1.

Why is my premium so high?

There are many factors that go into determining a premium rate for insurance. The most obvious, of course, is one’s driving record. In most cases, insurance companies surcharge for each violation. This is calculated by formula: for example, a speeding ticket might generate 1 rating point, while a DUI (driving under the influence of drugs or alcohol) will generate 4 rating points. Accidents can also affect your premium. Most companies will allow 1 accident or violation before you will notice a significant change.  

Age, sex and marital status of the driver are all rating factors. Youthful drivers – defined generally as under 25 – will pay the most for auto insurance as they are statistically twice as likely to have an accident as someone older. Coincidentally, their insurance rates are usually twice those of their nervous parents. There is some relief, however, for honor roll students. Statistics show that students who get good grades (usually 3.0 or higher) have less accidents and moving violations. Therefore, most insurance companies offer a “good student” discount – often at a 25% savings on the youthful premium!

On the other side of the spectrum is the aging driver. Only recently, since cars have only been around about 80 years, has the insurance industry learned of the effects of aging on driving. Consequently, after about age 70, most companies charge more premium.

The logic behind the marital discount is obvious. Not only are people with families less likely to “party all night long”, but they can’t drive the same car at the same time. They share the risk and individually, are less likely to have an accident, statistically speaking. This reasoning is also behind the multi-vehicle discount. Two vehicles in one family mean a 50% less opportunity for each car to be involved in an accident.

Another factor affecting premium is the overall economy. When the stock market is doing well, insurance companies have better performing portfolios, which in turn can be reflected in stable, and in some cases, reduced premium rates. A downturn in the economy, however can force insurance companies to increase premiums to offset losses in the market. Mutual companies are less dependent on these market fluctuations so they tend to be relatively stable over a five-year period. Lawsuits against insurance companies can also affect your premiums. Some recent Supreme Court decisions have cost the insurance industry billions of dollars in settlement awards. While it is good to hold insurance companies accountable for wrong actions, it does trickle down to the average policyholder because he or she ultimately pays these judgment awards. All things considered, however, Ohio enjoys some of the lowest rates in the country. Folks in California pay an average 150% more for the same risk as their Buckeye State counterparts.

2.

How has September 11 affected my insurance rates?

Insurance companies buy insurance to back up the reserves they are required by law to maintain to cover potential claims. This insurance is called "re-insurance" and is brokered to insurance companies by large companies such as American RE, which is owned by billionaire Warren Buffet. There are only a few such companies in existence, so the market is relatively tight. When they raise their rates, the insurance industry tightens underwriting restrictions and raises premiums. These actions are referred to as a "hard market*". Reinsurance companies paid much of the losses related to the World Trade Center disaster. They claim not enough money in premium was collected to help offset the payouts. As a result, the rates for reinsurance to insurance companies tripled. Some of this extra expense is transferred to policyholders. This has affected commercial policy rates more than "personal lines" coverage such as homeowners and auto. Some commercial risks have had a 300% rate increase. Of course, these companies ultimately pass this cost on to - you guessed it, the consumer. 
*Please read the article entitled "Hard Market Q & A" reprinted from the PIA (Professional Insurance Agents) organization for a more detailed analysis of this phenomenon.

3.

What should I do if I have a claim? 

If it is an automobile accident or injury accident in the home, call emergency and police first. Next, call your insurance agent. If the agent isn't available, call the toll free number printed on the top of the declarations page of your policy or on your insurance card. According to the contract in your policy, you have a duty to report claims as soon as possible. The insurance company is responsible for determining "fault" and how much damage is incurred. It is also your responsibility to limit further damage to the insured property. This means you should have vehicles towed from public roadways, furniture removed from flooded basements and holes in roofs covered to prevent further damage from rain. All expenses incurred should be documented and in most cases will be reimbursed minus any deductible on the policy.

 
4. 

How do I know if damage is covered by insurance? 

When in doubt, call in a claim. Generally speaking, anything sudden and unexpected is a legitimate insurance claim. Normal wear and tear is not covered by insurance such as worn out carpeting or a water heater that goes on the fritz. These are maintenance items and should be considered part of the cost of owning property. Each case should be determined on an individual basis and there is no penalty for asking. It is a good idea to read through your policy to see exactly what is and isn't covered. Don't be afraid to call your insurance agent to ask general questions regarding coverage. That's why they are there. There is no additional cost for advice - it comes with the policy.

