Insurers Lifting Rates as Storms Defy Models
Allstate Corp. (ALL), Travelers Cos. and State Farm Mutual Automobile Insurance Co. are among insurers raising homeowners’ rates after damage from natural disasters defied industry projections.
Allstate, the No. 2 U.S. home insurer, boosted prices for its namesake brand of home policies by 5.6 percent in the nine months through Sept. 30 and has said more increases are coming. Travelers is raising rates after re-evaluating U.S. storm risk. State Farm, the largest U.S. home insurer, has charged homeowners more nationwide for three straight years.
Near-record-low interest rates cut insurers’ investment income, and tornadoes, wildfires and Hurricane Irene increased claims costs in the U.S. last year. The industry averaged annual underwriting losses on homeowners’ policies in the decade ended in 2010, according to data compiled by the National Association of Insurance Commissioners.
Homeowners’ coverage “has been really underpriced,” said Josh Stirling, an analyst at Sanford C. Bernstein & Co., in a phone interview last month. “If you go back 10 years, these businesses were loss leaders.” Personal auto coverage has been profitable for insurers during that period, NAIC data show.
Catastrophes worldwide led to a record $105 billion in insured losses last year, according to a report this month from Munich Re, the world’s largest reinsurer. About $25 billion of those losses came from U.S. storms, including the tornado that leveled parts of Joplin, Missouri, in May. Irene, the first hurricane to make landfall in the U.S. since 2008, caused $7 billion in insured losses.
Policyholder-owned State Farm raised homeowners’ rates 3.6 percent last year, Dick Luedke, a spokesman for the Bloomington, Illinois-based insurer said in a phone interview. That follows a 7.3 percent increase in 2010 and a 9.7 percent increase in 2009.
Allstate boosted homeowners’ rates for its namesake brand in 37 states in the first three quarters of 2011, compared with 32 in all of 2010, according to regulatory filings. Chief Executive Officer Thomas Wilson, 54, has said that the company is acting as if increased weather-related losses are part of a permanent shift in climate patterns.
“Rates were not adequate” for homeowners’ insurance, he said at an investor conference in New York last month. “They are not adequate for us and the rest of the industry. We are getting little pushback from regulators or customers, for that matter, on raising pricing in the marketplace. So there are more rate increases to come.”
Travelers’ CEO Jay Fishman, 59, has also said he is pushing for rate increases after tornadoes last year fueled a second- quarter loss and forced the company to assess whether its models understated storm risk.
“We can either make the decision that we’re really smart and we’ve been unlucky, or we can make the decision that something different is happening,” he said on an October conference call with analysts to discuss the New York-based insurer’s quarterly results.
U.S. state regulators approved about 1,500 requests to raise rates for policies that protect homes last year, according to data compiled by Perr & Knight, a Santa Monica, California- based consulting firm that tracks the records. That adds to more than 3,700 in the prior two years. Companies must seek approval from states to make most changes on policies sold to consumers.
Allstate, based in Northbrook, Illinois, has also moved to change terms of some policies. The insurer started a program in Oklahoma that limits payouts for customers’ with older roofs, Wilson said at an investor conference in December.
More Increases Coming
Some carriers in Georgia have refused to cover homes with roofs older than 10 years, said Victor Hamby, a partner at Hamby & Aloisio Inc., an independent insurance agency in Atlanta. His clients faced rate increases averaging about 18 percent last year and he expects them to continue rising this year and next. He attributes the increases to underwriters needing to recoup losses and a new state insurance commissioner who has sped up the process for approving rate changes.
“The underwriting standards have really tightened up,” he said in a phone interview last week. “It’s not like you can jump from one carrier to another and they’ve got the sale of the day going on down the street.”
Insurers are expanding the area they consider at risk for large tornado and hail losses beyond Texas, Oklahoma and Kansas, said Howard Botts, executive vice president at CoreLogic Inc.’s spatial solutions business, who creates natural hazard databases for the industry. The U.S. Gulf Coast, Minnesota and Wisconsin are among areas now considered at higher risk, he said.
“It often takes catastrophic events, or large loss events, to get the attention of senior management,” Botts said in a phone interview. Insurers are “much more sensitive to losses now that they can’t offset that with their investments.”
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