Two years ago, Leo N. Richard’s insurance company dropped the windstorm coverage on his Seabrook home.
This year, he’s likely in for a big premium increase because his insurer, State Farm Lloyds, is planning rate hikes that, when combined, average 53.7 percent in Harris County.
But he’s not sure why he’s seeing less coverage and is about to pay more–especially since he hasn’t seen a hurricane hit Seabrook since Alicia swept through in 1983.
“It’s been 20 years,” said Richard, 52. “Nothing has come through here in so long.”
He, like other coastal homeowners, is questioning his predicament. The answers are many: construction costs, the recent history of bad weather and the prediction of more expensive claims. But this time around one of the factors, according to the insurance companies, is the astronomical rise in reinsurance rates.
Reinsurance is the coverage insurance companies buy to help pay for catastrophic losses. In other words, it’s insurance for insurance companies. And when primary insurers get hit with rate hikes, they pass them on to consumers.
The surge in homeowner rates shows insurance costs can still shoot up in areas where no hurricane has recently hit.
Last year alone, reinsurers were on the hook for about $25 billion in losses from hurricanes, including Rita and Katrina, said Bob Hartwig, chief economist for the Insurance Information Institute, an industry trade group in New York.
Now those companies are raising the rates they charge primary insurers–in some cases three times as much.
“The risk is higher; the demand is higher; the supply has been somewhat reduced; and all of these things are affecting the price,” Hartwig said.
Reinsurers, most of which are global companies based in Europe or Bermuda, use hurricane models to help determine the rates they need to charge should disaster strike.
The models, among other things, combine historical disaster information with current data about an area’s construction costs, weather forecasts, amount of coverage sold in an area and the types of buildings insured to determine the potential cost of disasters.
Reinsurers divide the world into geographic zones that don’t always fall neatly along state lines. The risk in New Orleans, for instance, and the risk in Houston are the same to most reinsurers, Hartwig said.
Allstate Texas Lloyds and State Farm Lloyds blame rocketing costs for this latest round of hikes.
Allstate Corp. said earlier this year that it paid $400 million for $2 billion in reinsurance to cover losses nationwide. It also bought an additional $100 million in reinsurance just for losses in Texas, but didn’t disclose what it paid for the Texas coverage. The company plans a hike this summer to offset the costs of reinsurance.
State Farm Lloyds, which buys reinsurance in the open market and from its parent company, couldn’t say how much its costs went up because contracts are still being finalized, a spokeswoman said.
But it did say in a filing with state regulators this week that it would boost rates up to an average 39 percent in Harris County and an average 36 percent in Galveston County just to recover reinsurance costs.
Factor in rates the company says it needs to recover other expenses and those averages jump to 53.7 percent in Harris and 57 percent in Galveston.
Company spokeswoman Sophie Harbert couldn’t say how much of the company’s reinsurance comes from external companies.
More Top Picks Best Side By Side Refrigerators
Historically, however, most of it has been provided by its parent company, State Farm Automobile Mutual Insurance, according to AM Best, an agency that rates insurers.
Though it might appear State Farm has some control over its reinsurance rates–since it buys some of it from its parent company–Harbert said State Farm Automobile Mutual Insurance bases the prices it charges on the external market.
While the state regulates the rates insurance companies charge consumers, it doesn’t regulate the rates reinsurers charge insurance companies.
Texas Public Insurance Counsel Rod Bordelon, who is charged with representing consumer interests before the Texas Department of Insurance, said the reinsurance costs in State Farms’ recent filing would be examined.
“We are still reviewing the rates,” Bordelon said, referring to the company’s combined rate increase. “But at first blush, there’s not any evidence for this kind of a rate increase, and I anticipate asking the insurance commissioner to disapprove it.”
Bordelon noted the company used some methods to calculate the rate hike it needs that are similar to methods it used to justify rates nearly three years ago when the Insurance Department ordered it to cut rates 12 percent.
The department challenged the methods then and the company appealed, leaving the case tied up in court to this day.
Two years ago Texas moved to a less-regulated “file-and-use” rate system, allowing insurers to implement rates as soon as they file them.
It’s unclear when reinsurance prices will decline. Hartwig, of the Insurance Information Institute, said it would likely take several years of average to below-average hurricane losses.
In the meantime, consumers can expect insurers to keep passing the cost on.