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Study - Insurance Companies Shifting Disaster Costs to Homeowners, Taxpayers
by ConsumerAffairs.com

When insurers don't pay, consumers do.

Insurance companies have been methodically shirking their financial responsibility for weather catastrophes like hurricanes, tornados and floods in recent years, shifting much of the risk and costs for these events to consumers and taxpayers, according to the Consumer Federation of American (CFA).

The CFA released a study -- “The Insurance Industry’s Incredible Disappearing Weather Catastrophe Risk” -- as insurers in eleven states requested large homeowners’ insurance rate increases of 18 percent or more. These states are Alabama, Arizona, Colorado, Georgia, Kansas, Kentucky, Maine, South Carolina, South Dakota, Tennessee, and Virginia.

“Insurance commissioners should block many of these pending rate increases because they place an unwarranted financial burden on homeowners, many of whom are coping with severe financial difficulties in a bad economy,” said J. Robert Hunter, CFA’s Director of ?Insurance and former federal insurance administrator and state insurance commissioner.

“In the last twenty years, insurers have been so successful at shifting costs to consumers and taxpayers that they are currently overcapitalized and cannot justify higher homeowners’ rates,” Hunter said.

Insurance executives frequently remind the public and regulators of the frequency and severity of catastrophic events. CFA’s study found that some of the savings insurers have achieved are legitimate, the result of the use of reinsurance and wise risk diversification strategies.

However, the study found that the bulk of the savings that insurers have realized has been through shifting costs to taxpayers and consumers. Insurers have hollowed out the coverage they offer to homeowners by increasing deductibles and capping the amount they will pay if the home is damaged or destroyed.

These coverage reductions expose taxpayers to higher disaster ?assistance payouts because homeowners have less money available to help themselves.

Higher rates
Additionally, insurers have significantly raised rates over the years, sometimes using questionable computer rate “models” developed by other companies.
Insurers have also used fine print tricks, such as the “anti-concurrent causation clause,” which allows insurers to refuse to pay for wind losses if any flood damage occurs at about the same time, even if the wind losses occurred first. Finally, insurers have shifted coverage for homes in high-risk areas to state insurance pools.

When insurers do not pay, consumers do.
To demonstrate how much more consumers are paying for catastrophe coverage in recent years, the study offered a hypothetical example of how much the owner of a home worth $100,000 with a typical policy would have paid for losses after Hurricane Katrina in 2005, compared to after Hurricane Andrew in 1992.

Assuming that the home had a $500 deductible under Andrew and a 5 percent deductible during Katrina, if $10,000 in damages occurred, the homeowner would have paid $500 to repair the damage after ?Andrew, but $5,000 after Katrina.
If the homeowner had to upgrade the home’s electrical system, the insurance policy would have fully paid for these costs after Andrew, but paid nothing after Katrina. If some water damage occurred at the same time, the policy would have fully covered the wind claim of $9,500 after Andrew, but paid nothing after Katrina.