home insurance payout ratio

The September 2007 issue of Bloomberg Markets magazine has an article "Insurance Hoax" by David Dietz and Darrell Preston critical of home insurers. The article says that Allstate paid only 58% of home
insurance premium income as claims in 2006, compared to 79% in 1996. Throughout the property-casualty industry, the payout ratio declined from 64% to 55% from 1996 to 2006.
Given such a big spread, I wonder how much sense it makes to forgo home insurance if possible, although that represents a big risk. Maybe a policy with a very high deductible (say $100K) would make sense for rich people. If one has a mortgage, typically home insurance is required.
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I agree it's worth wondering, but as you and others probably know, it seems to me there's a question of whether folks are making more claims, and also somewhat more questionable claims, these days, too. Seems to me I have read that this has been the case in recent years.
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That is possible, but it is hard to believe that "more questionable claims" account for a difference between 79% and 58%. Of course, insurance companies seem to regard many claims about wind damage from hurricane Katrina as questionable. They might prefer to put them in the category of flood damage, meaning less or no payout. But such logic on the part of insurance companies is Questionable (with a capital Q).
If it is possible to collect statistics about payouts declining from 79% to 58%, then it should also be possible to collect statistics about the frequency of fraudulent or doubtful claims, Of course to make any sense it would have to be done by an independent agency not beholden to insurance companies. But if it were done properly, I'll bet the decline from 79 ti 58 would turn out to be related to conservative politics and companies "seizing the opportunity" in the present day business climate to stick it to consumers, not to fraud on the part of consumers.
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Elle wrote:

Would more claims affect this particular statistic?
-Will
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Beliavsky wrote:

B- Haven't see the article but just those stats aren't compelling, there's a cycle to payouts based on catastrophic events. Given that 2006 was such a slow year for storm claims (no hurricanes hit the US), I'd expect US home insurers' loss ratio to be unusually low that year. Especially because of all the premium increases and changes in underwriting after Katrina. In P&C overall there has been a change in pricing for storm risks, because of higher storm activity. Allstate specifically made some big changes and even got out of higher-risk markets. More premium, fewer claims, and you get to 58%. Two major hurricanes, a 6.5 quake, or a big fire season and it goes the other way.
It may well have overshot but only if it stays low for an extended period would it be an issue. And if it's too high...competition should weed that out in the form of lower premiums. The most I'd say is "shop your policy" but foregoing home insurance is for most people an unacceptablly large risk.
-Tad
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wrote:

True and this statistic said nothing about rejecting any claims. Thumper
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Has anyone examined this on a smaller scale like car insurance? I just paid off my car and I've been seriously considering dumping the collision and comprehensive insurance. If I totalled the car or it were stolen, how badwould it be? Well, it would certainly suck, there's no doubt about that. But honestly, it wouldn't be that big of a deal. I would just go out and buy a new car. Or maybe a used one. But I wouldn't be ruined, financially.
On the other hand, the insurance only costs me about $10 / month (I'm with USAA). So it's not like dumping it is going to save me a lot of money.
There was a similar thread about a year ago about dental insurance. Elle, didn't you start that one? Someone was asking whether or not it would better to just take the money you would put toward dental insurance premiums and save them to pay for dental work, yourself. Made sense to me.
--Bill
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The article is now online at http://www.bloomberg.com/news/marketsmag/mm_0907_story1.html . The Wall Street Journal has an article today about how many homeowners are being forced to go without insurance for wind damage because their policies have been cancelled or because the premium have been raised sharply. An recent article "In Nature's Casino" http://www.nytimes.com/2007/08/26/magazine/26neworleans-t.html?ex 89051200&en785b5c1794f0ec&eiP70 in the New York Times magazine by Michael Lewis talked about the pricing of catastrophe bonds and cycles in home insurance rates.
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Beliavsky wrote:

http://www.nytimes.com/2007/08/26/magazine/26neworleans-t.html?ex 89051200&en785b5c1794f0ec&eiP70
I thought that was a really interesting article (well, for insurance anyway!). Insurers weren't setting premiums high enough because they didn't factor in the possibility of large catastropic events, simply because they hadn't happened before (before Hurricane Andrew). Similar reasoning to, "home prices never go down." The insured losses from Andrew in Florida were apparently greater than the total premium that had ever been collected in the region. Hard to run an insurance company given that framework -- you have to jack the rates.
A series of more-expensive catastrophic events (on the scale of Katrina) could well lead to much more expensive pricing of homeowner's insurance, to finance the mega-events that may occur over the next 10, 20 years. Payout ratios would look even lower than they are today. Not because of price-gouging, but because of the higher cost of reinsurance. The article implied that these big events may be beyond the claims-paying ability of private insurance.
-Tad
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You didnt add in investment return which can be considerable. On the life insurance side, a popular hook now is promise to refund all the premiums after a certain term because they make more the premiums and insurance payouts.
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