As renewal notices go out in the mail, insurance agents across California are answering calls from their policyholders, some of whom are facing the rising homeowners and auto insurance rates.
Unfortunately, several factors have caused the auto and homeowners insurance markets to harden nationwide. Bob Hartwig, Ph.D., chief economist for the Insurance Information Institute, estimates that the cost of both auto and homeowners insurance coverage will increase by nine percent in 2003.
California law requires insurance companies to set auto insurance rates based on four factors: motor vehicle record, the number of years driving, the number of miles driven, and other factors determined by the California Insurance commissioner. However, rising medical costs, higher vehicle-repair costs, and skyrocketing jury awards are now driving up the cost of auto insurance.
Medical Costs: The latest statistics collected in 2000 by the California Office of Traffic Safety (OTS) show that a traffic collision was reported every one minute and two seconds. Among the 500,000 traffic accidents reported, OTS reports that 201,679 of these accidents resulted in either death or injury. Medical costs are a major component of the price of auto insurance.
Court Decisions: One recent decision banned the use of aftermarket parts, which forces insurance companies to pay higher costs for brand-name auto parts. Another 2001 Georgia Supreme Court ruling requires insurers to pay consumers the diminished value of a car, even if it is fully repaired.
Jury Awards: According to the Insurance Information Institute, the average jury award in auto liability cases rose 44 percent in 2000.
Several factors are contributing to rising homeowners insurance rates.
Insurers are paying out more in claims than they are collecting in premiums. From 1997 to 2001, the number of non-catastrophe losses paid by insurers per insured home climbed more than 10 percent and the cost of an average claim skyrocketed by 29 percent.
As a result, it cost insurers on average 42 percent more to provide insurance for a home in 2001 than it did in 1997. During the past decade, homeowners’ insurers have paid out $1.18 in expenses for every dollar that they have earned in insurance premium.
Water Claims: California insurers paid roughly two billion dollars between 1997 and 2001 to satisfy claims for household water damage—more than most natural disasters. The cost of water-related damages—including mold—has climbed dramatically in a short time, with the average California water damage claim escalating to $4,730 in 2001 from $2,537 in 1997.
Home Building/Repair Costs: Though inflation has been relatively stable in recent years, the cost of home repair has not. While the Consumer Price Index (which measures the cost of living) increased by 8.4 percent from 1999 to 2001, the cost of home repair escalated by 17.3 percent during the same period.
Catastrophes: During the 1990’s, the frequency and severity of natural disasters such as earthquakes, wildfires and storms increased dramatically. During the past 12 years, insurers have paid more than $100 billion in catastrophe claims.
How Agents Can Help Customers Save Money
Although insurance prices are currently on the rise, there are several things agents can advise their clients to do to control costs.
Ask about discounts: Insurers offer many discounts to their customers, including rewards to longtime customers and clients who buy several policies.
Maintenance: Encourage clients to keep their homes well maintained. Advise homeowners to regularly inspect and replace water hoses and other fixtures that might leak or spark.
Home security: Installation of certain home security devices and systems may qualify homeowners for an insurance discount.
Deductibles: Advise clients to consider raising their deductibles, and to file insurance claims only in the event of a major loss.
Maintain good credit: A good track record of financial decision-making can help save money on the cost of insurance.
Miller is executive director of the Insurance Information Network of California. Nicole Mahrt, who contributed to this article, is public affairs director, Western Region, for the American Insurance Association.
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