24 April 2009

Why the recession will increase your insurance premiums

This week I received the invoice for renewing our homeowner's insurance and was startled to see a 20% rise in the annual premium. This in the absence of any change in coverage or the filing of any claims in recent years.

I drove to our insurance man's office and had a long talk with him about this. The 20% increase was, he said, an across-the-board rise for all policyholders in the company (or at least in the region). This puzzled me, because there have been no Katrina-level catastrophes in the past couple years, and I asked if the housing crisis was impacting insurance companies. Not exactly, he said, but it's all related to the recession.

Insurance companies pool premium payments and invest the proceeds in government-backed instruments, using the income from those instruments to pay claims and business costs. Everyone who has renewed a C.D. or has an interest-bearing account knows how interest rates have plummeted in the past year. Insurance companies ladder the maturities of their purchases to smooth out short-term interest rate changes, but the fall in rates has included the entire yield curve, so the fall in income from those investments couldn't be avoided. When the income from those instruments falls, insurance companies have to make up the difference by increasing premiums for policyholders.

That answered my question and made perfect sense. I didn't press him as to what government-backed instruments were in the company's portfolio. It could be something as safe as Treasuries, but I'll bet there were a variety of mortgage-backed securities and credit-default swaps and other junk mixed in.

As I left I did ask whether this was company-specific or industry-wide, and he affirmed the latter, stating that he knows of some rival companies that are increasing premiums by 40-50% for policyholders.

My insurance company is State Farm. The increase was 20% compared to a policy renewal in April of 2008. I'm curious as to what experience other homeowners with other insurance companies are experiencing. Feel free to share comparative numbers in the Comments section.


  1. Your insurance man is right for sure. Premiums are bound to trend up industry wide as investments suffer, though, I didn't experience a change this year personally. As an insurance agent myself, I try and make sure my clients have the best deal, no matter what the market. And unlike a state farm or allstate agent- I and other independent agents have access to many companies to find the best premiums and coverage. I'd be happy to run some numbers if you want (sorry for the pitch, i can't help it!). Great blog by the way!

  2. To add to this post - I'm an employee at a community bank in the Washington, DC, area. We just learned that our health insurance premiums were going up 20% beginning in the next cycle. This matches up to your number. Our company pays the majority of the premium but it can't help but pass along some of the increased premiums to the employees.

    Also, although we're not focused on residential lending, we do own mortgage-backed securities as part of our investment portfolio. I just thought you should know that we just sold those securities at a healthy profit because they had paid as agreed. It's worth noting that not all mortgage-related securities are considered bad.

  3. I live on the Mississippi Gulf Coast where Katrina caused great damage in 2005. We thought last year's homeowner's premiums were excessive. This year's premiums are up easily 20-25% over last year. Below is the text of postcard from my Allstate agent:

    "I am sorry to inform you that your Homeowner's Premium will increase at renewal. Please give us a call and we can explore options to soften the impact."

    I already had called and shaved off almost $700 by taking on a higher deductible, and dropped collision on my auto policy, also with Allstate, for another $260 reduction. But the $960 reduction for my small home which has had no claims and only minor damage in Katrina, and the auto policy which has never had a claim, still leaves me with a homeowner's premium that is a thousand dollars more than it was two years ago. It is bad enough to gone through Katrina, but being forced to pay more because of the greed and poor judgment of Allstate's investments in liar's loan securities and other toxic mortgage backed products should be actionable. All policy holders should find a legal avenue to sue Allstate, State Farm and all the others who would have their financial losses, resulting from their poor business judgment placed upon our backs.

  4. Just to make my own position clear, I'm not claiming that State Farm or others invested in "liar's loan securities and other toxic mortgage backed products" (although I haven't checked and it is possible).

    Even if they had invested in US Treasuries and nothing else, their income would still have plunged and premiums would have had to rise.

    I'm sure someone has data and info on what investments were actually made.

  5. Would such an increase make you reconsider having insurance at all? After all, insurance is like a gamble, or avoiding a gamble if you like. As this increase seems unrelated to an increase in risk (fom what the agent said) that means you're paying more for the same value?

  6. I am (soon to be WAS) a State Farm insured as well... but as you may have heard, they are dropping ALL homeowner's coverage in my home state of Florida.

    I too have never file a claim in the 14+ years that I've owned my home.

  7. Travellers is up 10% for me this year, 50% over the past 5 years. Outside Nashville.


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