If you own a home in the United States but live abroad, you probably rarely think about the insurance on your Stateside house. Recent trends in the insurance industry will reward you for investing a little time to review your policy, and may give you a nasty shock if you do not.
Homeowners insurance rates in the US are on the rise, and so are the number of policies that insurance companies are dropping or refusing to renew. If you have a mortgage on your house, you have no option but to have insurance on it, and if you are dropped you may have to pay triple what you now pay for coverage.
Two events have conspired to cause a radical change in US homeowners insurance. One event is the end of the 1990s bull market; the other is a recent jump in homeowners claims. Insurance companies make money in two ways. If the money they receive in policy premiums exceeds what they pay out in claims, they make a profit on their insurance underwriting. Insurance companies invest the premiums in the financial markets until they need to pay them out in claims; this investment return supplements their underwriting profit, or compensates for an underwriting loss. The end of the bull market and the drop in interest rates have cut investment income for insurance companies at the same time that homeowners insurance losses in 2001 reached almost $9 billion, roughly equal to the industrys losses from 1997 through 2000 combined.
The industry is taking drastic measures in response. Many homeowners have been labelled frequent claimers, and their premiums have increased dramatically and in some cases their policies have not been renewed or they have been cancelled. Now the industry is taking further steps. Homeowner insurance premiums across the United States, regardless of claim history, will increase by at least 20 per cent. Since US homeowners must have insurance as part of their mortgage agreements, they have little choice but to increase their deductibles and pay higher premiums.
Insurance companies have faced large losses before. The difference this time is that computer technology allows them to track and share individual claim histories. This means that insurance companies can identify individuals they think are likely to file future claims and drop them or drastically raise their insurance rates.
Thats the bad news. The good news is that there are several ways you can reduce your homeowners insurance bills while you reduce the chance that insurance companies will label you a frequent claim filer and drop your coverage. The most efficient way to use insurance is as protection from major losses. Everybody, especially everybody living overseas where unexpected expenses are common, should keep at least three to six months of their monthly expenses in an easily accessible account. I call this a self-insurance fund. By maintaining a self-insurance fund you can easily afford to pay for small emergencies yourself. Maintaining a self-insurance fund which will earn money market interest for you rather than the insurance company means that you will file fewer insurance claims and can buy insurance with a higher deductible.
Fewer claims mean that insurance companies are less likely to drop you as a customer, which means you keep your coverage at relatively low rates to insure your home against catastrophic losses such as might occur from a tornado or a fire.
Insurance with a higher deductible means you also save money on your premiums. According to Insure.com, increasing the deductible on a typical homeowners insurance policy from $250 to $500 can save up to 12 per cent on insurance premiums. Raising that $250 deductible to $1,000 can save 24 per cent; to $2,500 up to 30 per cent, and to $5,000 up to 37 per cent. Remember to explore the various discounts that most homeowners insurance companies offer.
If your insurance company does drop you because of your claim history, it is required to give you at least 30 days notice, 60 days in some states. As soon as you learn of plans to drop you, begin shopping immediately for an alternative provider that way you can honestly say you currently have homeowners insurance. If you actually lose the coverage you will find it harder to locate a company that will take you, and you will pay more. You could also be in trouble with your mortgage company, depending on the terms of your mortgage.
Anybody dropped or denied coverage has the right to a copy of their claim history, which the industry tracks. To obtain your claim history, visit www.consumerdisclosure.com or, if you have a means to call 800 numbers in the US, call 800-456-6004.
Barbara Frew is the author of Personal Finance for Overseas Americans. She holds an MBA in finance from George Washington University and has worked abroad as a financial analyst with Citibank. She has lived in Finland, Russia and Austria. E-mail: bjfrew@GILFinancialPress.com.