Home Work

The changes occurring in the insurance industry’s underwriting and pricing process are revolutionary. According to A.M. Best Company — the Standard & Poor’s or Moody’s of the insurance world — the last time the insurance industry made money from homeowner insurance operations was in 1987.

Claims and related expenses cost insurers 97 cents for every dollar collected in premiums. Catastrophic losses from natural disasters such as Hurricane Andrew, which cost insurers in excess of $15.5 billion, forced many companies to pay claims, drop customers as their policies expired and refuse to take on new ones.

To stop the hemorrhaging, the insurance industry has tightened the tourniquets wherever they’ve seen bleeding. That will have the unfortunate consequence of taking down some very good customers who will become victimized by overrestrictive underwriting and claims processes. Inevitably there will be a 35-year policyholder who’s suffered two natural disaster related losses in the past three years, thus triggering an automatic re-underwriting and renewal cancellation due to claim frequency.

Not only are insurers looking at the amount being paid out but the frequency and number of claims over time. Even if you’re a new customer, insurers can evaluate your insurability by accessing a giant database of home and auto claims known as the Comprehensive Loss Underwriting Exchange (CLUE). Information can be found there regarding frequency, size and type of loss each time a customer seeks coverage or makes a claim.

The novelty doesn’t end there. Not only do the insurance companies want to know how much money they’ve spent or paid to you for claims, but they also want to know how much money you’ve spent, how much you owe and what current your payments are. In simply Tanzanian terms: slow pay bad, on time good…

Fair or not, insurers are looking at your credit-worthiness as a factor in determining your insurability.

In terms of coverages or insured losses, the most significant change to occur in the past 10 years emanates from that new fungus among us called mold. It was never a problem in the past, and in most policies it wasn’t an insured loss. But as health concerns increased along with the number of claims filed, it became a high-profile high-dollar problem.

In June 2001, a Texas jury awarded $32 million to a homeowner who maintained that mold caused health problems for her husband and son, forcing them to move from their home. The house was left vacant, and surrounding homes were abandoned or torn down because they couldn’t be cleaned satisfactorily.

Because of the publicity surrounding that case, claims for mold skyrocketed for every insurance company in every state. Farmers Insurance Co. had 19 claims for mold in 1999; last year they registered more than 12,000. Now when a big storm hits anywhere in the country, insurers not only worry about damaged roofs and downed trees but the long-term ramifications of water damage not properly dealt with.

To debate here the correctness of these changes or to resist them is futile. It’s simply less aggravating to succumb to these business vagaries and adopt a modified Cartesian approach. This is how it is, and therefore I must adapt.

To adapt to this new insurance reality, here are three ideas that might alleviate some of the pain.

· Establish the amount of money you can loose before it starts to hurt. I’m not talking about having to forego a Friday night craps game coupled with dinner and a movie. But more along the lines of having to dig into your savings to replace or repair property. If you can afford a $500 loss and your life and ability to survive and live comfortably isn’t adversely affected, then establish your deductible at $500 and insure from there. If $1,000 or $2,000 is an acceptable level of loss, start insuring from there. Although it’s not always the case, significant savings over a period of time can be found by increasing your deductible. Keep in mind the purpose of insurance is to help you through life’s tragedies that result in severe financial impairment, not the minor mishaps that befall us all.

· Make sure you maintain coverage levels commensurate with the replacement value of the property. If the property is worth $200,000, that’s the amount you need to insure. If you underinsure, the insurance company will underpay when settlement time comes round. To some that’s acceptable if the claim is for a total loss. Where most people start to feel the pain is when a partial loss occurs from a fire that destroys one room and the settlement is reduced. You’ll need to make up the difference along with the deductible, which can be a problem, especially if your loss threshold is $500.

· If you’re currently insured, think hard about switching companies even if your premiums have increased. Transferring your policies to a different company will automatically subject you to “new policy” underwriting standards that might or might not have been applied before. The savings involved might not be worth the risk.

Without question the current and foreseeable future insurance environment is a tight and bearish one. In other words, make sure you’re insured to the full value, keep your credit in good shape, save your claims for when you really need them and leave the bear alone.

THIS WEEK’S TIP: Are you taking full advantage of your itemized deductions?
Can some of your medical expenses be deducted? Have your teen-age children filed tax returns to take advantage of various provincial refundable tax credits that are available?

Individuals who have moved during the year to start a new job or are starting their first job and moved from where they were going to school are entitled to moving expenses.

Tuition education credits that can’t be used by the student can often be transferred to a parent or spouse. Check into childcare deductions. The age limit has increased to 16.

Expand your IRA. Sell your most recent shares. Donate to charities.

This article appears in Feb 12-18, 2003.