LOS ANGELES – Whew. The year 2006 is in the books, with no major Atlantic hurricanes or other such disasters. That's definitely a good thing, especially for those in vulnerable areas. But as it turns out, it will help the rest of us financially too.
Finally, after years of persistent annual increases, some in the double-digit range, property insurance rates -- homeowners, renters and automobile insurance -- should moderate. But is it time to celebrate?
Insurance companies are making money. Now, it might seem counterintuitive to want insurance companies to make money. But in this case, when they win, you win too. When insurers make money, they don't have to raise rates. In fact -- perhaps with a gentle nudge from regulatory authorities -- they might even lower them.
That's the situation we find ourselves in as the year 2007 opens. Insurers are getting more profitable, and a recent California reduction and the tailwinds of a favorable investment climate are moving things in the right direction -- at least for now.
Why insurers are more profitable
Having no hurricanes is a big deal. According to reinsurer Munich Re, global losses from natural catastrophes dropped to $45 billion in 2006 from $219 billion in 2005, and insured losses dropped to $15 billion from $99 billion.
But there's more. Insurers are getting more efficient, too. Years of automation have improved claims processing and industry consolidations have lowered overhead. It costs less to do business.
Insurers rely a lot on investment returns to pay for claims and build reserves for future claims. Double-digit premium increases seen in 2002 and 2003 largely reflected the poor investment climate in 2001 and 2002.
And insurers are shifting cost burdens to areas of highest risk. Rates in some of the most vulnerable coastal locations have increased as much as tenfold. That's bad for those folks, but generally good for others. Most of us in "safer" areas no longer subsidize risks taken on by a relative few.
It might be better than first thought
According to a forecast published by the industry advocate Insurance Information Institute, homeowners insurance rates are expected to rise just 1.5% in 2007, less than the rate of inflation and less than the 2.8% increase experienced in 2006. Better yet, auto insurance premiums are expected to drop 0.5%, and many business lines are expected to drop by some 5%.
That forecast was prepared before Dec. 26, when the California Insurance Commissioner's office announced an agreement for an 18% rollback in homeowners insurance rates with Farmers Insurance, one of the state's largest insurers. The state's other large players are expected to follow suit, for all were found to be "paying far less than 50 cents of each premium dollar to settle policyholder claims."
According to the insurance institute's president and chief economist Bob Hartwig, who prepared the 2007 forecast, the California news should "drive overall rate increases to the lower end of the forecast range," which is about 0.4% according to his forecast.
Whatever the final figure, it looks like we're in a buyer's market for most forms of property insurance -- at last. So I say it's time to do the following:
Price shop. A buyer's market is always a good time for comparative shopping. Profitable insurers look to expand business and market share, and for the first time in a few years are trying to attract your business. Look for better features, such as immunity to increases after a first loss. Check your coverage. Because of escalating construction costs and other factors, some two in three homeowners are underinsured, according to industry estimates. So if you're part of this group, your policy won't replace what you have. Also, most homes have more expensive features, like granite counters, specialized windows, trim or lighting, which may not be fully covered. And look for flood and special storm coverage if appropriate. The lull in rate increases is a good opportunity to plug any gaps. Raise your deductible. Long a tactic to fight increasing rates, you can increase your deductible to $5,000 or even $7,500. You can use the savings -- and the rate increase you didn't get this year -- to create a rainy day fund to cover the deductible if something bad happens. Don't get complacent. Finally, just because we dodged a bullet in 2006, don't expect immunity from disasters going forward. "It will happen again," says Hartwig. And if you're in a high-risk area, you may not see much of a lull. "Rates will move on two trajectories -- double digits for many coastal areas, and the rate of inflation, for now at least, in the others," according to Hartwig.
Bottom line: enjoy the sunny skies for now -- but stay prepared for the worst.
Jennifer Openshaw, author of the upcoming book, "The Millionaire Zone," is CEO of winningadvice.com. She is also host of ABC Radio's "Winning Advice with Jennifer Openshaw" and appears frequently on such shows as the CBS Early Show and Good Morning America. E-mail her at Openshaw@winningadvice.com.
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