Property Insurance Coverage and Cost
November 23, 2007
There is growing concern over the availability and the cost of property insurance for those who live along the eastern coast of the US. Some insurers have begun to reduce or even eliminate coverage in these high risk areas.
Some homeowners living in those areas are wondering why this is happening, especially since the insurance industry as a whole has seen increased profits. The answer to that is that profits for the insurance industry should be viewed over the long term and not on a per year basis.
In the state of Florida, for example, one hurricane can literally wipe out any profits from previous years that the insurers might have gained.
The numbers seem to prove this point. From the years 1993 through 2003, the average rate of return on net worth for all homeowner’s insurance companies in the United States was 2.8 percent. For those located in Florida, the rate was a healthy 25 percent. However, when the formula includes the years 2004 and 2005, the opposite is revealed. Between 1990 and 2006, the average rate of return was -0.7 percent for the US as a whole, but it was a whooping minus 38 percent for Florida insurers.
Some of the major reasons for the large rate hikes in these high risk areas are the almost certainty of future storms and the increased cost to insurers to get re-insurance. Re-insurance is insurance for the insurers that helps to spread out the loss over a larger base. These cost, as one might imagine, are passed along to the consumer, resulting in higher rates.