Why Insurance Costs Go Up and What Customers Can Do To Save Money


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As renewal notices go out in the mail, insurance agents across Texas are answering calls from their policyholders, some of whom are facing rising homeowners and auto insurance rates.

Texas law requires proof of financial responsibility for anyone who drives an auto within the state and homeowners need at least dwelling coverage to qualify for home loans. 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 (III), estimates that the cost of both auto and homeowners insurance coverage will increase by nine percent in 2003.

Auto insurance Rising medical costs, higher vehicle-repair costs and skyrocketing jury awards are now driving up the cost of auto insurance.

According to the Texas Department of Public Safety (DPS) in 1999 a traffic collision was reported every 101 seconds in the state. Among the 311,701 traffic accidents reported, DPS reports that more than 206,326 of these accidents resulted in either death or injury. Medical costs are a major component in the cost of auto insurance. Nationally, auto insurers pay $15 to $20 billion in medical claims each year.

Two court decisions also have contributed to the rising cost of auto insurance. One recent decision banned the use of aftermarket parts, which forces insurers to pay higher costs for brand-name auto parts. Another ruling requires insurers to pay consumers the diminished value of a car, even if it is fully repaired.

Insurance rates are also being affected by higher jury awards in vehicular liability lawsuits. According to the III, the average jury award in auto liability cases rose 44 percent in 2000. Insurance rates are now reflecting the impact of these higher medical costs, court decisions and jury awards.

Homeowners insurance Several factors are contributing to the trend of rising homeowners insurance rates, not the least of which are water damage claims—including the growing number of claims for mold damage, higher home repair costs and catastrophes.

From 1997 to 2001, the number of non-catastrophe losses paid by insurers per insured home climbed more than ten percent, and the cost of an average claim skyrocketed by 29 percent. As a result, it cost insurers an average 42 percent more to provide insurance for a home in 2001 than it did in 1997. During the past decade, homeowners insurers paid out $1.18 in expenses for every dollar that they earned in insurance premium.

It is estimated that property and casualty insurance providers paid almost $2.9 billion in claims in 2001—driven largely by a 1,306 percent jump in the number of mold claims from the previous year. According to the Texas Department of Insurance, water damage in 2001 surpassed wind and hail damage for the first time. The cost of water-related damages—including mold—has climbed dramatically in a short time, with the paid losses for water claims escalating to $1.2 billion in 2001. The average cost per policyholder went to $444 in 2001 from $23 in 2000—costs shared by all Texas insurance consumers.

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.

During the 1990s, the frequency and severity of natural disasters such as earthquakes, floods, wildfires and storms increased dramatically. Over the past 12 years, insurers paid more than $100 billion in catastrophe claims, or about $700 million per month.

How agents can help There are several things agents can advise their clients to do to control costs and protect their insurance coverage.

Inform customers of insurer discounts, such as rewards to longtime customers and clients who buy several policies from the same company. Installed home security devises and systems may also qualify for discounts.

Encourage clients to keep their home well maintained and to regularly inspect and replace water hoses and other fixtures that might leak or spark. Preventing household damage with regular maintenance is cheaper and less frustrating than repairing damage caused by water leaks or a fire.

Advise clients to consider raising their deductible, and to file an insurance claim only in the event of a major loss. Higher deductibles can save 15 percent or more in premium costs.

Remind customers that a good track record of financial decision-making can also help save money on the cost of insurance.

Tiffany O’Shea is public affairs director, Southwest Region, of the American Insurance Association.


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