5.

What is backup of sewers and drains and how do I know if I need this extra coverage? 

Backup of sewers and drains used to be automatically covered on homeowners policies for no additional charge. It provides coverage for damage to homes from water and sewage coming up through the drainpipes in the basement (usually) of a home. With the explosion of suburban development, many communities were overwhelmed with the increased use of the storm and sanitary sewer systems. What was intended for 5,000 homes is now serving 20,000 or more and the storm water and sewage have no where to go but back up and into citizen's homes. These municipalities are frantically replacing all of their antiquated drainage systems with large diameter pipe. However, it is too slow to alleviate the costs to insurance companies who are paying out millions of dollars in claims. In one community, nearly 70% of the homes had a backup claim in a single year. Unfortunately, one company held most of the insurance in that town. They experienced a 400% loss ratio in that territory! These types of losses were occurring at such frequency that the industry as a whole has begun to charge an extra premium for this coverage. If you have a finished basement, this coverage is essential because a backup loss can involve damage to furniture, walls and floor coverings. Usually, the premiums for this coverage are under $100 annually and subject to a deductible similar to the one on your dwelling. If you do not have a finished basement and wish to forgo the coverage, be sure anything of value is off the floor. You can do this with cinder block bricks or 2 x 4's. Also, be sure your appliances, such as water heater, washer and dryer and furnace are at least 4" off the ground. Most homes built after 1975 have this feature built in. If you have cement floors but finished walls with baseboard, be aware of the potential damage 4 inches of water (the normal "flood" depth) could do to both.

6.

What does "guaranteed replacement cost" mean?

True guaranteed replacement cost means that the insurance company will pay you whatever it costs to rebuild your home with "like kind and quality" materials and fixtures, labor and style no matter how much that amount exceeds the face amount of the policy. True guaranteed replacement cost is not offered anymore on homeowners policies. Guaranteed replacement cost used to be the law in the state of Ohio. In the 50's and 60's a four-bedroom home in the suburbs cost between 20 and 30,000 dollars. That same home increased in value due to inflation to over 150,000 in twenty years time. Under the guaranteed replacement cost rule, if the homeowner still carried the original 20,000 face amount on his policy, and the house burned down completely and it cost 150,000 to rebuild with "like kind and quality" materials; the insurance company was obligated to make up the 130,000 difference. Understandably, the insurance industry lobbied congress to change this antiquated law and it did. Now, if a homeowner carries too little insurance, the insurer may charge a co-insurance penalty to help make up the difference in replacement cost. Most insurance policies these days write the face amount equal to the estimated replacement cost and offer a "guaranteed replacement cost" endorsement that varies widely from company to company. For some insurance companies "guaranteed" is limited to 25% of true replacement cost. In other words, if the house was insured for 100,000 and there was a total loss, the insurance company would guarantee to pay up to 125,000 to rebuild that house at no extra penalty. If the actual cost were 145,000, the homeowner would have to pay the 20,000 extra. Some companies offer up to 100% replacement cost on the dwelling. In our example above, the same home would be insured up to 200,000 for a total loss.
Should you purchase the guaranteed replacement cost endorsement? In our professional opinion, yes. The form that is used to determine the value of your home is called a Replacement Cost Estimate. There is no guarantee the estimate is exactly what it would cost to rebuild your home. Since we are talking about values in the hundreds of thousands of dollars, a 10% mistake could cost you thousands of dollars of unanticipated expense in the event of a total loss should you undervalue your home. If you feel confidant in forgoing the endorsement, it is imperative that you have a good idea of what it would cost to rebuild your current home. Remember that debris removal is included as part of the loss. That can add up significantly, say if one wall of your house is left standing. A general rule of thumb is $100 per square foot of living space for an average structure. Custom materials are harder to estimate, so keep that in mind as you determine the amount. Your agent has special cost estimators to help you arrive at a number. Of course, the replacement cost endorsement takes all of the worry out of this decision.

7.

