Are Cost, Availability of Calif. Homeowners Insurance at Crisis Proportions’

Today, the California personal lines industry is at the peak of a down cycle that has adversely affected the homeowners’ insurance marketplace. The downturn began in 2000, and worsened after the Sept. 11 attack on America. Thus, over the last two years, after nearly a decade during which homeowners’ insurance premiums in California remained relatively flat, premiums have risen substantially, and the market has tightened significantly throughout the state.

According to the top homeowners writers in the state, the number one reason for the turbulent homeowners market is skyrocketing water damage claims and associated mold concerns.

Insurers cite a study conducted by the Insurance Information Network of California (IINC), which found that home insurers paid nearly $2 billion for household water damage claims between 1997 and 2001. In 1997 water-related claims paid by insurers representing two-thirds of the market totaled $206 million. By 2001, the amount more than doubled to $431 million. The study found that in 1997, the average water claim filed in California cost $2,537 to repair. In 2002, it increased 86 percent to $4,730 per claim.

The increase in water claims can be attributed to many things. Consider: the average home in California once had only one bathroom, but today homes average two or three. Washing machines used to be located on the first floor or basement, but today many are located on the second or third floor. Plus, the average cost of a home in California has risen to more than $300,000 according to the California Association of Realtors. They also report that repairs of homes have risen 27 percent since 1997 and building costs have risen 17-27 percent in the same period.

Next, add the highly charged issue of mold—which may or may not be covered—and you have a fairly good look at the big picture. Multi-million dollar mold jury awards, sensationalized reporting on “toxic mold” in the media, and profiteering by some individuals have led to an explosion in mold related claims and costs.

According to the Insurance Information Institute (III), mold claims—which were virtually unheard of just a few years ago—cost homeowners insurers nationwide more than $1 billion last year, approximately five times the cost in 2000. Since then, insurers have been hit with thousands of “toxic mold” lawsuits. For every dollar collected in premiums in 2001, homeowners’ insurers paid out $1.18 in homeowners’ claims, according to the Institute.

But, the insurers’ plight does not go unchallenged. Critics in California accuse the industry of non-renewing policies without justification, and some say the industry is raising prices to cover losses in the stock market.

The Personal Insurance Federation of California (PIFC) polled its member companies that write homeowners insurance in California and found from two top insurers that out of the millions of homeowners policies in force, less than one-half-of-one percent are non-renewed.

In addition, the overly politicized and burdensome rate regulatory environment in California makes it difficult for insurers to obtain necessary and justified rate approvals. As a result, companies cannot be assured of obtaining adequate rates. For that reason, other underwriting tools become even more important in California, to ensure companies can manage their exposure to loss and ensure that they are able to meet their obligations to existing policyholders.

Insurers in California are required by law (Prop. 103) to take investment income into account in determining insurance rates. However, investment income has been only a relatively minor factor in insurance rate decisions when compared to the impact of rising claims costs. When investment income was up in the 1990s, it did help to partially offset the impact of rising claims costs. Although investment income for all investors is down, P/C insurers, due to their more conservative and diversified investment portfolios, continued to make modest returns on their investments even in the current down market. Insurers tend to be more heavily invested in bonds, with a much lower percentage in stock. Thus, the claim that insurer investment “losses” are the primary reason for increasing premiums is totally inaccurate.

Critics have also asserted that loss history databases such as the Comprehensive Loss Underwriting Exchange (CLUE) should not be used by insurance companies to underwrite policies.

Loss history databases, such as CLUE, are valuable underwriting tools that enable insurers to more accurately, fairly and efficiently underwrite and rate policies. Loss history reports compiled by CLUE provide the loss history on a particular property which is necessary for evaluating the risk of future loss and accurately underwriting and rating a homeowners insurance policy.

Insurers do not use loss history reports for policy renewals, but only for evaluating the risk of future loss on new policies. These databases allow insurers to verify the loss history information a prospective policyholder provides as part of their application for insurance. If insurers cannot consider prior losses in underwriting a policy, policyholders without any claims history will pay more for insurance.

If insurers lose the right to utilize loss history databases like CLUE, the absence of this information and the need to independently investigate loss history will create a delay in the ability of insurers to respond to consumer requests and bind coverage. This could delay the close of escrow for a greater number of purchasers and have negative impacts on the homeowners market.

Any legislative activity that seeks to improve the condition of California’s homeowners insurance market should focus on those factors that would reduce the costs of insurance rather than impose additional regulation that would add to cost burdens and potentially reduce availability for consumers.

G. Diane Colborn is vice president, Legislative and Regulatory Affairs, Personal Insurance Federation of California (PIFC).

Topics California Carriers Legislation Profit Loss Claims Underwriting Homeowners