You have heard people repeatedly emphasize the importance of shopping around before purchasing an insurance policy.
The reason why this is said time and again is that it is sound advice-and you can realize huge cost savings. This is amply evidenced by a recent simplified and unscientific survey on home insurance quotes that concentrated on sample addresses in fifteen cities spread throughout the US.
The survey looked at the websites of four leading insurance companies and collected quotes for annual homeowner’s insurance for each address. The insurance quotes were collected in the month of June 2013 and were based upon full replacement insurance coverage worth $250,000 for a single-family house and a liability insurance coverage worth $300,000. Each of the policies had a $500 deductible, $500 property damage replacement limit and a medical insurance coverage worth $1,000 per individual. Some companies in the survey did not give quotes for some locations.
Even though the survey was quite limited, it still shows that there can be significant difference in insurance costs. Therefore, it is crucial to get and compare a number of quotes when purchasing insurance.
The variation in rates was as high as 188%
In one address in Chicago, the difference between the highest and lowest home insurance rates among the four companies was 121%. This means that one policy cost double the other one, and yet both offered similar coverage.
In an Indianapolis address, quotes from three of the four companies indicated a 56% difference between the highest and the lowest. For another sample address in Roanoke, Virginia, the rates given by three of the four companies showed a variation of up to 67%.
One address in Wichita Kansas showed the biggest difference of a whopping 188% between the lowest and highest among rates provided by three companies. This basically means that one insurer would charge almost three times the rate of another company for the same coverage.
Why the price variations?
According to a spokesman of a trading group known as the Insurance Information Institute that is based in New York, home insurance rates are approved by State insurance departments every year based on expected and actual losses within that state. Whereas insurers should produce actuarial data to explain their proposed rates, both insurers and regulators have the same goal of making sure each company has the financial ability to pay for any insurance claims.
One likely explanation for the wide variations in the quotes that you might get when shopping around is that insurance companies allocate different weights to the factors used in determining the rate of your homeowner’s insurance. These factors include the risk of natural disasters (such as tornadoes, hail storms and hurricanes), crime rates and the cost of building in your locality.
The impact of severe weather on insurance companies
The variation in rates probably indicates the differences in how insurance companies are holding up against recent catastrophes, the pattern of inclement weather in states such as Minnesota, Missouri and Oklahoma have caused sizable insured losses.
The city of Moore has been struck by massive tornadoes two times in the last 14 years. Minnesota has experienced snowstorms and flooding-most memorably the blizzard that led to the collapse of the roof of the Metrodome in 2010.The tornado that hit Joplin, Missouri,in 2011 was the largest insurance event in Missouri’s history.
Harsh weather is the main contributor to rising home insurance rates. Other factors include diminished rate of returns on the investments of insurance companies, increased rebuilding costs, higher re-insurance (the insurance that protects insurance companies) rates and regulators allowing small rate increases over several years instead of the necessary larger ones.
Do huge storms immediately translate to higher rates?
Increases in insurance rates do not immediately come after disastrous events, even though it seems that way. As a matter of fact, future events are reflected as much as past events in the home insurance quotes you get.
Insurance companies increasingly apply models. For instance, when it comes to hurricanes, they use about 10,000 years of forecasted data, trying to incorporate each kind of storm that is likely to occur using an expected frequency. For example, there are storms that may occur once in a thousand years while others happen every ten years. The insurance companies try to use all this information when pricing their insurance policies.
This might explain why inhabitants of New Jersey and New York can relax for now.
Projected data before New York was hit by Superstorm Sandy occurred, and the expected losses were greater than actual losses. Models provide more stability when it comes to pricing the insurance policies. Consequently, insurance companies had no reason to hike the rates after Superstorm Sandy because it was already included when pricing the policies. Such disasters should not lead to a massive change in the rates.
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