The risk your home policy won't cover

It's not tomorrow's big natural disaster. It's getting hit by today's huge premium hikes. Here's how to fight.

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By Joe Light, Money Magazine staff reporter

Where hikes hurt most
Foul weather and natural disasters have driven up homeowners' insurance costs over the past five years. But as the examples below show, the pain isnt evenly distributed.
Premium increase since 2003
Massachusetts 50%
Florida 46%
Coastal North Carolina 44%
Louisiana 25%
California 21%
Notes: Increases exclude state-sponsored insurance plans for all states except Louisiana. Increase in Coastal North Carolina applies to the following counties only: Carteret, Currituck, Dare, Hyde, Brunswick, New Hanover, Onslow and Pender.
Source:State insurance regulators; Center for Insurance Research
How much can you save?
You can reduce your premium by as much as 20% if you qualify for one or more of the commonly offered discounts below. Make sure to ask for them - don't count on your insurance agent to volunteer the info.
If your annual premium is $2,000, you could save up to...
  • $300 to update your plumbing electrical and heating systems
  • $400 to install a central station burglar and fire alarm
  • $300 to combine home and auto policies
  • $100 to install deadbolt locks
  • $200 to install hurricane sutters or roof tie-downs
  • $400 to own a new home (discount decreases as home ages)
  • Notes: Discounts will vary among companies and locales. Premiums are reduced by smaller amounts if discounts are combined.
    Source:Insurance Information Institute
    Mortgage Rates
    30 yr fixed 3.80%
    15 yr fixed 3.20%
    5/1 ARM 3.84%
    30 yr refi 3.82%
    15 yr refi 3.20%

    Find personalized rates:

    Rates provided by

    (Money Magazine) -- As if it weren't bad enough that home prices are going down (way down), the cost of homeowners insurance is also moving in the wrong direction: up (in some areas, way up).

    And the worst increases aren't confined to the hurricane-ravaged Gulf region. Just ask Paula Aschettino, who lives on Cape Cod, Mass., which hasn't seen a major storm since 1991. Yet in the past two years, her premium has jumped 50% to $4,800 a year.

    "My increase in premiums is outrageous," says Aschettino. "Up here we just don't see that kind of damage."

    Granted, not every homeowner has suffered premium hikes of that magnitude lately. The most dramatic increases, ranging from 20% to a whopping 100% over the past five years, are showing up in coastal areas.

    But rates are also on the rise in midwestern states because of weather nasties like tornadoes and hailstorms. Missouri, for example, saw rates ratchet 40% higher after hailstorms caused $1.9 billion in damage in 2001.

    The good news: There are steps you can take to lower your premiums no matter where you live. But to devise your strategy, you first need to understand what's behind the price hikes and how insurers are changing the rules of the game.

    New risk models

    On the face of it, the reason for higher premiums is obvious: bad weather, lots of it. In 1992, Hurricane Andrew inflicted about $25 billion in damage on South Florida, $15.5 billion of which came out of insurers' pockets.

    A hurricane the size of Andrew was supposed to happen only once every few decades, but nobody told that to Katrina, Wilma, Gustav and Ike. All caused billions in damage.

    The financial hit led insurers to devise new ways to assess their risk. Under the old method, they calculated the odds of a major storm based on 30 to 100 years of weather history.

    But one by one, companies have switched to a model that instead focuses on the past five years - a period of intense hurricane activity. Not surprisingly, that puts a much higher probability on the Big One striking - somewhere, sometime soon. Up and away go the rates.

    Consumer advocates, though, aren't buying the new methodology. Insurers' models, they say, are supposed to spread risk out over long periods, keeping premiums steady through both calm and turbulent times. Shifting to such short-term history as a basis for rates, they argue, is a bit like adjusting a baseball player's salary based on his past five games.

    "Insurers came after Hurricane Andrew with new models and said, 'Trust us, we know what we're doing now,' " says Birny Birnbaum, executive director of the Center for Economic Justice, a nonprofit consumer advocacy group.

    But after a few storms they were back for more rate increases. "That doesn't make sense," he says. Regulators increasingly agree and often turn down insurance company requests for big rate increases.

    But when commissioners hold the line, that can lead to a different problem. Rather than write policies at the lower rates, some carriers simply stop serving the area.

    Since 2004, for example, Allstate has written 500,000 fewer policies in Florida. State Farm has virtually stopped writing new policies there and is not renewing wind policies for homeowners who live within a mile or so of the beach.

    As a result, instead of many insurers competing for your business and keeping rates in check, you might have only one, which charges you as if you're Donald Trump - or even worse, no private insurers at all.

    Most states sponsor backup insurers that will issue a policy if no private insurer will, but their rates are usually among the highest. Some insurers, regulators and lawmakers are pushing for a federal program to back insurers if a mega-catastrophe does strike, and that could bring rate relief. But there's no indication if or when it will pass.

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