How do I determine how much liability insurance to purchase? What about deductibles? 

There is no doubt that medical expenses continue to rise in America. It is not uncommon for the victim of an automobile accident to incur hundreds of thousands of dollars in hospital and recovery care expense. This doesn't include loss of wages and other forms of compensation the claimant is entitled to as part of the settlement. 
Of course, no one intends to hurt another human being when they are involved in an accident and we would want to do everything in our power to help that person get back to a normal, productive lifestyle. It is this attitude that one should consider when choosing limits of liability for their insurance policy. Financial planners usually suggest you think in terms of "protecting your assets", and this is true. You should, at the very least, cover your own potential loss. Some planners advise carrying enough insurance to cover the value of their home and possessions. But this doesn't address the real purpose of the coverage. Remember, it is called liability insurance. What is a liability? Webster's dictionary defines liable as "legally bound or responsible". In other words, the care and recuperation of the injured party in an accident you have caused, falls on your shoulders - legally, and morally. If you were to say, carry the abysmally low "state minimums" of $12, 500 per person, $25,000 per accident, you would be "legal", but would you be fulfilling your responsibility as well? If you have trouble with this concept, just keep in your mind as you pay the extra premium higher limits of liability can cost (actually, they are not that far from the lower limits) the face of a small child recovering in the hospital - all being taken care of by your generosity in providing adequate coverage for him or her. A week in intensive care can run up to $100,000 easily and this doesn't take into account medicine, painkillers and bandaging. Imagine that child as your own. Of course, if you can't afford the premiums and risk your policy canceling for non-pay, any insurance is better than none. 
As to deductibles, you should select an amount that you feel you could comfortably afford to pay suddenly and unexpectedly, as most body shops and mechanics want to be paid BEFORE releasing the car to the owner. They don't consider the bill paid until the deductible is paid. Some folks put the money aside in a bank account to draw interest and have available should the occasion arise. A deductible is called "self insured retention" in the biz and is seen as a deterrent to frequent claims abuse. That is why insurance companies offer sizable discounts for higher deductibles. One thing to keep in mind when determining what deductible amounts (or to have physical damage coverage in the first place) is a realistic idea of the vehicle's worth. If the Actual Cash Value (the value insurance companies pay in claim settlements) is near or lower than the deductible, then it probably isn't worth carrying the physical damage coverage. Kelly Blue Book (www.kbb.com) offers an online estimator to help you determine what your ACV would be. Most adjusters have their own "book" for determining value, but generally speaking they arrive at a number in between the wholesale and retail values found in the Kelly estimates. On homeowners insurance, we recommend higher deductibles since this line of insurance is claims sensitive. With most companies, more than one claim can get your policy cancelled for "frequency". See the article Three Strikes and you're Out for a more detailed discussion of this issue.

8.

Can anyone operate my car and be covered under my insurance policy? 

The answer to this question used to be clear: Yes, if you had an insurance policy in force on your vehicle, the insurance would "follow the car" and anyone could drive this vehicle. Newer policy forms, however, suggest that the insurance now follows the driver. Note the language in this exclusion to liability coverage found in an updated policy form (Grange Mutual Casualty, page A-3 Exclusions, Coverage A; Liability - emphasis theirs):
11. For bodily injury or property damage caused by your covered auto when it is driven, operated or used with your permission by a person whom you know:
a. is under the minimum age to obtain a driver's license;
b. does not have a valid driver's license;
c. has a suspended driver's license;
d. has a revoked driver's license; or
e. has a restricted driver's license and is operating a vehicle beyond the scope of such restriction.
This is an attempt by the insurance industry to address the problem of those with suspensions (for alcohol abuse, as an example) driving a friend's or family member's car to get around the financial responsibility laws. Under prior policy forms, there would be coverage found for accidents caused by someone not legally licensed in Ohio on the owner's policy. This exclusion would prevent payment by the insuring company for an accident caused by such a situation if the owner knew of the driver's suspension or other ineligibility to drive a vehicle (such as an underage driver).
It should be noted, however, that your liability and physical damage* coverage still extends to other non-owned vehicles you choose to drive (unless furnished for your regular use), regardless of whether the vehicle is covered by insurance or not.
*READ YOUR POLICY - Some automobile policies DO NOT cover physical damage to other non-owned vehicles - particularly commercial auto policies.

