Insurance companies want home owners to foot a bigger share of the bill for weather catastrophes like hurricanes, tornados, and floods, according to a study from the Consumer Federation of America.
Insurers have asked state regulators for permission to raise home owners’ insurance rates by 18% or more in 11 states: Alabama, Arizona, Colorado, Georgia, Kansas, Kentucky, Maine, South Carolina, South Dakota, Tennessee, and Virginia.
“Insurance commissioners should block many of these pending rate increases because they place an unwarranted financial burden on home owners, many of whom are coping with severe financial difficulties in a bad economy,” said J. Robert Hunter, CFA’s director of insurance and former federal insurance administrator and state insurance commissioner. “In the last 20 years, insurers have been so successful at shifting costs to consumers and taxpayers that they are currently overcapitalized and cannot justify higher home owners’ rates.”
In addition to the rate increase requests, insurers have hollowed out the coverage they offer to home owners by increasing deductibles and capping the amount they will pay if the home is damaged or destroyed, CFA says. These coverage reductions expose taxpayers to higher disaster assistance payouts because home owners have less money available to help themselves.
Other ways insurance companies are charging home owners more:
- Using questionable computer rate “models” developed by other companies
- Fine-print tricks, such as the “anti-concurrent causation clause,” which allows insurers to refuse to pay for wind losses if any flood damage occurs at about the same time, even if the wind losses occurred first
- Shifting coverage for homes in high-risk areas to state insurance pools
To demonstrate how much more consumers are paying for catastrophe coverage in recent years, the study offered a hypothetical example of how much the owner of a home worth $100,000 with a typical policy would have paid for losses after Hurricane Katrina in 2005, compared to after Hurricane Andrew in 1992.
Assuming that the home had a $500 deductible under Andrew and a 5% deductible during Katrina, if $10,000 in damages occurred, the home owner would have paid $500 to repair the damage after Andrew, but $5,000 after Katrina.
If the home owner had to upgrade the home’s electrical system, the insurance policy would have fully paid for these costs after Andrew, but paid nothing after Katrina.
If some water damage occurred at the same time, the policy would have fully covered the wind claim of $9,500 after Andrew, but paid nothing after Katrina.
“Insurers’ surplus would have risen by $15 billion in 2011 even with the tornadoes and floods that caused huge losses, if they had not paid stockholder dividends,” Hunter said. The study concludes that the insurance industry has moved from its historic role as a calculated risk-taker to one of a risk-avoider, exposing consumers and taxpayers to much higher costs.
Not only have insurers insulated themselves from their historic share of hurricane risk, they have made no serious effort to cover risks associated with floods or terrorism, which are entirely backed by federal taxpayers, CFA concluded.