The San Diego Union-Tribune

Thanks to sky-high doctor bills, terror attacks, SUV crashes, mold damage and a shaky stock market, Californians are paying higher rates these days for auto, life and homeowners insurance.

Insurance policies for homeowners and drivers, which jumped between 7 percent and 8 percent last year, are due for a new round of price rises this year. Since January, insurers have filed more than 250 petitions for rate increases at the California Insurance Board, which oversees the industry.

More than half the requests, mostly from smaller insurers, were for double-digit increases. But many requests were for increases of 6.9 percent or lower, allowing the insurers to avoid public hearings, which is required for any request above 7 percent.

Within the past six weeks, Allied Property, Amco, Depositors, Hartford, Progressive, Prudential and Explorers asked for 6.9 percent increases to auto or home coverage. In mid-March, State Farm was allowed to boost its auto insurance rates 6.9 percent, a month after it raised homeowners rates 6.9 percent.

“In the past few months, things have been out of control,” said Pam Pressley, attorney for the Foundation for Taxpayer and Consumer Rights, which is pushing for a freeze on rate increases. “Some companies that got rate increases in 2001 are asking for even more in 2002.”

Allstate, for instance, was allowed to enact a 6.2 percent increase for good drivers last summer after applying for a 6.9 percent increase. Now, it is waiting for the Insurance Board to decide on its request from last November for an additional 20 percent increase for good drivers and 24 percent increase for riskier drivers, as well as 22.3 percent boost for homeowners.

“Times are tight. And the costs per each claim are going up,” said Allstate spokeswoman Lisa Wannamaker. “For car insurance, labor costs are going up at body-repair shops. Doctors’ bills are going up. For homeowners insurance, we haven’t filed a rate increase in eight years, and in the meantime costs of construction and materials have all gone up.”

An increasing worry for insurers is the cost of cleaning up mold and fungus in homes damaged by flooding. After flooding in Texas last year, State Farm alone paid $625 million because of mold. Although the problem is mostly in the South, its threat is pushing homeowners rates higher nationwide.

The recent popularity of sport utility vehicles has also added to insurance bills.

“SUVs and pickups are much more expensive to fix than other vehicles, and they cause a lot more damage when they’re involved in accidents,” said Peter Moraga of the Insurance Information Network of California, an industry-sponsored association.

Partly as a result of the increasing frequency of costly accidents, insurance firms paid $9.2 billion in auto accident claims in California in 2000, a 16 percent increase from the $7.9 billion paid in 1999.

The move to increase rates comes after a brief price war during the late 1990s. Collectively, California auto insurers dropped their rates by 12.8 percent between 1989 and 1999, shaving off $1.8 billion in annual premiums. By 1999, the average California driver was paying $659 annually for car insurance, compared with $803 in 1995.

No other state achieved such a cost reduction, although few other states started with rates as high as California’s. Before the price war, it had ranked as one of the 10 most expensive insurance markets in the nation.

One reason for the decline in prices was the go-go stock market of the late 1990s. Insurers were able to take losses on auto collisions and earthquakes but still make money through investments on Wall Street. But when the bull market turned bearish in 2000, the insurance companies suddenly found themselves in hot water. They began filing requests at the California Insurance Board to increase their rates.

“Property and casualty insurers typically lose money on underwriting (or paying insurance claims) and make up for it on investments,” said Melissa Gannon, who tracks the insurance industry at Weiss Ratings Inc.

“The more they lose on the underwriting side, the more they need to make up for it on investments. And if they’re not making money on their investments, that means they need to raise their rates.”

At State Farm, the nation’s largest auto and homeowners insurer, unrealized losses on the investment portfolio amounted to $2.8 billion last year, contributing to a net loss for the year of $5 billion.

State Farm — which paid out $1.25 last year in insurance claims for every $1 that it brought in — is in such dire straits that the Standard & Poor’s credit agency is considering lowering its AAA rating. S&P director Charles Titterton noted that State Farm was asking for rate increases in several states. But Titterton said the rate increases may be “significantly inadequate” to cover the firm’s underwriting losses.

“In poor market conditions, you have to pay a lot more attention to pricing,” said Lisa Wannamaker, spokeswoman at Allstate Insurance, the second-largest carrier for home and auto insurance.

The newest threat to insurance portfolios came last week, when the Federal Reserve announced it was no longer lowering interest rates. The Fed’s move could hurt the value of many of the corporate bonds that insurance companies have in their portfolios.

Life insurance companies alone hold $1.3 trillion worth of corporate bonds. Weakness in the portfolios could trigger more upward movement for insurance rates.

Making matters worse is that insurance companies are paying higher insurance bills themselves. Insurers cover losses on their policies by taking out policies from reinsurers. And the reinsurance industry last year was hit by the worst monetary disaster in its history. The terrorist attack on the World Trade Center cost reinsurers an estimated $50 billion to $60 billion. To recover their losses, they are charging insurance companies higher rates.

“If you’re an insurance company and you see your costs of reinsurance double or triple, you have to take it out on somebody,” said Andy Barile, an insurance industry consultant in Rancho Santa Fe. “The natural target is your customer.”

Barile is afraid that insurers may try to recoup their losses too fast.
“This is going to be a very difficult time for insureds because for several years they have been paying the wrong price for the insurance product,” he said. “Now they have to pay the right price, but it’s so much more than what you can afford. You can only push insureds so much until they say I’ve had enough and start looking for alternate ways of doing things, such as self-insurance.”

Dean Calbreath: (619) 293-1891; [email protected]