9.

Should I buy the "extra" insurance on my rental car?

No one can come up with an answer to that question that would suit all rental car agencies. Each has its own contract that will spell out the "lessee's" responsibilities. Often that includes paying the deductible that the rental car company carries on its insurance policy. Sometimes that amount can be as high as $1,000. Other rental car agencies limit it to $250. If the accident were to happen out of town, the deductible would have to be paid immediately. Under your insurance policy, the "damage to your own vehicle" part stipulates that you are responsible for any applicable deductibles. This would include the deductible on the policy covering the non-owned vehicle you are driving. Obviously, when you are traveling, an extra expense of $1,000 may be beyond your reach on short notice - particularly if the accident happens toward the end of your trip. Of course, a minimal deductible may be easily accommodated, but you would have to read the entire contract before you purchased the insurance to know exactly what that number might be. The employee behind the counter probably has no idea what the deductible is. Unless you enjoy reading contracts with very tiny print, it may be wise to just purchase the "extra" insurance to avoid the inconvenience of an unexpected expense on your vacation.

10. 

Why go through an agent for my insurance? Isn't it cheaper to buy directly? 

The proliferation of dot.com companies and direct writers hawking insurance on the Internet and television advertising gives the illusion of "savings" not available through the agency distribution system by cutting out the "middle-man". However, despite claims of 15 - 25 percent savings, there is still no appreciable benefit to purchasing insurance directly from the company in our estimation. A comparison of rates with or without an agent shows no real difference in premium. Often, insurance purchased directly is actually HIGHER than the same coverage offered through an agent. Add to that the cost of your time spent researching these companies and the difference can be dramatic. There is another benefit to the agency system that is often overlooked in the rush to "do-it-yourself" insurance: experience and knowledge. Insurance agents are required to complete 40 hours of coursework prior to being granted a license to sell. On top of that, they are required to attend 15 hours of continuing education classes every two years to maintain that license. That gives the policyholder direct access to professional, timely advice on a difficult and rapidly changing industry. Anyone who has had to contact their mortgage company to request information on their loan can tell you how long the wait in "voice-jail" can be. Imagine having to change a mortgagee clause on your homeowners insurance every year. This is just one service your agency can provide at no extra cost. We have a little sticker we apply to each policy jacket sent to new customers. It says: "This policy comes with an agent".

Hard Market Q & A

Reprinted with permission by PIA (Professional Insurance Agents)

For more than a decade, insurance companies competed heavily to write coverage for U.S. businesses, public entities and other organizations. However, things have changed dramatically in recent months. Such changes, already underway in 2001, accelerated steeply as a result of the terrorist attacks on September 11. The insurer's insurance, and that of the average consumer, will be increasing. The industry is imploring federal action be taken to safeguard the stability of the insurance marketplace, and in turn the availability of offerings to the insurance buying public in the future. To rationalize the concerns of policyholders, PIA has compiled the most frequently asked questions, with answers, on how and why conditions have changed.

Q.

In my business publications, I am reading that some insurance premiums may be increasing by 30, 50 or even 100 percent. Why is this happening?

A.

