, like individuals, received excellent returns. By contrast, during the first half of 2002, all U.S. property and casualty insurers lost $8.6 billion — on paper — from investments, the Insurance Services Office reported. That same group said the industry showed a profit of only $4.6 billion during the first half of 2001.

During the mid- to late 1990s, the insurance industry became more heavily invested in Wall Street than was the historical pattern, Heller said. Typically, insurance companies were conservative investors, but they joined the throngs of investors who purchased stock in such companies as WorldCom and Enron, he said. When those corporations and others fell apart and their stocks and bonds became worthless, he said, the insurance industry wanted policyholders to make up the rates across the board — in homeowners, automobile and medical-malpractice insurance.

“They wanted to maintain that hyper-profitability,” Heller said. “Not only are the rates going up, but a lot of homeowners are seeing their policies dropped because they made a claim.”

It’s been a long time since premiums really paid for claims.

“The last time the insurance industry made money on homeowners policies was in the mid-1960s,” said Anne A. Musser, senior partner and commercial agent for Commonwealth Insurance Group in Newport News.

Instead, insurers made money by investing the money from premiums.

“They were no longer making underwriting money, but they were making really good money because of the stock market,” Musser said. “Then the whole atmosphere changed.”

The stock market plunged, those monies evaporated and insurers had to look for another way to generate profits. They started putting mold exclusions in policies and getting finicky about whom they chose to insure — using credit reports to help eliminate high-risk policyholders.

The stock-market losses were atop the $1 billion that the industry paid in mold claims in 2001 — five times more than what it paid in 2000. In the past decade, the industry paid out more than $100 billion for storm-related catastrophes. So over the past decade, homeowners’ insurers have paid $1.18 in losses and expenses for every $1 that they earned in premiums, said Robert P. Hartwig, vice president and chief economist for the Insurance Information Institute. In 2001 alone, insurers paid out $8.9 billion more in losses and expenses than they received — the second-worst year on record, behind 1992 — the year of Hurricane Andrew, which had losses of $11.5 billion, Hartwig said.

The industry could afford to pay more than it brought in because of reserves.

Supple, the State Farm spokesman, said insurance was a business, and like other industries, it had to make a profit to stay in business. Investments have long been part of the formula to help maintain the affordability of insurance, he said.

“The insurers are not immune to the same losses in the markets that every other company and individual was involved with — State Farm was not the only entity that had a problem with WorldCom,” he said. “During the very prosperous ’90s, policyholders benefited greatly from insurers’ wise investments.”

He said State Farm‘s losses from WorldCom represented a very small part of the company’s total investments. “When you have 73 million insurance policies served, as State Farm does,” he said, “you have enough assets to protect those people.”

The insurance industry had enough assets not to go belly-up or have to beg for a government bailout, as some industries did after the Sept. 11 terrorist attacks.

“I’m proud to say I am part of an industry that had enough financial stability and reserves to pay those claims,” said Walker, the agent in Williamsburg. “We’re not the airline industry. We didn’t have to go to the government.”

Now those reserves are depleted, and homeowners rates are rising — they’re expected to go up 9 percent more in 2003, the Insurance Information Institute reported. The trend of new homeowners having great difficulty finding coverage started six months ago, said Hunter, the Consumer Federation spokesman and a former insurance commissioner for Texas.

“Homeowners insurance went up 3 percent in 2000, 6 percent in 2001 and we had projected 6 percent this year, but we were way low,” he said. “We didn’t expect State Farm to make such a radical change. It’s going to be more like 12 (percent) to 15 percent.”

That’s the national average. Consider the case of one of Walker’s clients in Williamsburg, a city that suffered a hailstorm, an ice storm and Hurricane Floyd over three years. The client has a $450,000 house. After the hailstorm, he needed a new roof and put in a $12,000 claim, which Walker said was certainly justified. But after the next two storms, he made claims of $2,000 and $1,000, respectively, and then made a fourth claim — when his Palm Pilot was stolen. His premium skyrocketed from $600 to $2,800 a year.

“Those three claims came back to haunt him,” Walker said.

Homeowners insurance today isn’t for home maintenance but really for a true catastrophe, Musser said.

She advises consumers not to use homeowners insurance until they absolutely have to.

Even Musser and Walker, who are independent agents with the 30 insurance companies they represent to chose from, said their homeowners insurance at their personal homes went up 15 percent apiece this year.

Musser recommends that homeowners be on time with their insurance payments. Late payments could be another factor that insurers consider when trimming their lists.

Consumers, she said, should also be aware of the effect that their credit report has in determining rates.

She said virtually all the insurers that her company represented now used credit reports.

There is one safety net for new and longtime homeowners.

If someone has tried and can’t find homeowners insurance anywhere else, he or she should be able to get it through the Virginia Property Insurance Association at 1-(804)-358-0416.

It usually has higher rates, but it’s basically the last resort for homeowners insurance.


The cost of insuring homes is rising, but there are several ways that policyholders can hold down insurance costs:

– Ask about discounts, such as for insuring a home and multiple vehicles with the same insurer.

– Equip your residence with smoke detectors.

– Have a home security system installed.

– Raise your deductible.

– Maintain good credit.

Source: Insurance Information Institute


Sarah Sue Ingram can be reached at 247-4767 or by e-mail at [email protected]

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