Weather related claims and your insurance

Bob Johnson
Insurance Federation of Minn.

Many Minnesota homeowners have been surprised this year to see a significant premium increase when they open their homeowner’s insurance statement. An article in the Minneapolis Star-Tribune last month explored why.

While average auto insurance premiums have been trending down over the last few years thanks to safer cars, fewer miles driven and far fewer accidents, homeowners’ insurance rates have done the opposite. In 1997 Minnesota’s average homeowner’s insurance premium was $345 per year. Today it’s $919, a 265 perecent increase! This year, for the first time that we’ve known, Minnesota’s statewide average premium is higher than the national average. There are two major reasons for this.

While rising property repair costs since 1997 are one part of the increase, the other part may not come as a surprise to many weather watchers. Simply put, since 1998, Minnesota has become a major natural catastrophe state.

In 1998, three major storms struck Minnesota. Insurers paid out more than $1.5 billion in storm losses that year, which was more than was paid in the previous 40 years combined.

Since then the trend has continued. In 2007 and 2008 Minnesota had the second and third highest catastrophe losses, respectively, in the nation, alongside more predictable states like California, Louisiana and Texas. In 2010 Minnesota saw 144 tornado touchdowns – the most in the nation. And in 2011 a tornado struck the most densely populated part of the state: North Minneapolis.

But 1998 also saw dramatic changes in the home repair marketplace. After those destructive storms hit, Minnesota experienced the emergence of storm chasers. These are mostly out-of-state contractors who swoop into an area right after a storm, promising fast repairs. They often make exaggerated claims and offer unscrupulous inducements to homeowners who sign a repair contract. These firms often try to do more work than necessary, charge at the highest end of the rate spectrum and are generally not around if something later goes wrong with the repair. Local contractors usually don’t engage in these tactics.

Over the last several years the Insurance Federation of Minnesota, which represents most property insurers operating in Minnesota, has worked hard to pass legislative changes that will crack down on these deceptive and fraudulent practices.

Thanks to these new laws, contractors can no longer offer inducements like the so-called free roof or yard sign allowances. And, consumers can now cancel a contract from a storm chaser within 72 hours for any reason (the old law didn’t allow any cancellations).  These changes benefit legitimate local contractors as well as consumers.

While these changes are helpful, our state needs to take more action to protect policyholders from higher than average premium increases, and it can be done through a relatively simple legislative change.

Right now Minnesota is the only state in the nation that forbids insurers from raising rates or non-renewing coverage for policyholders that have multiple weather related claims. In every other state, these high-risk policyholders are able to be placed in an insurance mechanism where their much larger than average losses can be absorbed into a larger pool, which can better manage the higher risk. In Minnesota lower-risk policyholders are subsidizing higher-risk policyholders because of our unique laws. If we can bring this important underwriting tool to Minnesota we might be able to help prevent this unfair cost shifting.

What happens in a state where a broken homeowner’s insurance market isn’t fixed? Florida is an excellent example.

After years of substantial hurricane losses and a government unwilling to adopt common sense reforms, most insurers were forced to leave. Now, the state of Florida is the source of almost all the state’s homeowners’ insurance coverage.   The state has vastly under-reserved for major losses by tens of billions of dollars. And when the next major hurricane hits, Florida might easily plunge into deep financial trouble.

Our insurance situation, while not as dire as Florida’s, is more easily fixable.

 

Bob Johnson is the president of the  Insurance Federation of
Minnesota.

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