It's true that commercial insurance premiums are increasing across the board, and more so for some risks than others. As "The Kiplinger Letter" told its subscribers, "stiff premium increases were already in the works long before Sept. 11." There are several reasons why this is occurring.
Even before September 11, insurance premiums were not covering loss costs. 
Throughout the 1990's, insurers could provide insurance at a discount from their actual cost of paying claims. They could do so because they could make up the difference by investing the premiums profitably. However, the returns from both equity and bond markets entered a period of decline in the second half of 2000, from which they have not yet recovered. This decline forced insurance companies to adjust their pricing accordingly.
Competition had driven premiums lower and lower.
The historically outstanding performance of investment markets in the mid-1990's led insurance companies to seek more and more market share to maximize investment returns. Competition among insurers drove their pricing to ever-lower levels that proved unsustainable when the investment markets slumped.
Returning to prior rate levels entails a bigger relative change.
Many businesses saw their insurance premiums decline significantly over the period of the mid and late 1990's. The math dictates that, to return to previous rate levels, a bigger percentage change is necessary. For example, a policyholder may have enjoyed a one-third reduction in premiums, eventually paying a lower price that may have persisted for several years. Just to return to the original pricing level, the insured would pay 50 percent more.
Costs of reinsurance, the insurer's insurance, have been rising.
Standing behind the protection offered by your insurance company is the financial strength of other insurers that "reinsure" your company's commitments to pay claims. These reinsurers, affected by the same developments in investment markets, were already raising their prices when the terrorists hit. So, the cost to your insurance company of providing you with the coverage you need already was on the rise.
September 11 caused enormous insured losses.
You already know that these events, taken together, were the costliest ever for the insurance industry. Fortunately, the industry was financially prepared to pay claims from that disaster. These losses, plus the immediate, steep investment market declines, caused a sudden, severe erosion of the capital that insurers and reinsurers had in reserve. This reduction means companies must be extra conservative going forward.
Insurers must adhere to prudent "rules of thumb".
Prudent business practice dictates that an insurance company must maintain an adequate balance between its existing capital and the risks it takes on. In this context, increased pricing is not undertaken simply to "make back" the losses the company already has paid out. Rather, increased pricing rebuilds capital to assure that the company can pay future losses that occur by maintaining an adequate financial cushion.
Insurers are constrained by regulators and financial rating firms.
It is not just prudent business practice that dictates an insurer's financial and risk selection decisions. State insurance regulators continually monitor certain key financial ratios and sound a warning if a company strays from a secure range. Other firms, such as A.M. Best Co. and Standard & Poors, which rate insurers' soundness for purposes of paying claims and issuing debt, also continually monitor companies' financial conditions. These factors are highly influential in shaping insurers' decisions.
September 11 changed insurers' concept of risk.
Even world-famous CEO's like Warren Buffett admit that insurance companies failed to foresee a deliberate terrorist act, carefully designed to inflict maximum damage and casualties, when estimating their exposure and pricing their policies. Nor did insurers contemplate a choreographed event where so many separate coverages and multiple locations would be impacted. Some risks that are seen as likely terrorist targets, or are located near such targets, will be screened more carefully and priced more conservatively because of this change in perspective.

Q.

Why am I hearing that some policyolders are being canceled or nonrenewed, not just charged more premium?

A.

Many of the same factors explained above will apply to these decisions as well. Some risks, when reevaluated in today's terms, will be seen as posing too great an exposure to continue insuring. To some extent, this is always occurring, as a company routinely reviews its policyholders' loss history, safety awareness, exposure to natural catastrophes and so forth. But the new perspective suggests that certain things, like event cancellation, high-profile venues such as the Olympic Games, areas of high value concentration such as downtown city buildings and even large offices or malls full of people, present possibly unacceptable levels of risk to an insurance company. And, even if the company would like to continue insuring its existing policyholders, the reinsurance that makes this possible may become unobtainable or prohibitively expensive.

Q. 

I hear that companies may add "terrorism exclusions" to policies. Is this likely to happen to my insurance program? 

A.

 Much uncertainty currently exists over these exclusions. In some cases, and insurer's ability to offer a policy without coverage for terrorist acts may make a decisive difference in whether the insurer can continue to renew an existing policy at all. However, at present, a company in most cases cannot simply add such exclusions. If it is licensed and regulated in your state, the insurer usually must get state approval for such policy conditions. And, it generally will be required to notify you before applying the exclusion.
Some companies indicate that they will apply such exclusions, if allowed by state regulators to do so, only when they think a policyholder presents a distinct risk of being targeted by terrorists. But other companies, possibly due to a loss of their own reinsurance coverage, believe they will be forced to add these exclusions broadly across their whole range of policyholders.
What will happen to an individual policyholder is difficult to foresee accurately until there is a clear notice form the insurer. You should stay in close touch with your professional insurance agent as your renewal approaches, carefully review any notices you receive from your agent or company, and ask your agent for information about any exclusions that may apply.

Prepared by Ellen D. Kiehl, Ph.D., CAE
Copyright 2001 Professional Insurance Agents
Reprinted with permission of PIA