Insurers blame bad weather and mold for sending insurance rates through the roof. Are they telling the whole truth?

By Matthew Power

At the end of July of this year, Gordon Stewart, president of the Insurance Information Institute, an industry-sponsored interface with the public, based in New York, laid out the bad news before a congressional subcommittee.

"Three years ago, the few claims that insurers did see [for mold] were handled for a few thousand dollars," he explained. "Average mold claims today cost about $35,000--and can easily exceed $100,000. ... The average cost per policyholder went from about $23--this is in Texas--in the first quarter of 2000 to about $444: That is what everybody else pays when we have to look at every mold claim as a 'white suit' problem."

There's no question that insurers have had a couple of down years. They describe 2001 as the worst year ever in terms of catastrophic homeowner claims, to the tune of $9 billion.

What is in question, however, is the way these companies have responded. State Farm, which represents about a third of all policies nationwide, has increased homeowner rates in the last three months by 20 percent to 30 percent in most states. To make matters worse, it has stopped issuing new policies in more than 20 states.

The reason for the hike, according to J. Robert Hunter, director of the Insurance Consumer Federation of America in New York, has little to do with mold. He says insurers--specifically State Farm--have relied too heavily on the stock market and made some huge business blunders last year. And now they're making consumers pay for their mistakes.

"Yes, we do rely somewhat on our investment income," notes Zoe Younker, spokeswoman for State Farm Insurance. "But if we didn't, everybody's premiums would have been higher through the '90s."

"Back in 2001, State Farm announced that it was losing market share by selling homeowner insurance below cost," Hunter says. "[The firm] was using it as a loss leader to get more auto insurance, where the profit is higher. Well, [the company] lost $5 billion last year. Then it made a 180-degree turn and increased premiums dramatically. It is letting its mistake fall on consumers. When State Farm makes a move like that, it's open season for everybody else to raise their rates."

Younker acknowledges that her company has "refocused" on whether its homeowner rates are adequate.

Hunter, who served as federal insurance administrator under President Gerald Ford, says that homeowner insurance has been slightly underpriced, given inflation, "but what's needed is a 5 percent to 10 percent increase in rates--not 30 percent."

Is resistance futile?

A few efforts have been made to challenge the decisions of the insurance oligarchy. In Texas, for example, the state has sued Farmers Group, alleging that the company is charging excessively high rates for homeowners' insurance.

And in Indiana, an investigation by the Indianapolis Star found that dozens of complaints had been sent to the Indiana Department of Insurance--an entity with the power to deny rate hikes. Result: an unsympathetic form letter defending the hikes on competitive grounds.

But if one company's rates go through the roof, won't consumers simply find another insurer?

Probably not, says Hunter. For one thing, many smaller companies have raised rates to follow suit. For another, "there's a great inertia in insurance, especially when the market is volatile."

"We understand some people may look around," State Farm's Younker adds. "But we're not publicly traded. We answer to our customers. This is not a permanent solution. We're looking at our book of business."

Thinking small

Big insurance company profits will soon skyrocket, Hunter asserts, and consumers will have to settle for less. But it's not too late to play smart with the numbers.

"There are things you can do," he adds, "like taking a higher deduction. Also, some good, smaller companies have not jacked up their rates yet. But ultimately, the burden still falls on consumers."