What's happening to homeowners insurance rates?

If you see a rise in your homeowners insurance premiums this year, you are not alone. Almost all insurance companies in Minnesota are raising their rates for 2002.

Why are rates increasing?

The fact is, insurance companies haven't been charging enough to cover the unexpected losses we've seen in the past five years. Minnesota's home insurance rates used to be a "bargain buy" compared to other states, but the weather-related catastrophes in the late 1990's have created a new reality.

Generally, insurance companies expect to pay about 60 cents in claims for every $1 in premium. However, in 1998 alone, a year of unusually severe hail storms and tornadoes, claim costs were 295% of premiums. In other words, for every dollar received in premium, the companies paid out $2.95 in claims. If costs had returned to normal in the succeeding years, we wouldn't be seeing these big rate increases now. Unfortunately, the weather did not improve enough to bring costs down. In 1999 insurers losses were 113% of premium and in 2000 they were 130%.

How rates are figured

Homeowners' insurance rates have two parts: a basic cost that covers normal events and a catastrophic charge. The price for both of these parts is increasing. The cost for "normal" losses is determined by the average loss paid for the past three to five years. The cost for "catastrophes" is determined by looking at the catastrophic losses over the past 15 to 20 years.

In the mid-1990's the average loss per policy in Minnesota for all homeowners and renters policies was $210. In 1998, the average loss rose to $900 per policy - the highest in the United States. In 1999 and 2000 the averages dropped to $420 and $470. Because the 1998 losses were classified as catastrophic, recovering the loss can be spread over several years. However, since most of the losses in 1999 and 2000 were considered "normal," companies are allowed, under the law, to recover costs more quickly.

Other reasons for the increase

While most insurance companies say they are raising rates to recover past losses, there is also a concern in the industry for the potential of more significant losses in the near future.

In addition,

• Real estate prices have increased dramatically, raising the cost of homes and, in turn, raising insurance costs.
• Reinsurance rates have increased. Reinsurance companies help the insurance companies pay for catastrophic losses, and in order to recoup the extensive losses rate increases are passed on to the customer.

How can insurance companies get by with raising rates this much?

While rate increases of this magnitude are difficult for consumers, Minnesota law allows the companies to raise their rates "as needed" before the Department completes its review process. However, the companies DO have to file their rates with the department and the department has 60 days to review the rate increase and to disapprove it if it is found to be unfair or unlawful. The department is in the process of reviewing many companies' rate increases now.

What the department looks for in reviewing rate increases

As the state's insurance regulator, the Department of Commerce is responsible for protecting consumers while ensuring that the companies remain financially stable. To make sure the insurance companies are not taking unfair advantage of consumers, we closely examine all rate increases of 25% or more. We look for excessive rates that the companies cannot support, any signs of discrimination, and overall actuarial soundness. When in doubt, the department can initiate a formal investigation and conduct a hearing to determine that the rates are indeed fair. In some cases insurance companies are ordered to pay back overcharges to the policyholders.

What can consumers do?

• Pay the premium to keep your coverage in force. Check with your insurance company about monthly or quarterly payment plans if you cannot afford to pay the whole premium at once. However, keep in mind that extended payment plans usually cost more in the long run.
• You can shop around for lower rates, but given today's market be aware that the new company may also raise its rates, so you may not gain anything. Don't cancel your current policy for 59 days - that's how long the new insurance company has to deny you coverage.
• Ask your agent if your current level of insurance is appropriate for you. You may be able to lower your rates by adjusting your coverage.
• Make sure the insurance company has properly calculated your premium. Sometimes mistakes are made. Check with your agent or the insurance company.
• Ask about your insurance rating. If the rate you are paying is at a higher tier than the average customer, find out why and what you can do to lower your rate. If you learn you are paying more because of a low credit score, ask for a copy of your credit report and check it for accuracy. Be aware that insurance companies cannot obtain your credit score without your written authorization, and you must sign a new authorization form each year.
• Check with your agent about increasing your deductible or reducing optional coverage to lower your premium.
• Take advantage of discount programs offered by companies - such as a non-smokers or low-mileage discount.
• Select the same company for homeowners and auto insurance. You may get a discount for purchasing both products from one company.
• While it seems contrary to the idea of insurance, if you file too many claims you may find yourself without coverage. With some companies, simply filing two claims within three years can result in not getting your policy renewed.

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Martinson Insurance
518 Hawthorne Street • PO Box 8
Alexandria, MN 56308
Phone: 320-763-6518
Toll Free: 800-757-6518
Fax: 320-763-5546
E-mail: agency@martinsoninsurance.com
Web: www.martinsoninsurance.com