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A Big Year for Hail Drives Up Insurance Premiums

March 21, 2014

Homeowners along North 146th Plaza in Omaha's Eldorado neighborhood stepped outside after last April's massive hailstorm and surveyed the damage.

Shingles dented and punctured. Gutters, flashing, siding and downspouts pounded like a tin toy belonging to a 4-year-old with a new hammer. “The roof looked like it had a bad case of acne,” said Ted Pankonin, who had paid for a new roof just three years earlier. “Black spots all over.” Next came the insurance adjusters, computers and checkbooks in hand. Then the roofers, offering to schedule repairs. Then the workmen, replacing roofs up and down the block. Now many of the cul-de-sac's residents, along with many other Nebraskans and Iowans, are getting an unwelcome notice: premium rate increases for their homeowners insurance — in some cases more than 20 percent.

The April 9 hailstorm prompted more than 40,000 insurance claims in Omaha, mostly for damage to houses and cars. Counting the tornado that struck Wayne, Neb., on Oct. 4 and other weather damage in 2013, insurance companies paid out $1.33 on claims for every $1 they collected in premiums last year. It was the worst year for homeowners insurance payouts in Nebraska in at least a decade, said Nebraska Insurance Director Bruce Ramge, which meant an unprofitable year for the companies that insure against property damage from wind, hail, fire and related causes. Companies consider a longer time period when they set rates for the coming year, but a year with bad claims can make increases more likely, Ramge said.

In 2012, a fairly normal year, claims totaled about 60 percent of the premiums collected by the companies. In Nebraska, companies that sell homeowners coverage are raising rates an average of 16.2 percent, with the higher rates taking effect as insurance policies renew. That includes nine companies with increases of more than 20 percent and five higher than 25 percent. In Iowa, where storms were less damaging in 2013, increases are averaging 10.1 percent. Only two are raising rates by more than 20 percent, and one is decreasing its average rate slightly. J. Robert Hunter, insurance director for the Consumer Federation of America, said rate increases wouldn't be that high if companies properly calculated the risk of losses from natural disasters, either by looking at historic data or by using computer simulation models.

Without analyzing the data supporting each company's rate increase, Hunter said, it's difficult to say whether the increases are proper. But one year's high claims should not make a difference of more than 2 percent in future rates, he said. “You're not supposed to make up for last year's losses,” Hunter said. “Insurance companies are supposed to be forward-looking,” with premiums designed to pay future claims. But he said companies also realize that many consumers will accept higher premiums because they know about claims from a recent storm. And sometimes a company decides to raise rates sharply because others are doing the same thing, Hunter said. Pankonin, from the Eldorado neighborhood, said his insurance carrier, Allstate, raised his premium by about $300 a year, or about 20 percent. Stephanie Howell, a spokeswoman for Allstate, said premium changes are based on loss trends over many years and projections of future losses. “Allstate is committed to keeping the insurance landscape in Nebraska and Iowa competitive, and we will continue to make responsible business decisions to remain strong and positioned to deliver on its promise to customers,” she said. Allstate offers discounts and relies on its agents to work with customers to keep rates as low as possible while meeting their needs, Howell said.

But some Nebraska policyholders are escaping the higher rates, even if they had hail damage from the same storm last spring. Darcie and Brian Shunk and their neighbors southeast of 168th Street and Giles Road in Sarpy County had the same damage as others in the west Omaha strip that took the brunt of the April hailstorm. “It looked like it had snowed,” Darcie said. “Everybody got a new roof.” So far, the Shunks haven't gotten a rate increase notice from their insurance carrier, Metropolitan Life. Individual rate increases vary according to type of coverage, claims history, discounts and other factors, said Ann Avery, a spokeswoman for State Farm Mutual Insurance. The company is raising premiums by an average of 5.4 percent in Nebraska and 1.4 percent in Iowa. State Farm fielded 12,000 claims from wind and hail damage in 2013 in Nebraska, making the state No. 10 on the company's wind-and-hail list. Texas was No. 1 with 42,000 claims. Wind and hail claims nationally cost State Farm more than $3 billion in 2013. Premium rates are designed to cover future claims and are based partly on claims over a long period of time, not just the latest year, Avery said. That means the large payouts in 2013 or any single year won't have an undue impact on future rates, she said. The rate-making process also takes into account factors such as prices for construction material, medical costs and other variables, she said.

The company focuses on the number and cost of claims for State Farm, not what impact climate change might have. “The rate allows us to keep the promises to policyholders when claims do occur,” Avery said. In calculating rates, American Family Mutual Insurance Co. considers 25 years of losses from catastrophes such as hailstorms, said spokesman Steve Witmer. The company is raising rates by 17 percent in Nebraska and 16 percent in Iowa, on average. Because the company looks at losses over a long period of time, he said, you can't assume an individual's 2013 hail damage — 4,000 claims totaling more than $30 million in Nebraska — caused the increase. “A heavy year like Nebraska had last year for catastrophes doesn't affect the rating process as much as a heavier non-catastrophic year might,” he said. A heavy non-catastrophic year would show an increase in claim costs beyond natural causes. “Iowa had a much lighter year, relative to Nebraska,” Witmer said. “The idea looking forward is to figure out how much premium you need to meet your customers' needs.” It's unclear whether climate change is causing more claims, he said. “We're certainly watching very closely the impact of whatever may or may not be going on with the climate. In the meantime, companies try to set rates so that premiums break about even, covering claims and operating expenses, he said.

Insurance companies boost their reserves and make profits by investing the premium revenue until it is needed to pay claims. The biggest increase in Nebraska is by National Farmers Union Property & Casualty Insurance Co., at 26.6 percent. Deidra Parrish Williams, a vice president of the company, said its record of rate increase in the state “has been very conservative. What appears to be a jump in our most recent rates actually only puts us in line with our competitors' current rates.” Ramge, the Nebraska insurance director, said this year's premium increases are higher than usual. The state reviews rates to make sure the companies are charging enough to cover their future claims, based on documentation that the companies provide about their claims experience. “It's important that their rates are adequate so that companies can maintain their financial strength” and continue to sell insurance in the state so that consumers have a choice of carriers, Ramge said. “I think everybody understands that you want the company to be around to pay a claim if you have one.” Premium increases vary among companies because their policies differ, their claims experiences over the years differ, the rates they have been charging differ and other factors can mean higher or lower rates, Ramge said. In the end, he said, competition helps keep rates reasonable by giving consumers choices among companies. “They don't want to give up market share.”


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