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Rock vs. hard place: raise insurance rates or lose coverage?

State Farm’s request for a rate hike in Mississippi averaging 42.5% sent shock waves throughout the state, causing a great deal of alarm among homeowners, real estate agents, homebuilders and the banking community.

The increase request varied by county, with proposed increases for some coastal counties as high as 70% while the rate increase request for some counties elsewhere in the state was as low as 13%. The Mississippi Department of Insurance (DOI) recently approved a rate hike of 25% for the three Coast counties, and 19.9% for the rest of the state. The higher rates won’t go into effect until policies come up for renewal.

Even though the insurance company could justify the proposed increase based on claims history, Mississippi Insurance Commissioner George Dale said he spent a considerable amount of time trying to negotiate the rate increase down as far as he could.

“I’ve heard from just about everyone who lives on the Coast, and most everyone who lives on a fixed income,” Dale said. “There is a good bit of concern, and I understand that. My job is to provide a market at the most affordable rate.”

State Farm has 31.3% of the market share for the state. The Mississippi Farm Bureau has the second highest market share at 20.9% followed by Allstate at 7.9%, Nationwide at 6.2% and Shelter at 2.5%.

“State Farm and Farm Bureau write over half of the homeowner’s insurance in the State of Mississippi,” Dale said. “I’d like to keep them in business because I don’t have anyone to take their place.”

Dale said the problem with rising costs for home insurance is nationwide in scope.

Surrounding states have already approved large increases for State Farm. Arkansas has approved a 33% increase, and Tennessee has passed a 27.8% increase. A 29% increase is pending in Alabama.

“Speaking with the Georgia and Alabama commissioners, we are all between a rock and a hard place,” Dale said. “Voters sometimes just don’t understand our responsibilities to provide a market at the most affordable rate. I don’t have a choice. I have to provide a market. And I intend to do that.”

Lower rates on the Coast came at the cost of higher rates elsewhere in the state, leaving Dale open to criticism that he is making the rest of the state subsidize the Coast’s insurance market. But Dale said it is important to keep reasonable coverage on the Coast, one of the fastest growing regions of the state.

Tyrus Sturgis, public affairs specialist for State Farm Insurance, says the rate increase was necessary because of a host of negative trends: increased claim frequency, increased claim severity, rising repair costs and inadequate premium rates.

“This situation is not unique to Mississippi and it is not unique to State Farm,” Sturgis said. “We requested a rate increase averaging 42.5% statewide. This amount is actuarially sound based on our underwriting results and a study of loss trends. Rate changes for individual policyholders are affected by a number of factors including location, type of construction, loss history and coverage selected.”

Sturgis said insurance rates in Mississippi have not kept pace with the rising costs of building materials and repairs. Increasing claim frequency and severity have also outpaced insurance rates.

“In June of 2002, the average amount we paid for fire losses (excluding those caused by lightning) was over $22,000,” Sturgis said. “In 1997, it was just over $12,000. The average water damage claim increased from just over $1,400 in 1997 to over $2,700 in June 2002. State Farm lost $50 million in Mississippi in its homeowner’s line of insurance in 2001. That equates to losing $300 for every homeowners policy we have in force in the state.

“We are certainly aware that an increase of this magnitude has a large impact on consumers. At the same time, we have to evaluate our financial position to ensure we remain financially strong. We are making efforts to control non-claim operational expenses and attain adequate rates in order to keep the promise of protection we have made to our customers in Mississippi.”

Homeowners can help manage the cost of insurance with preventive actions, such as checking to make sure washing machine hoses and icemaker lines are in good shape and repairing small roof leaks promptly to curb water damage claims. Installing smoke detectors and following manufacturer’s instructions when using space heaters can prevent fire damage claims. Selecting a higher policy deductible, eliminating hazardous conditions and doing preventative maintenance such as pruning tree limbs away from the house can also help keep premiums manageable. It can also help to determine if the insurance company provides discounts for multi coverage from having your vehicle and homeowner insurance with the same company.

Dale recommends homeowners shop around to get the best policy for the money that is available.

“When I talk to people over the phone concerned about the rate increase request, I tell them, shop around,” Dale said. “State Farm isn’t the only game in town. But people say no one else will write coverage for their home. That is the whole problem I’m under.

“We strongly encourage home owners to begin to shop for insurance a longer time before the policy comes up for renewal than they have in the past.”

When shopping for the best rate on insurance, some people have found themselves turned down because of “credit scoring”. With credit scoring, you don’t have to have blemishes on your credit record. You could be scored low if you pay for things in cash instead of using credit.

“The big thing with insurance companies now is credit scoring,” Dale said. “Insurance companies are non-renewing people by the droves for things related to bad credit. If you have any blotches on your credit records, make sure you get that corrected. In Mississippi we do not allow companies to use bad credit by itself to non-renew policies. But if a person has a couple or three claims and blotches on their credit record, they are most likely to get non renewed.”

Dale said at least two out of every five applications being sent to companies are being sent back because of credit issues. A top official of a major insurance company in Mississippi was turned down for a policy initially because of credit. The reason he was turned down was he paid cash for everything. Dale thinks insurance companies are going too far with credit scoring, and said the DOI plans to look into the issue early this year.

The availability and affordability of homeowners and other real property insurance are major concerns to Realtors, says Ellen Short, 2003 president of the Mississippi Association of Realtors and broker-owner of TRI/BMAC Real Estate in Tupelo.

“We want our customers and clients to find insurance readily available, from reputable firms, who will offer complete and satisfactory coverage for the homeowner,” Short said. “State Farm has been a valuable partner with us in the home- buying process for many years and we want to see that relationship sustained.”

Short said higher home insurance rates could discourage home ownership, which is key to nurturing price and stability in a community.

“Simply put, homeownership is a major step in the ladder of economic security,” Short said. “A person who owns his or her own home becomes rooted to a place. The home is a source of pride to its owner, and he commits to its maintenance and upkeep. As a result, the entire community and state benefits.

“Currently, homeownership rates are at an all-time high: 67.4% nationwide for 2000, the most recent reporting year, according to the Census Bureau. Mississippi’s Homeownership Rate stood at 72.3% in that same year —
maki
ng our homeownership rate one of the highest in the nation. And yet, when you look at that Mississippi rate in terms of minority ownership, it dips considerably.”

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