Why Are Homeowners Rates Increasing & Coverage Decreasing?

The answer to the questions is “catastrophe losses”. Catastrophe losses have been increasing for the last 10 to 15 years.  Thunderstorm/Tornadoes have decimated areas in the Southeast and Midwest.

The term “catastrophe” in the property insurance industry denotes a natural or man-made disaster that is unusually severe. An event is designated a catastrophe by the industry when claims are expected to reach a certain dollar threshold, currently set at $25 million, and more than a certain number of policyholders and insurance companies are affected.

Insured catastrophe losses in the United States for 2011 totaled $35.9 billion, greatly surpassing the average of $23.8 billion for the years 2000 to 2010. But, despite the growing losses, insurers remain strong. As of the end of the third quarter, policyholders’ surplus stood at $538.6 billion, down somewhat from $559.2 billion at year-end 2010, in large part as a result of claims payments to disaster victims. Policyholders’ surplus is essentially the equivalent of the industry’s net worth and a reliable indicator of its ability to pay claims.

The federal government issued 99 disaster declarations in 2011, a record and an indication of the increased number of catastrophes, as well as a greater propensity to issue federal disaster declarations. According to Munich Re, a major reinsurance company, losses due to thunderstorms (hail and tornadoes) this year exceeded $25 billion, more than double previous records.

 
Thunderstorms/Tornadoes: Continuing last year’s trend of unusually damaging storms in the Southeast, tornadoes spawned by two violent weather systems tore through 12 states during the period February 28 to March 3, causing 39 deaths, flattening whole communities and causing as much as $2 billion in insured damage, according to catastrophe modeler EQECAT. The storms also produced large hailstones. With tornado activity for the first two months of the year well above average, forecasters say the tornado season in 2012 could be as active as 2011 but storms are likely to strike further north as global weather patterns change.

INSURED LOSSES, U.S. CATASTROPHES, 2001-2010 (1)
Year
Number of catastrophes
Number of claims
(millions)
Dollars when occurred
($ billions)
In 2010 dollars (2)
($ billions)
2001
20
1.5
$26.5
 $32.4
2002
25
1.8
5.9
7.0
2003
21
2.7
12.9
15.2
2004
22
3.4
27.5
31.4
2005
24
4.4
62.3
68.9
2006
31
2.3
9.2
9.9
2007
23
1.2
6.7
7.0
2008
36
4.1
27.0
27.6
2009
27
2.2
10.5
10.6
2010
33
2.4
14.1
14.1
 

(1) Includes catastrophes causing insured losses to the industry of at least $25 million and affecting a significant number of policyholders and insurers. Does not include flood damage covered by the federally administered National Flood Insurance Program.
(2) Adjusted to 2010 dollars by ISO using the GDP implicit price deflator.

Source: The Property Claim Services (PCS) unit of ISO, a Verisk Analytics company.
Information from Insurance Information Institute, Inc.  website www.iii.org