Nearly all U.S. states prohibit insurance companies from implementing excessive rate increases on home and auto coverage. Even with those protections, the average cost of auto insurance has risen much faster than overall inflation over the past five years, and some state regulators fear that homeowners insurance could soon do the same.
The concern has led some lawmakers to consider implementing price caps on insurance companies. While this may seem like a great idea if you are a cash-strapped motorist and homeowner, these regulations can backfire. Find out why and how you can protect your access to home and auto insurance in the future.
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Each state defines how it regulates insurance rates. Some require insurance companies to get approval before raising their rates, some allow limited rate increases without approval, and others give the green light to higher rates as long as they are reported. Illinois is the only state that does not have a qualification law.
Most states specify that rate increases cannot be “excessive, inappropriate or unfairly discriminatory,” according to the National Association of Insurance Commissioners.
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Still, insurance costs in disaster-prone areas have skyrocketed. According to Michael Coffey, founding partner and insurance defense litigator at Coffey Modica LLP, homeowners insurance costs in some areas of Florida have increased by 30%, while premiums in Illinois have increased by 50% over the past three years. In California, Coffey continues, industry analysts expect a 21% rate increase after the Los Angeles wildfires last January.
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Regulators in Illinois, Louisiana, Michigan and New York are exploring price caps as a way to protect residents from rising insurance costs. “State governments are feeling pressure to act from voters who feel abandoned and vulnerable,” explained Max Dugan-Knight, climate data scientist at Deep Sky Research.
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Illinois: Lawmakers have proposed the Insurance Rate Fairness and Consumer Protection Act, or SB0268, which requires insurers to seek approval to increase homeowners and auto insurance rates.
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Louisiana: Louisiana recently passed House Bill 148, which allows the state’s insurance commissioner to block any excessive rate increases.
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Michigan: Michigan regulators are reviewing two bills governing insurance rates, SB 328 and SB 329. SB 328 would require insurance companies to reduce auto premiums by 10% or more at the first renewal. SB 329 would eliminate reinstatement fees and prohibit price increases related to coverage gaps.
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New York: A group of lawmakers in August announced an investigation into property insurance premium increases. The objective is to identify possible regulatory changes for the state.
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The argument for limiting insurers’ ability to raise rates is simple: Additional regulatory oversight can keep prices affordable for ordinary Americans struggling with ever-increasing rates, according to Coffey. Dugan-Knight added that price caps may “offer some short-term relief from rising insurance premiums.”
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In the long term, price caps can reduce competition and limit access to insurance. Dugan-Knight characterized the regulation as a “Band-Aid solution” because it does not address “a fundamental problem of increasing risk.” As Coffey said, “insurers must be able to assess risk and set rates without artificial constraints on the market.”
If they can’t, they could simply stop doing business in the state. “Insurance companies will withdraw from states where they cannot charge premiums to keep them solvent,” explained Melanie Musson, insurance and finance expert at Clearsurance.com.
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The trend is already occurring in the highest-risk states even without legislative changes. According to an Insurance.com survey, more than 15% of homeowners in California, Florida, New York and Georgia reported receiving policy cancellations because their insurance company left the state.
Tighter restrictions on insurance rates could accelerate these state exits. In turn, higher-risk customers may have more trouble finding insurance from a smaller pool of providers.
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In this complicated insurance environment, keeping the level of risk low is essential. The lower your risk, the cheaper it will be to insure. That helps you maintain access to coverage even if the pool of insurers in your state shrinks.
As a homeowner, you can manage your risk profile by avoiding damage and filing fewer claims. Franklin Manchester, Chief Global Insurance Advisor at SAS, recommends these measures to safeguard your home:
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Leak detection: Install a leak detection system to identify water leaks early.
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Electrical fire detection: A system that monitors your home for electrical faults can protect you against wiring-related fires.
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Brush removal: Keeping the area around your home free of weeds can prevent fire damage.
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Roof and window inspections: Monitoring the condition of your roof and windows can prevent water leaks, which can cause water damage, mold growth, wood rot, and electrical damage.
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Replacement hoses for the washing machine: Manchester says this update can mitigate the damage of a claim and may net you a discount on your policy.
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You can apply the same concept to your car insurance. Try these strategies to file fewer claims.
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Safe driving: Conservative driving habits can help minimize tickets and accidents.
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Seat belts: Limit injuries by wearing your seat belt when driving, without exception.
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Garage parking: Enclosed, covered garage parking can minimize weather damage and prevent vandalism.
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Anti-theft device:A car alarm or steering wheel lock can prevent theft.
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Safe distance: Keeping a healthy distance between you and the car in front of you can help prevent rear-end collisions and chipped windshields.
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Routine inspections: Keeping your car inspected and maintained reduces the risk of an accident and claim.
By following these best practices for your home and car, you can limit your risk of claims, protect your access to insurance, and hopefully qualify for the lowest rates.
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Is Mandatory Auto Insurance Reduction Real?
Michigan regulators are considering a proposal that would require insurance companies to reduce rates on a customer’s first renewal.
A report from the Consumer Federation of America estimates that the cost of homeowners insurance has increased 24% over the past three years. That’s 8% annually, but your experience could be different depending on where you live and other factors.
there is no federal limit on insurance increases. States regulate insurance companies. Most require insurance companies to report rate changes and can block excessive increases.
Homeowners insurance rates have increased due to the increased risk of natural disasters, inflation and higher construction costs. Factors related to their grades may also have contributed. Your rates may increase if you or your neighbors filed more claims, added money to your home or property, or if your credit score decreased.
Tim Manni Edited this article.