Money matters by: Joel Schlesinger
If you've noticed your premiums for home insurance steadily on the rise in the last few years, you're likely not alone. While it's hard to pin down insurers into admitting premiums are rising across the board, experts in the field of property and casualty (P&C) insurance biz say premiums are generally increasing for everyone.
For the average homeowner, struggling to pay down debt, saving for retirement and their kids' education, a premium hike can be galling, especially when you have never made a claim.
If you're like me -- on a bad day -- it's infuriating.
But let's face it, grabbing the pitchfork from the garage to form an angry mob won't reduce your premiums. If anything, roving mobs will raise rates.
Instead, maybe trying to get inside the head of the insurance companies, and look at the world through their risk-averse goggles, might help pacify the angry beast.
And what you will find is it's hard out there for an indemnitor these days.
"Over the last few years there has been a lot of pressure on claims cost for insurers," says Serge Corbeil of the Insurance Bureau of Canada (IBC), which represents P&C insurers.
Low interest rates are great for borrowers, but they're bad news for insurance companies that rely on government bonds as safe places to put their premiums to meet future obligations. Add to that increased volatility in the stock markets, and it's progressively more difficult to make an investment buck insurers can count on from one year to the next.
To boot, costs have been going up for insurers because the price to replace a home has been on the rise, says Mike Bellhouse, a senior account executive with Ruban Insurance Brokers in Winnipeg.
It's like inflation, only often higher.
"The insurance company is going to be paying what it costs to rebuild or repair your home," says the former underwriter. "The increase in cost will be based on the construction price index put out by Statistics Canada," Bellhouse says.
And Winnipeg is leading the nation for residential properties. From February of last year to February of this year, construction prices jumped by 5.5 per cent compared to the national average of 2.2 per cent.
Compounding problems for insurers -- and we, the insured -- is claims have gone up over the last few years, says Doug Rogers, an account executive with Ranger Insurance, a brokerage firm in Winnipeg.
"The insurance companies are telling us brokers that the cost of claims has skyrocketed in Canada," he says. "The incidence of major events has increased dramatically."
Claims for residential properties have been between $4 billion and $5 billion annually since 2008. That's about double the claims more than 10 years ago, according to ICB statistics.
Still, insurers have remained profitable over the last few years. TD Insurance, for example, has been a lucrative arm for the big bank. One of the largest direct insurers in Canada (meaning it doesn't use brokerages to sell its product line), its revenues net of claims in 2012 were $1.113 billion for all insurance, which is down from the previous year's $1.167 billion. In its annual report, it stated the property and casualty arm of the insurance division faces challenges associated with higher costs because of unpredictable weather conditions.
If you're looking for a scapegoat, bad weather seems to be public enemy No. 1. ICB states extreme weather conditions are on the increase, claiming major weather events that used to occur every 40 years now happen on average every six years.
"Last year was the fourth year in a row that insurers had to pay about $1 billion for weather-related claims, so there seems to be a trend that we no longer can ignore," Corbeil says. "It used to be just one year there'd be a bad one for claims, but when you have four years in a row with high claims payments, insurers will identify a trend and eventually, they have to adjust the premiums to match the new reality."
Even hurricanes, tornadoes, typhoons and forest fires outside of Canada are taking a toll on insurers here at home and, in turn, on the humble homeowner because the cost of insurance for insurers is on the rise, too.
"Insurers buy themselves what's called reinsurance and the premium cost for that is going up because of all the weather events that have been happening around the world," he says. "It goes up if the payments globally for reinsurers are going up and up -- not for one company in a particular country but every company everywhere."
Many of the world's largest reinsurers -- including Swiss Re and Munich Re -- point to climate change as the reason. Swiss Re states weather-related insurance-industry losses were about $3 billion in the U.S. in 1980, Insurance Networking News reported last year. But over the past decade, those losses have averaged about $20 billion a year. The costs are getting so out of hand, major reinsurers have been lobbying in Washington for lawmakers to pass climate-change regulation, the article stated.
Munich Re even devotes a substantial portion of its website to climate change's impact on insurance liability.
Be it climate change, low interest rates or inflation, one thing is certain, Bellhouse says. Insurers are tightening up how they assess risk. They're asking more questions and drilling down more deeply than in previous years to assess their liabilities.
"They're moving to make it very scientific and actuarial-based, going by postal code to pinpoint the risk characteristics of homes in that neighbourhood, whether it's fire, sewer backup, water damage and break-ins," Bellhouse says.
This new reality is a gag-inducing pill for homeowners to choke back when faced with yearly rising premiums, but we can take steps to stem the hikes, says Tony Hayes, with property insurer RSA.
"My take on the subject is it highlights the importance of the independent broker," says Hayes.
Brokers can help homeowners do comparison shopping to find insurance at a suitable price with appropriate coverage, he adds.
"Some brokers could have access to upward of 20 different insurance companies."
The insurance business is competitive, and consumers do have a lot of choice, Rogers says.
Some homeowners switch from insurer to insurer annually to pay the lowest premium.
"Getting the lowest price is the Winnipeg way, but building that strong relationship with your insurance carrier shouldn't be overlooked, especially when you need a favour."
Still, loyalty has its limits, and there's no harm in doing comparison, keeping in mind that the broader view of bad weather, inflation and low interest rates isn't pretty.
"Unfortunately, insurance firms are in the business to make money," Rogers says. "People may not like hearing it, but these companies need to be financially sound and have money in the bank or they can't pay claims."
Where do your premiums go? Between 2006 and 2012, about 90 per cent of premiums collected by P&C insurers in Canada went toward costs. About 9.2 cents out of every dollar was profit.
What a difference 25 years makes: Catastrophic-claims costs have been on the rise, insurers say. Insured losses in 1987 -- the highest for the decade, largely the result of the Edmonton tornado -- were more than $381 million inflation adjusted in Canada. In 2011, the annual insured losses were more than $1.7 billion with the Slave Lake fire being the highest source of losses for that year.
Tips to keep premiums low:
Take advantage of discounts: Different insurers offer different discounts -- savings applied to premiums for certain characteristics of a home. Among the various discounts are a fire/burglar alarm, a sewage backup valve and a sump pump. Even your age can amount to a discount, says Doug Rogers. "Years ago, you reach age 50 and get a discount. In some cases, that's gone down to 25." Credit history can also affect the premium price. "The thinking is if you have better credit, you are less of what the industry terms a 'moral risk,'" he says. "If you have good credit, the more likely you are to budget and replace your roof when it needs to be done."
Trim down coverage: One way to keep premiums low is to evaluate your policy and determine whether you need all the coverage provided. "What do you need? Do you need sewer-backup coverage? Do you have an extensive jewelry collection?" he asks. Increasing the deductible you pay on a claim also reduces the annual premium.
Shop around: If you're with a direct insurer, how do you know they're providing you with the best price? Take a look at other providers. This involves a bit of work: calls to other direct providers and visiting an insurance broker or two who can do some shopping on your behalf. One thing a broker can do is to make sure you're not overpaying on your insurance premiums, says Mike Bellhouse with Ruban Insurance. As a client, a broker should check annually for new discounts and determine the replacement cost for your home to make sure the cost and the coverage line up, he says.
Republished from the Winnipeg Free Press print edition May 11, 2013 B12