Diane Colborn, vice president of the Personal Insurance Federation of California (PIFC), told the Assembly Insurance Committee earlier today that the most significant factor in recent homeowners insurance premium increases has been the dramatic increase in water loss claims and related costs.
The Committee, chaired by Assemblyman Juan Vargas, is studying the cost drivers in property insurance, including water losses and mold. “In addition to the frequency and severity of water claims,” Colborn continued, “other contributing factors include concerns regarding household mold and associated litigation costs, increased home repair costs, inflation in property values, and fraud. All of these factors combined have adversely affected the homeowners insurance marketplace in the state.”
Colborn offered statistical facts and information to back up the reasons for a tightened homeowners insurance market.
A main factor in rising homeowners insurance premiums has been that insurers are losing money on homeowners insurance polices in California. In 2001, the last year for which data is available, homeowners insurers paid out an average of $1.18 in claims for every $1.00 in premium collected.
A study by the Insurance Information Network of California (IINC), found that California insurers paid out nearly $2 billion in household water damage claims from 1997 to 2001. That represents more than a 100 percent increase over those four years.
The increase in water loss claims costs has been exacerbated by hysteria regarding mold and alleged health effects, which have not been scientifically substantiated.
SB 732 by Senator Ortiz was signed into law in 2001. It requires the Department of Health Services to conduct a study to establish mold exposure limits and clean up standards. PIFC supports the study and development of state standards and remediation guidelines for mold clean up which are based on sound science.
The claim that insurer investment “losses” are the primary reason for increasing insurance premiums is inaccurate. Under Proposition 103, investment income is required by law to be taken 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 is up, it helps to partially offset the impact of rising claims costs. When investment income is diminished, then any rise in costs must be reflected in premium rates.
Although investment income for all investors is down today, property and casualty insurers, due to their more conservative and diversified investment portfolios, continue to make modest returns on their investments even in the current down market. Thus, investment income, while a factor in ratemaking, is only a minor factor in ratemaking calculations.
“PIFC cautions the Legislature to be aware of legislation that could further hinder an already troubled homeowners insurance marketplace. Instead, we urge legislators to consider legislation to stop frivolous lawsuits, reform cumbersome regulatory procedures and study homeowners mold remediation standards as a way to help mitigate rising insurance costs,” Colborn concluded.
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