Do you live in coastal South Carolina, North Carolina, Georgia or Florida and experiencing significant increases in your homeowners insurance premiums and wondering why? I will do my best to explain this frequently asked question below. Please note this is simply my opinion/thoughts on the matter based on conversations I have had with insurance industry folks across the country and in London (where most of the world’s insurance action takes place).
Many people in coastal South Carolina, North Carolina, Georgia or Florida are opening their mail and subsequently their homeowners insurance renewal only to find a 10%, 20%, 30% and even 40% increase in their insurance premium over the previous year. Why is this? Many people are saying, “I did not have a claim last year, why is my homeowners insurance premium going up?”. They call their insurance agent only to hear something like, “it is happening to everyone” or “it is what it is” (unfortunately, sometimes their agent doesn’t even call back). While saying some of these things this is true, many homeowners want a better answer.
Below is my attempt at that answer…
Let me start off by saying this is a very difficult topic to explain to insurance people, let alone the consumer, but I will try. Should you have any additional questions about this topic, you can always reach out to me or one of our agents directly.
Soft Market – we have been in a “soft market” for nearly the decade. What is a soft market? It means on the average, a decrease in insurance rates on an annual basis. Meaning that over the past ten years you were probably able to get a better “deal” on your homeowners insurance from the previous year. Think about it, ten years of rate/premium decreases creates a large gap in the exposures associated with a risk and the actual money coming in for said risk. After so long, the market has to “readjust”. We are now in that readjustment period. However, it came virtually overnight. So, versus seeing small increases each year in the rate/premium, we are seeing years worth of rate increases instantly (in many cases). But why?
Why? This is the reason you are probably reading this article and we will get to it now. Why are homeowners insurance premiums skyrocketing in coastal South Carolina, North Carolina, Georgia or Florida for many homeowners?
You have heard of London, England right? (side note: my middle name is England). Chances are, you probably have also heard of “Lloyd’s of London” too. Quite possibly your homeowner’s insurance policy is written on Lloyd’s of London paper (FYI, this is an entirely different talking point, very interesting conversation but not the topic for this article). Well, it is estimated that 90% of the world’s insurance flows through Lloyd’s of London in some form or fashion.
For many large banks, corporations, and financial institutions, Lloyd’s of London is a place to invest money. For the past 10 or so years, Lloyd’s of London has, for the most part, been a very safe and lucrative place to invest and make large returns for investors. In simple terms, the more money invested into Lloyd’s of London, the more “capacity” there is available for insurance companies to write insurance as there is more “in reserve” to protect against losses. Well, this money is not as readily available as it once was. I am not saying that Lloyd’s of London is in a bad place, far from it. As a matter of fact, Lloyd’s of London is still one of the strongest insurance products out there, if not the strongest. I am just saying that with investment funds leaving for other opportunities, there is less “capacity” for the insurance companies to write more business.
So how does all this relate to my insurance premiums going up?
Well just like anything in this world, it all really relates back to supply and demand. The supply (insurance capacity) is being limited or capped, the demand (people wanting to purchase homeowners insurance) is continuing to rise, especially on the coast where it is already hard to find placements of policies, so the only thing that can change is the rate, or the “price” to charge for the product. Low supply, high demand and you guessed it, rate increases! Now as I said previously, this change happened quickly so the rates have gone up virtually overnight.
I think examples help explain things a little better so let me use a hypothetical here…
Let’s say Lloyd’s of London contract #1 has a capacity to write $50,000,000,000 (yes, $50 billion dollars) of exposures in year one. Year two rolls around and their contract renews, but now they only have capacity to write $40,000,000,000 ($40 billion dollars). While $40 billion is a huge number, they just lost $10 billion in capacity. How do they adjust for this? Well, to make sure they are writing good business they tighten their underwriting guidelines (what they will write) to control the quality of what they write and then, you guessed it, they increase rates to maintain their capacity so it does not fill up too quickly.
Now let’s take this same situation but instead of going from $50b to $40b, let’s say they go from $50b to $25b…same concept applies, except rates may go up even more to accommodate this new environment.
Thinking globally, now we have to factor in losses. Afterall, these companies want to make money right? Globally, there have been some pretty significant losses these past few years that have reduced profits (or created a profit deficit aka losing money). This has caused the investors to stop pumping so much money into Lloyd’s of London. It can only sustain itself for so long before “change” (real change I might add) needs to happen.
Are you comatose yet?
This leads me to probably what you are thinking now…can I still find a better deal?
This answer is a big maybe. The answer is maybe because each situation is different and we do not know what current contract your insurance policy is written on. The only true way we can find out is if we remarket your homeowners insurance policy. I can tell you that there is most likely a good chance you will find something “cheaper” but is that always better? Maybe. Maybe not.
Maybe – maybe the new option is better but let’s decide that together. Let’s decide on merits other than price alone. Let’s look at the insurance company and brokerage the contract is written through. How stable are they? How do they handle claims? Who handles the claim? What policy forms is the policy written on? What endorsements are included? Exclusions? Is it truly the best thing for you? Again, this is what we can decide together.
Maybe not – likewise, the same questions come up but we may decide that although we found a “cheaper” option, it might not be the best option to protect your asset. Again, this is something that our agent’s will help guide you through so you can make a smart decision. Again, we do not just want to look at price, but who the market is and the stability of the market based on historical data. The last thing we want is to do this horse and pony show again next year, right?
So going back to one of my initial statements saying that this is a difficult topic to discuss…would you agree? Lol. Hopefully I at least shed some light on why your homeowner’s insurance premium might be going up, especially if you are insured through the Lloyd’s of London market.
In closing, while this is important to understand, I think it is more important to work with an insurance agency that you trust and will work all this stuff in the background so you can enjoy your family, work, retirement, or whatever it is that keeps you busy each day. We at Mappus, want to assure you that we do great due diligence to understand our markets as much as possible so we can place you with the best overall option available. After all, we are generally insuring your largest asset.
If you are not a Mappus client, we would love the opportunity to earn your trust and your business. You can simply complete the form below and one of our agents will reach out to help guide you through the process.