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Are We Entering A Hard Insurance Market? (6)

Are We Entering A Hard Insurance Market? (6)

I have owned and operated a personal lines and commercial insurance agency representing the largest publicly traded Property and Casualty insurer in the United States. This company will spend half a billion dollars this year in advertising. In fact, the "Big Four" U.S. auto insurers will spend about two billion dollars in advertising in 2012. There is a true advertising war being waged. Unfortunately, a premium price war has not followed. There are several reasons for this. The first affects both your auto and homeowners policies, the last two primarily your homeowner's policy.

Financial Markets: Historically, insurers could gather premiums collected, take out operating expenses, then make investments in equity and bond markets and expect a seven to nine percent return, allowing premiums to grow until needed to pay claims. They can't count on these types of market returns now. What consumers are experiencing now is the true cost of insurance with investment returns stripped down.

Global Catastrophic Losses: 2011 will be the highest catastrophe-related loss year in world history (natural catastrophes and man-made disasters). $350,000 billion in economic losses, $108,000 in insured losses. As a result, re-insurance costs (insurance that insurance companies buy to cover them) are at historic levels, if available at all. If you look on your homeowner's declaration page, some companies will list the extra re-insurance charges they are passing on to you.

Local property concerns: Low lying coastal areas such as south Louisiana create special concerns for property insurers and re-insurers. Actuaries can predict with some certainty how many hail storms, tornadoes, and severe thunderstorms a given area may encounter in a given year. Hurricanes however are hard to predict and price for. We all remember the 2004 Atlantic hurricane season when Florida was hit with four named storms. That had not happened to one state since 1886. This is an example of how hard it is to price a homeowner's policy in coastal areas. With many large property insurers, their rates and availability (capacity) are somewhat controlled by their re-insurance contracts. Think of it this way, if a large company has 30 percent of the homeowners market share in a given area, that company insures roughly every third house or business on each block. Actuaries can price that risk for hail storms, even tornados, but a major hurricane, or a series of storms puts even the largest insurers at risk. In coastal areas, being insured with carriers with the highest market share may result in higher premiums charged as a result of that greater risk by the insurance company and its re-insurer.

So, what does this mean to you? Consumers are beginning to realize that working with an independent insurance agency has many advantages. These agencies can find the right company at the right price. They are not "captive agents". They may have access to twenty or more companies versus one. From an auto insurance perspective, there are many fine, highly rated companies that primarily use independent agents to sell their policies. These companies limit their advertising budgets and can pass on savings to their policy holders. When reviewing your homeowner's policy, be mindful that a large portion of your premium may be re-insurance costs that your company is passing on to you.

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