Rising Construction Costs And Expensive Catastrophes Lead To Increase In Homeowners Insurance Costs -- I.I.I. Provides Tips To Help Homeowners Save Money On Insurance

Rising Construction Costs And Expensive Catastrophes Lead To Increase In Homeowners Insurance Costs -- Insurance Information Institute (I.I.I.) Provides Tips To Help Homeowners Save Money On Insurance Rising construction costs and increasingly expensive natural disasters are expected to push the cost of homeowners insurance up by 8 percent in 2004, according to a report by the Insurance Information Institute.

The projected increase represents a modest change from the estimated 7 percent increase in 2003, noted the I.I.I. The average cost for home insurance nationwide for 2004 is projected to be $615 – an increase of $46 for the average homeowner over this year.

“Part of the increase reflects choices more homeowners are making,” said Robert Hartwig, senior vice president and economist for the I.I.I. “People are taking advantage of record low interest rates and are moving into new homes or making additions to their existing homes in near record numbers,” he said. “These upgrades and additions are pushing up insurance costs. People expect their premium to stay the same, but they don’t realize they have more house to insure.”

Cost Drivers in Insurance

According to the I.I.I., between 1990 and 2002, home insurers paid out, on average, $1.17 in losses and expenses for every $1 they earned in premiums. In 2002 alone, home insurers paid out $3.5 billion more in losses and expenses than they received in premiums. In 2001, home insurers lost $7.3 billion, the second worst year on record (the highest is 1992, which included Hurricane Andrew, produced losses of $11.5 billion). Losses in the homeowners insurance line over the past four years (2000 through 2003) are estimated at $17 billion, approaching the level of insured property losses from the September 11 terrorist attack.

Approximately 41 million homeowners have added to or improved their homes between 2001 and 2002. In 1999, the most recent year for which annual figures were available, an estimated $25 billion was spent on home improvements.(1)

During the 1990s, the severity of catastrophes began to increase dramatically. Since 1990, insurers have paid out more than $100 billion in catastrophe-related losses – or about $700 million per month.(2) Catastrophes include well-known events such as Hurricane Andrew and the Northridge earthquake, but also hundreds of smaller disasters associated with tropical storms, tornados, wildfires, hail, ice and snow.(3)

“Homeowners insurance rates in many parts of the country continue to rise because of the extraordinary costs associated with paying these claims,” said Hartwig. “In fact, virtually every part of the country is either at risk of or has experienced a billion dollar disaster.”

Mold in homes is not new. However, increased public anxiety stemming from publicity surrounding high profile lawsuits in Texas and California has increased the risk associated with water damage across the country.

“There is no new ‘killer mold’ out there,” said Hartwig. “But the sharp rise in mold claims is definitely a 21st century phenomenon. Unfortunately, so are multi-million dollar jury awards associated with mold,” he said. “No one wants to see the virtual collapse of the insurance market in Texas happen anywhere else, so steps are being taken to limit coverage and contain mold costs. But we are still in a situation where a water damage claim anywhere in the country can produce a million dollar lawsuit. Insurers have to factor that into the cost of insurance.”

In Texas, for example, mold was not a market factor until 2001, when claims shot up to $1 billion. In 2002, mold costs surged to $2.3 billion, according to figures from the Texas Department of Insurance.

While the typical American homeowner will pay $569 in 2003 and $615 in 2004, rates do vary significantly from one part of the country to another.

Depending on the underwriting guidelines permitted by individual state regulations, factors that influence the cost of insurance may include:

The age and construction of a home;

Proximity to a coast or other natural hazards (e.g., fault line, wildfire zone)

Fire safety features such as smoke detectors or sprinklers;

Anti-theft features such as off-site alarms or strong doors and deadbolts;

The loss history of the homeowner and property; and

Credit-based insurance score.

Although the cost of insuring homes is rising, managing insurance protection both preserves coverage for a real disaster and helps save money, offsetting higher insurance costs, according to the I.I.I.

What Consumers Can Do

Think insurance when buying a home. Get a copy of the insurance loss history of the home you want to buy. Get it inspected so you know that past problems have been properly repaired. The CLUE and A-PLUS databases, for example, enable insurers to check the claim history of both the homeowner and the property which the homeowner is purchasing.

Raise your deductible. Higher deductibles on your home could produce savings of 15-30 percent or more.

Shop around for the best coverage. Prices vary from company to company, so it pays to shop around. You can call companies directly or access information on the Internet. Your state insurance department may also provide comparisons of prices charged by major insurers.

Upgrade your home. Consider modernizing your heating, plumbing and electrical systems to reduce the risk of fire and water damage. Make sure to let your insurer know of these upgrades. Find out from your insurer what steps you can take to make your home more resistant to windstorms and other natural disasters. You may be able to save on your premiums by adding storm shutters, reinforcing your roof or buying stronger roofing materials. Older homes can be retrofitted to make them better able to withstand earthquakes.

Improve your home security. You can usually get discounts of at least 5 percent for a smoke detector, burglar alarm or dead-bolt locks. Some companies offer to cut your premium by as much as 15 or 20 percent if you install a sophisticated sprinkler system and a fire and burglar alarm that rings at the police, fire or other monitoring stations. These systems aren’t cheap and not every system qualifies for a discount. Before you buy such a system, find out what kind your insurer recommends, how much the device would cost and how much you’d save on premiums.

Buy your home and auto policies from the same insurer. Some companies that sell homeowners, auto and liability coverage will take five to 15 percent off your premium if you buy two or more policies from them.

Maintain good credit. Increasingly, insurers are using credit-based insurance scores to determine homeowners and auto coverage premiums. All else being equal, a person with a good insurance score will pay much less for insurance than someone with a lower score.

(1) According to a research report issued in February by Harvard's Joint Center for Housing Studies.
(2) Excludes the impact of the September 11, 2001 terrorist attack. (3) Insurers define a catastrophe as any single event that produces insured losses of $25 million or more.

Neff Insurance Agency, 34 Elva Ct., Vandalia, Ohio 45377, Phone 937-898-6956 Fax 937-898-6957, www.Neffinsurance.com Neffinsurance@Choiceonemail.com.