There are many bad ideas, but today’s blog looks at proposals by several States to consider the really bad idea of capping premium increases for personal lines of insurance.
There seems to be a substantial consensus that there is a crisis when it comes to the cost of home and auto insurance, but a dearth of viable solutions. The issue shouldn’t be that complicated. Insurance companies can only pay out what they take in through premiums.
Insurable risk for both homes and autos has seen significant increases over the last several years. For example, the average transaction price for autos topped $50,000 in September. Five years earlier, the average transaction price was $40,000. In addition, repair costs have skyrocketed due to more expensive systems, and significant increases in repair labor costs. Bottom line, the insurance industry is being asked to provide coverage for more expensive vehicles with increased complexity and repair costs. If that is a problem for you, consider a cheaper and less fancy vehicle. Do you really need a six figure Escalade or F-150?
In addition to the foregoing, individual insurance rates are significantly affected by personal driving records and the location of the vehicle.
Premiums for residential insurance have also seen significant increases because of the rise in home prices and the increase in construction in areas known to be prone to destructive events.
Anecdotally, it seems that every time there is a substantial loss due to natural causes, fire, flood, wind, America’s response is to build back bigger and better.
The underlying fundamentals of the insurance industry require premiums that match losses. When regulators fail to recognize this reality and limit or deny rate increases, the industry’s response is to simply move on. For example, California for decades had an effective 6.9% ceiling on rate increases. That kept its home-insurance rates below the national average, despite pricey real estate and the frequency of wildfires. The resulting pullback by home insurers plunged the market into crisis. California seems to have capitulated and double-digit increases are the new normal, but it is still difficult to get coverage.
All comments and suggestions are welcome.
Walter J. Kirchberger, CFA
