As claims drop, insurers cut rates

By Sherry Slater



The Journal Gazette





When the weather is bad, it’s really, really bad. But when the weather is good, it’s great … especially for insurance rates.



Fewer homes damaged by hail – that’s one of the explanations for American Family Mutual Insurance Co.’s decision to lower its homeowners insurance premiums by an average of almost 4 percent for its Indiana policyholders. The change, which went into effect Sept. 1, could save policyholders $2.8 million.



Steve Pleak certainly isn’t complaining. The Fort Wayne roofing, siding and window contractor switched to American Family about two years ago.



“The way I’m looking at it, with everything going up in price,” including gasoline and building supplies, he said, “it’s pretty dang decent that one company actually cares about their customers.”



American Family, based in Madison, Wis., is one of at least two insurers to lower rates for Indiana customers in the past four months. State Farm Mutual Automobile Insurance Co. dropped its auto insurance premiums by an average of almost 6 percent, effective June 15.



Bloomington, Ill.-based State Farm, which has issued policies on about one in every five cars in Indiana, insures more cars in the nation than any other company, according to spokeswoman Angie Rinock. The company estimated reduced insurance invoices will save Indiana policyholders $34 million.



The equation is simple, Rinock said. When claim rates fall, so do premium rates.



The shrinking prices have surprised Marty Wood, spokesman for the Indianapolis-based Insurance Institute of Indiana.



“Indiana is already excellently priced in terms of the rest of the country,” he said.



Wood cited competition as one of the main factors driving insurance rates. He listed it first, before an individual’s risk profile and the geographic area’s potential risk.



But Eckert, who has been an agent with American Family for 31 years, scoffed at the idea.



“I’ve never heard them say, ‘We’re going to lower the rates because our competition is lowering the rates,’ ” he said. “We have to collect the correct premium so we can cover losses if and when they occur.”



Mutually beneficial



State Farm and American Family are both organized as mutuals. Think of them as the credit unions of the insurance world.



According to Wood, being mutuals doesn’t really affect how they conduct business compared to a traditional insurance company. Agents woo clients. Underwriters assess risk. Customers pay premiums. And regulators require adequate reserves.



The only real difference is in who owns the company.



“Our customers own us,” said Larry Eckert, American Family’s northeast Indiana district manager. “We don’t issue stock. We aren’t pressured by Wall Street to make decisions to benefit shareholders.”



In fact, it’s the policyholders who benefit when reserves accumulate faster than company risk assessment officials – and state regulators – deem necessary.



A mutual has four main choices when it collects more money than it pays out in premiums. It can build a bigger pool to pay potential future claims. It can lower premiums. It can return some of the money to customers as rebates. Or it can do some combination of the three.



A publicly traded insurance company with a budget surplus would use only the first two of those options. Additional earnings would belong to shareholders.



Insurance companies make more money than expected when they collect more in premiums than they pay out in claims. Despite their risk managers’ most carefully calculated forecasts, sometimes the typical quota of disasters just doesn’t happen.



Blue skies bring savings



Better weather in the past few years has lowered the amount American Family has paid in homeowners insurance claims in Indiana – hence, the rate decrease.



American Family paid more than $22 million in the Anderson area alone in May 2000 to cover damage done by hail. Since then, the climate and the claims have been much more temperate, Eckert said.



This year’s more notable foul weather in his territory was January’s ice storm in Muncie. While the damage left thousands in the area without electricity for at least a week, American Family paid only $1.5 million in claims, Eckert said.



American Family, which operates in 17 states, hasn’t issued any policies in the Gulf states and doesn’t expect losses from Hurricane Katrina. The company lowered its homeowners insurance rates Sept. 1 in the majority of the states where it issues polices, Eckert said.



State Farm, which insures 28 million households, including some in states affected by Katrina, also lowered its auto insurance premiums because claims didn’t meet the projections, Rinock said.



The Portage, Mich.-based spokeswoman said collision and comprehensive coverage claims have both decreased for State Farm’s Indiana policyholders. That means people are probably driving better (the collision part), and they are having fewer problems with theft, vandalism, fire, glass breakage and, of course, storm damage.



“Weather is definitely a factor,” Rinock said.



Liability and medical payments have also gone down, probably because more cars have air bags and more states require people to use seat belts, she said.



State Farm lowered auto insurance rates in 33 of its 48 states this year, the spokeswoman said.



American Family has notified the Indiana Department of Insurance that it plans “a substantial auto rate decrease” on Dec. 17 and commercial insurance premiums in January, Eckert said.



The state agency reviews mutual and stock insurance company filings to ensure products meet state standards, according to Kate Kixmiller, senior policy analyst for the state insurance office.



The department has received numerous filings this year. Most merely tweaked existing rates in a change that might yield an average decrease of 0.3 percent, for example, that affects individual policyholders, she said.



“It’s across the board,” Kixmiller said. “We get filings to raise rates. We get filings to lower rates. We get filings to change rates with negligible effects.”



One of the standards the state agency checks for when it reviews such filings is that rates aren’t excessive, inadequate or unfairly discriminatory.



The last element – discrimination – would most likely be determined after a policyholder or agent complaint about an insurance company’s pricing practices, said Carol Mihalik, chief deputy commissioner of the department’s Consumer Protection Unit.



The Indiana Department of Insurance fields customer complaints by phone and e-mail, Mihalik said. The agency’s staff also acts as a liaison between customers and insurance companies.



Raising the roof



Pleak, owner of C and S Home Improvement, stands to benefit from American Family’s rate decreases.



He and his wife estimate they pay upwards of $6,000 a year in premiums for policies covering their home, three cars, boat and contracting business. So any rate decrease is a welcome relief for the Fort Wayne family.



When he looks back, Pleak doubts his former insurance agent – now retired – advised him well when it came to making sure he had adequate coverage.



“Nobody wants to pay (for) insurance, but you don’t want to go without it,” he said.



Pleak filed just a few claims early in his 10 years with another insurance company, but his rates continued to rise each year even after he got smarter about hiding his tools to keep them from getting stolen – the reason for his claims.



The contractor didn’t experience any losses in later years. But sometimes policyholders choose not to file claims because they worry their rates will increase as a result.



State Farm’s Rinock said she hopes all policyholders file appropriate claims.



American Family’s Eckert said he can understand why some people choose not to file claims. The district manager, who oversees 33 agents and about 55 licensed staff, said he’s talked to prospective customers who are shopping around for insurance because they filed two $200 claims in a couple of years and then found out their insurance company has decided to cancel their coverage.



“In some cases,” he said, “people are better off not putting in for minor claims.”