Average Homeowners Policy Rate Comparison is Meaningless

Despite the insurance industry’s traditional reliance on averages, averages don’t always make sense when comparing premiums. In Texas, as elsewhere, individual premiums are subject to so many variables — from value of property to protection services — that average premiums are meaningless to consumers. Yet, comparing averages is exactly what the National Association of Insurance Commissioners (NAIC) does in its annual publication of average homeowners premiums by state. (Released December 2007, www.iii.org/media/facts/statsbyissue/homeowners/).

While the report includes explicit warnings that Texas data should not be directly compared with any other state because of the differences in how Texas promulgates policy forms, those warnings did not prevent most media from reporting that Texas’ average homeowners premium of $1,371 was the most expensive in the country.

But is that accurate today?

No one would argue that homeowners insurance in Texas is not expensive. Our property losses span all five natural catastrophes and Texas is usually in the top three states for total cat losses each year.

But we question whether the NAIC report is a good source for comparisons. The NAIC report uses data from 2005, before the devastating storms in Florida and the northern Gulf of Mexico. I would not want to wager that Texans today are paying higher premiums than Floridians. The Florida premiums did not include policies written in the Citizens Property Insurance Corporation, today the largest writer of homeowners insurance in that state. In fact, a footnote to the report concludes that “results … underestimate the cost of homeowner insurance in Florida.”

Is there a good way to compare premium rates in Texas with other states? The NAIC report broke out premiums by ranges of value. The $100,000 to $125,000 range in Texas represents the highest number of policies. If the premiums for this level of property value are typical, then the “average” premium would be $1,011.

Or, we might look at the premiums and policy count reported to the legislature in the last quarter of 2005. Dividing one by the other develops an average premium under $1,000. But all these methods suffer a common limitation: They don’t tell a consumer or a legislator whether insurance purchasers are being overcharged.

How many times does it have to be said? The best way to drive down the cost of insurance or moderate premium increases is competition and the best barometer of competition is activity in the marketplace. The Texas Department of Insurance reports that 56 property/casualty insurance companies filed for new certificates in Texas in 2006 and 2007. That’s new competition.

A survey conducted by the Independent Insurance Agents of Texas of independent insurance agents in 230 out of 254 counties found that agents have plenty of companies willing to quote homeowners and auto insurance.

Agents outside the hurricane areas of the state also report declining prices in the last two years. One agent in the Dallas area, assessing his own experience with a book of one thousand homeowners policies, quantified an 8.3 percent premium decrease for the book from 2005 to 2007, and that was after adjusting insured values upward annually.

TDI reports that companies writing a third of the homeowners in the state filed for rate decreases last year. That only happens in a competitive environment.

Consumers don’t have to settle for inaccurate averages. They can take advantage of this marketplace by shopping their insurance with multiple agents or with an independent agent who represents multiple carriers.

It is a buyers’ market, and that’s a good thing for Texans.

David VanDelinder is executive director of the Independent Insurance Agents of Texas, www.iiat.org.

Topics Florida Texas Agencies Property Homeowners