First of all, the answer is not particularly based upon an individual’s own circumstances, unless it was due to their switching away a companion auto policy and losing a substantial discount, or due to a recent claim which caused the loss of a Claims Free discount. More often, there may have been a statewide rate increase affected by the company, and there are many factors contributing to that.
Insurance is basically a pass-through mechanism. Premiums come in and claim payments go out. People buy a policy in case they suffer a loss; and if and when it happens, they turn in their claim to get compensated for what they lost. Naturally, a major weather or fire claim can far exceed their annual premiums paid-in (even over several years); so it essentially becomes a numbers game to cover losses – with a lot of math and actuary science behind it. This involves a geographical spread of risk and using the law of large numbers and statistics while also banking on some investment income.
In order for a company to maintain its financial rating, which is indicator of its financial strength and soundness, it is important to end the year with an underwriting profit. This means that the company’s paid losses and expenses should not exceed the premium dollars collected because that represents an underwriting loss.
Although a company may also make income from investments, this offset cannot be relied upon to annually make up the difference of excessive losses. Indeed, since the downturn of 2008, where interest rates have been just above zero, there was very little income from investments. On the other hand, it is also not condoned to show exorbitant profits by charging rates that are too high. This is subject to review and penalties from the department of insurance regulators plus that company’s rates would not be competitive causing them to lose business to other companies in a free market.
So, if losses were too high, then the company raises the rates to meet that year’s claims paid? No, not at all. Rate setting is not based on the prior year’s losses; such that they just try to recoup what they paid out last year. Rates are based upon projected claim expectations. Actuarial science is prospective, or forward looking based on a study which, among other things, does include observing the experience from the industry and of the company’s own claims over several prior years. Essentially, an insurance company is selling a widget for a price, but they won’t know the total cost of that product until the next year is over and all claims are paid.
Analyzing claims costs finds that they are affected by many different factors. Here is a list of things driving costs which affect the Insurance Industry and therefore, those paying premiums for their Texas homeowners insurance.
Climate Change – No matter who or what is causing it, global climate is changing. A climate with warmer temperatures causes weather to become more severe. Warmer water and air enable storm systems to pick up more moisture which fuels more violent weather. That means longer heavier rains, larger hail, higher wind, and more lightning occurring – and the expectation is that this trend is expected to worsen. An occasional lighter season may occur – but the trend must be accounted for in claims projections.
Claims Severity – The average claim is rising in cost. As an example: The average cost of a roof replacement has risen due to inflation and from Demand Surge following catastrophes. There are not enough roofers and everyone wants a roof.
The density of risk affects the total claims dollars from an event because there are more homes per square mile, such as along I-35 in Texas, or in the Dallas/Fort Worth metroplex where hail storms regularly occur. In the case of hurricanes striking the coast, with more homes built adjacent to the coastline, there is more insured property affected by storm surge and high winds. In other words, the same storm hitting a point on the more densely developed coast today results in significantly greater overall losses than it would have in the past. There is a spread of this risk (called wind loading) that goes into the rates for structures, especially those near the coastal region. And it should go without saying, but homeowners should provide themselves with Flood Insurance if there is any potential risk that their home can be inundated by surface water.
Claims Frequency – The tracking of weather catastrophes has shown that not only is storm damage happening with more severity, the number of wind and hail storms and tornados sweeping across the US are breaking traditional averages. It is within this environment that insurance companies are expected to project the cost of claims with some degree of certainty. That’s a tough call.
Inflation – Home construction costs continue to increase due to rising costs in materials and labor. Long term construction cost inflation is normally about double the rate of inflation for most other consumer goods (as measured by the consumer price index). And reconstruction is costlier than the cost to build new. Following an insured loss, there are additional costs in reconstruction that are added to what was the original cost to build. An insurance claim involves clean up after the event, debris removal, site rehab, and other soft costs in addition to reconstruction of the damage.
Claimant Demands / Roofer Behavior – These factors also fall under the Claim Severity item previously discussed but deserves a little more detail. Simply put, if enough policy holders in an area suffer minor loss, but demand full replacement from the policy – for example, insisting on full roof replacement when simple repair would be more appropriate – this creates a “tragedy of the commons” effect, where policy costs increase region-wide as a result. Some behavior even veers into potential fraud which costs the US insuring industry in the billions. These costs are then borne by the rest of us.
Litigation – There have been some unscrupulous practices by roofers acting as claims adjusters, barratry on the part of attorney firms and public adjusters, and other bad actors which have driven up the total cost of storms. Every insured should know that they have the right to pursue a second opinion and can claim for supplemental damages not originally included in their loss without having to resort to the need of litigation. These factors combine to impact the affordability and the availability of insurance both regionally and across Texas.
Roof Age - Depreciation/Discounts/Surcharges – The industry has developed new discounted rates for newer roofing and may vary its calculated replacement value based upon the age and condition of an older roof. Because older roofs are more susceptible to damage from a storm than newer roofs, and can more readily be repaired if partially damaged, this practice seeks to reward the homeowner for a newer and therefore more protective roof.
Fire Protection – When a home is being remodeled or refurbished, the homeowner should consider replacing its wood or vinyl siding with cement type siding. This can earn an improved rate like a brick veneer home receives.
Alarm Systems – Having a third-party answerable alarm can earn you a discount. So can smart home devices like leak detectors, doorbell cameras and other sensors. Companies want to partner with a homeowner who likes adding these security devices to help protect the risk.
Age of the home – While you cannot make a home younger, you can replace the roof which gets a discount from several carriers. As a home ages, its components may need to be renovated or refurbished – which can affect its ability to withstand damage from or even suffer a loss.
Plumbing / Electrical Updates – Most carriers expect an older home to be updated. They don’t wish to insure cast iron pipes, aluminum wiring, outdated electrical panels, or old fixtures and connections which can leak due to deterioration. Air conditioners, washing machines and water heaters all become more prone to failure as they age. So periodic replacement as recommended will guarantee insurability especially by preferred carriers which offer better rates for coverage due to the lower risk.