Having property insurance coverage can mean the difference between protecting your assets, and losing everything. But as crucial as insurance protection is, you're likely to see some big hikes in your premiums coming soon.
What's bringing on higher rates?
Insurance companies engage in a constant tug-of-war with policyholders and government regulators. On one hand, insurers need to earn enough in premiums to meet their eventual losses and still make a reasonable profit. On the other hand, regulators want to ensure that policyholders don't have to pay so much that insurers end up reaping an unreasonably high profit.
What's happened recently, though, is that several factors have combined to exert pressure on insurers to raise premiums. First and foremost, high-profile disasters, including Hurricane Irene in 2011 and Sandy last year, have caused big losses among major insurers. Travelers (NYSE:TRV), Allstate (NYSE:ALL), and Chubb each suffered losses due to Sandy near the $1 billion mark, and other natural disasters in other parts of the country have contributed to hold back profits among property and casualty insurers. The need to recoup those losses has provided good arguments for insurers trying to get rate increases from regulators.
Another contributor to insurance-premium pressure is the current low interest rate environment. In setting insurance premiums, insurers have to take into account not just the money they collect from policyholders, but also the investment returns they'll earn on that money between the time they invest it, and when they need to pay it out through loss claims. When property damage occurs, it can take months or even years for work to be done and for insurance companies to pay out claims, and until those dollars flow out of insurers' reserves, they earn returns. But, with rates near historic lows, insurance companies can no longer count on dependable returns from low-risk investments, and they therefore have to collect more in premiums upfront to cover their eventual loss payouts.
Those pressures affect different companies in different ways. As a recent article in Barron's observed, mutual insurance companies, which are owned by their policyholders rather than by outside shareholders, have started raising their rates in order to shore up their balance sheets in the face of weak investment returns on their generally low-risk portfolios. Because mutual insurers have traditionally been a driving competitive force in keeping shareholder-owned insurance companies from raising rates, their struggles have freed investor-owned insurers to follow suit with rate hikes of their own.
Why property insurance has gotten popular
These issues affect different insurance lines in similar ways. But, within the industry, there's been a pronounced shift to focus on property and casualty insurance. Hartford Financial (NYSE:HIG) has moved aggressively to divest its annuity and life-insurance businesses to focus on property and casualty lines, and AIG (NYSE:AIG) has largely accomplished its post-bailout goal of selling off ancillary businesses in order to return to its core insurance-market roots.
Even though insurers can point to low interest rates as a way to get premium hikes approved, they aren't universally stuck with those low returns. Many insurance companies have benefited greatly by taking on more risk in their investment portfolios. Berkshire Hathaway (NYSE:BRK.B) is the most obvious example of an insurance company that retains heavy exposure to equities as part of its competitive advantage and a driver of its massive long-term returns, but increasingly, other insurance companies are following its lead, and investing in stocks and other higher-return, higher-risk assets. Lately, the stock market has cooperated, giving insurance-company shareholders some impressive stock appreciation, even in the face of major disasters.
What you can do
For consumers, the insurance environment could be tough for a while. What's promising, though, is the attention that property and casualty insurance is getting among potential new entrants to the industry. Greater competition is the key to breaking the trend of rising rates, and eventually, the flood of insurers seeking high profits leads to slower growth in rates and, sometimes, even reductions.
For now, to cut costs as much as possible, make sure you have only the insurance you need. Appropriate policy limits are your best defense against unnecessary costs. You should also consider taking on higher deductibles, as remaining responsible for a higher amount on each claim can reduce your premiums substantially. Finally, if you have a clean loss record, take advantage of discounts that many insurance companies provide.
By doing all those things, you may not produce the insurance savings you'd like to see. But not doing them will cost you even more in premiums.