Premium Rate Increases

     Many people in Minnesota and around the nation are asking what is driving homeowners insurance premium rates up.  This is a very good question that deserves an answer.

     Three main factors have combined to force insurance companies to increase premium rates: 1) the destruction of the World Trade Center, 2) the steep decline in interest rates and the decline of the stock market, and 3) large windstorm claim losses in Minnesota the past seven years.

     Looking at the insurance industry from the outside, you wouldn’t think that a building collapse in New York would affect homeowner’s in Minnesota, but it does.  All insurance companies buy and/or sell reinsurance to other companies’ worldwide.  This means that all insurance companies are affected but catastrophic events that happen all around the world. Early estimates for the cost of insurance claims from the collapse of the World Trade Center were $20 billion dollars.  Compare this to the worst hurricane, which cost about $6 billion dollars.  This huge $20 billion claim has to be paid by the primary insurance companies, and ultimately, by the companies that sold them reinsurance.  These and other reinsurance companies immediately significantly raised their reinsurance rates to everyone else, partly to recover their losses, and partly because they could not anticipate what other terrorist activities might follow.

     For Hay Creek Mutual, this meant that our reinsurance premium cost rose in January of 2002, and the amount of coverage we could buy decreased.  Hay Creek Mutual had to put more of our surplus at risk during the year 2002.

     Second, insurance companies make a significant amount of money from investment income.  Your policyholder surplus is invested, and the interest income helps to pay expenses and keep your premium stable.  Interest rates today are as low as they have been in twenty years.  That is not news to people who are trying to live off the interest generated by their life savings.  On top of low interest rates, the collapse of the stock market has reduced insurance company earnings and has greatly reduced the value of the stocks held in insurance company investment portfolios.

     Investment income for Hay Creek Mutual was $40,000 less in 2001 than it was in 2000 even though the company had more money invested in 2001.  The rate of return has not significantly increased in 2002.

     Third, Minnesota has been pounded repeatedly the last seven years by floods, tornadoes, straight-line winds and hail.  The tornado that went through St Peter at Easter is probably the most memorable storm.  Insurance companies expect to have one terrible claim year and two high claim years out of ten.  In Minnesota, we have now had seven high claim years out of the last ten.  Paying so many claims has put a strain on many insurance companies financial reserves.

     Put these three factors together and what do you have?  You have high claims, which are draining cash at the same time as you have low interest rates reducing income and higher reinsurance rates increasing expenses.  This is the formula for significant premium increases.  Some insurance companies are quitting doing business in the State of Minnesota.  They are canceling policies and leaving.  Other companies are taking rate increases of 50% or more to encourage their policyholders to quit buying from them.

     Hay Creek Mutual has taken an average premium rate increase of 7.5%.  Depending on the age of the house, some homeowner’s premiums may have increased slightly more or slightly less.  Hay Creek Mutual feels that 7.5% was a very conservative rate increase.  You must feel the same way because only a handful of policyholders have cancelled and more than 300 have joined the company this year.

     If you want to predict what premium rates will do in 2003, look back to our three factors and apply them to this year.  1) Reinsurance companies are still nervous about terrorists and the weather in the mid west.  We are told that reinsurance premium rates will rise again in 2003.  2) Interest rates have not improved, and the stock market has gotten much worse.  Investment income will be down more this year.  3) The floods, windstorms and hail again continue to pound Minnesota.  2002 will be another poor claim year for insurance companies.

     The three factors we looked at have actually gotten worse.  Based on this reasoning, I think that you can predict that insurance premium rates will continue to increase in 2003.

Niles Deden

Manager

August, 2002 

SITE LAST UPDATED:09/06/02 08:17:31 PM