How to cope with rising home insurance premiums

Gina Roberts-Grey

American homeowners should brace themselves for more than severe weather. Across the country, increases in home insurance premiums are on the horizon. Recent natural disasters – including tornadoes, floods and wildfires – share some of the blame.

On a national basis, no one can say for certain just how much home insurance rates will climb. Rate hikes vary from insurer to insurer and from state to state. But here are three things you can do to help ease the pain:

• Consider a higher deductible for your home insurance policy, says Linda Sherry, director of national priorities at Consumer Action, a nonprofit advocacy group for consumers. Raising your deductible could lower your annual premium. But it also means you’ll pay more out of pocket in the event of a claim.
• Shop around for a new insurer that offers lower premiums, Sherry says. If you do shop around, make sure your home is in insurer-friendly condition. “It should be free of any obvious liability risks like cracked sidewalks someone could trip over, broken steps someone could or missing shingles that could lead to a leak,” she says. “If you don’t perform the repairs, you could lose the new policy and be out of luck because you canceled the old one.”
  • Contact your state lawmakers. “Until and unless lawmakers enact meaningful insurance reform that brings greater transparency and accountability to the insurance market, customers are going to be left with a broken market that serves the industry and not the public,” says Alex Winslow,executive director of Texas Watch, a nonprofit advocacy group for consumers.

Loretta Worters, a spokeswoman for the nonprofit Insurance Information Institute, says home insurance premiums are simply catching up with the times. “Rates on homeowner’s insurance have been inadequate for many years,” she says.

From 2005 to 2008, home insurance premiums grew slower than inflation did, with increases in the low single digits, Worters says. With the insurance market rebounding a bit in 2011, insurers could seek much-needed rate increases “to get rates back to a more adequate level,” she says.

Unfortunately, that “adequate level” is hurting consumers’ budgets. For instance:

• Farmers is raising rates in Texas by an average of 10 percent.
• Georgia insurer GuideOne Insurance raised rates by an average of 12 percent in March 2012. Most other home insurers doing business in Georgia gained state approval for increases of 18 percent to 22 percent.
• Florida’s Citizens Property Insurance Corp. is raising rates for some condo owners and homeowners by 21 percent.
• The North Carolina Farm Bureau is bumping up rates on condo and home policies by 6 percent.
• Pennsylvania regulators are considering requests from Erie Insurance and Travelers to boost home insurance premiums by roughly 9 percent, effective in the summer of 2012. Allstate already has begun charging rates in the state that are up to 15 percent higher.

Worters says Mother Nature accounts for a good chunk of the premium increases, with tornadoes, snowstorms, wildfires and hurricanes pummeling much of the country recently. Hurricanes and tropical storms account for 44 percent of insurance claims tied to natural disasters, she says, with another 30 percent being generated by tornadoes.

Other reasons for spiking home insurance premiums include:

• Rebuilding is expensive. Although the value of homes has declined considerably in many parts of the country, typical reconstruction costs have not. “The cost of building a home rose by 45 percent from the start of 2001 through the end of 2011,” Worters says. Insurers wind up passing along those higher costs to their policyholders.

• The insurance market tanked. Insurers need help from consumers to dig out of a financial hole. Just like consumers look to 401(k)s to build a nest egg, insurers invest primarily in bonds because they’re safe, Worters says. But interest rates are considerably lower than they were in previous years, meaning insurance companies aren’t getting the financial returns they typically count on to help them stay afloat. “In the past, higher interest returns were used to help offset the cost of paying insurance claims,” Worters says.
• Insurers’ own premiums are rising. Reinsurance is purchased by insurance companies to protect them against major financial losses. Just like insurers, reinsurers’ investments are being hit by low interest rates and are being affected by recent outbreaks of  bad weather, Worters says. The result: Reinsurers up their rates, so insurers do the same.