Get your checkbooks ready, homeowners. You're facing another round of sharp rate hikes on your home insurance next year. Annual premiums are expected to rise 8%, to a nationwide average of $615, following a 6.9% rise this year, according to the New York-based Insurance Information Institute. What's more, policies will be harder to get, offer less coverage for your dollar, and continue to grow more expensive. Says James Walsh, an author and insurance-industry expert, "We're looking at another few years of premium increases."
What gives? For one thing, last spring's nasty storms, followed by tornadoes, a huge hurricane that hit the East Coast, floods, and the worst wildfires in California history, have landed insurers with $12 billion of catastrophic losses in the U.S. this year -- twice as much as in 2002. Besides, property-casualty insurers are hell-bent on restoring their profits after a long period of severe competition. "For many years, homeowners' insurance was unprofitable for us," says Kevin Kelso, president of personal insurance lines at Los Angeles-based Farmers Group, a unit of Zurich Financial Services. "We are going to charge what we need to run our business profitably."
That has been easier to do since the September 11 attacks, which caused an estimated $40 billion in losses. Those tragic events changed the thinking of policyholders and underwriters alike: Insurers lost their reluctance to push premiums higher, while customers reasoned that the extra cost was worth it if something like September 11 could occur. Says Deutsche Bank Securities Inc. (DB ) analyst Alain Karaoglan, "The concept that anything can happen is now more powerful."
As well as hiking premiums, insurers have been cutting back on coverage and encouraging policyholders to raise their deductibles, which limits claims. After the wildfires in Oakland, Calif., in 1991 and the Northridge, Calif., earthquake in 1994, insurers stopped guaranteeing full replacement cost for homes. Today, most policies have specific limits on coverage. And after paying out some $5 billion in mold-related claims in recent years, insurers now rarely write homeowner policies that include such coverage. Some are also trying to avoid concentrating risks in certain areas. For instance, State Farm Insurance Cos. stopped writing homeowners' policies in California for a year in 2002 to limit its exposure there and to shore up reserves.
The insurers' change in strategy has certainly been profitable. Net income industrywide could reach $29 billion this year, the highest since 1997, when catastrophic losses were unusually low, the Insurance Information Institute says. And that's despite record low interest rates that have reduced the industry's income from investments, 75% of which are in bonds.
In their dash for better profits, companies have also dropped lines in which they weren't leaders and done deals to shore up weak areas. Prudential Financial Inc. (PRU ) completed the sale of the bulk of its auto and homeowners' business on Nov. 3. The Hartford Financial Services Group Inc. (HIG ) sold its reinsurance business in May. Safeco Corp. (SAFC ) put its life-insurance and financial-services business up for sale in September. On Nov. 17, Travelers Property Casualty Corp. (TPK ) and St. Paul Cos. (SPC ) said they would merge in a $16.4 billion deal, creating the second-largest company after American International Group Inc. (AIG ) in property-casualty insurance. Consumers can only hope that the cost savings from deals -- and better investment returns -- will encourage insurers to ease up on rate hikes.
By Christopher Palmeri in Los Angeles