Whats a driver and a homeowner to do

July 14, 2012
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When the Insurance Service Office, which provides the industry with statistical information on risk, raised the Grand Rapids Fire Department’s public-protection rating this past spring from a good three to a great two, some thought city residents might see lower premiums on their homeowner policies.

But that may not be the case because some insurance companies have stopped buying ISO data and have quit using that information to calculate their rates. Instead, insurers have gone to a system that measures the actual loss that occurs within a ZIP code or another designated area. That loss measurement includes damage incurred from floods, lightening, hail and break-ins, along with fires.

According to fireserviceinfo.com, State Farm is the largest home insurer in the country, holding about 20 percent of all policies nationwide. The website also reported State Farm was one of the last insurance companies to switch from the ISO data to analyzing actual claims made for damage in designated areas and then projecting that data into the immediate future to set rates.

Dan Koorndyk is a State Farm agent. He told the Business Journal that an area’s fire rating is just one element that goes into calculating premiums for homeowners.

“About 70 percent of what makes up a homeowner’s rate card is not fire related, so the biggest portion of a premium is not based on fires — it’s based on other things like crime, weather and those type of things,” said Koorndyk, who is also a Kent County commissioner who represents Grand Rapids on the board. He has just marked his 30th year in the insurance industry.

“Basically, our rates are based on claims experience over the past several years so we can project what the future claims will be, and that’s how we set our rates,” he said. “So it will take a little bit of time for the fire department rating to factor in, but I’m sure if it has a positive effect on the overall fire rating, it will have an effect on homeowners’ rates down the road because our rate making is based on projected claims, which we base on past claims.”

Should the department’s protection rating produce positive results in the next few years, Koorndyk estimated that it could trim premiums by as much as 20 percent. Liability, however, will also have to be factored into the equation.

Another component that could affect premiums comes from the state Legislature’s recent decision to legalize Class C fireworks, which include a few that go airborne, like Roman candles and bottle rockets, and have the potential to become a fire hazard. “Again, it’ll probably take a year or two to factor that in, based on past experience,” said Koorndyk.

On another front, homeowners may wonder why their premiums haven’t fallen while the values of their properties have dropped by as much as 30 percent over the past several years. The reason policy prices haven’t gone down is because rates aren’t set according to a home’s value. Premiums are calculated to reflect the cost to rebuild a house.

“Homeowners’ policies are rated on replacement costs — the building costs. It has nothing to do with market value. So whereas market values are declining, building costs haven’t necessarily decreased. So the insurance is based on how much it costs to rebuild a home, not how much it costs to buy a home,” said Koorndyk.

“If you have a total loss to your home, we’re going to rebuild it for you. We’re not going to cash you out and then you go somewhere else, because if we did that, then we’d have a bunch of burnt-out houses all over the county.”

Koorndyk explained that the same replacement method is used to determine rates for automobile policies, because the claims made for damages to houses and cars are similar.

“We factor in totaling out a car into a rate, but the majority of people repair their cars. So the cost to repair a car is just as big of a factor as the value of a car when you’re looking at car insurance, because the majority of auto-insurance claims are for repairing vehicles and not necessarily for totaling one out.”

Another law that just came out of Lansing has a pretty good chance of raising premiums for auto policies. When state lawmakers passed the no-helmet law for motorcyclists, they likely sent drivers down a road to higher insurance rates.

“I believe it will (increase rates). The biggest effect it’s going to have is on the MCCA assessment, because if you’re hurt on a motorcycle in a collision with a car, you collect from the car insurance’s personal injury protection, which falls under the MCCA,” said Koorndyk of the Michigan Catastrophic Claims Association.

The MCCA provides unlimited medical coverage for severe injuries and insurance industry experts have claimed that motorcyclists not wearing helmets will be at a greater risk for more serious injuries than those who wear helmets.

“Basically, all motorcycle policies in the state represent only 2 percent of what’s paid into the MCCA. However, they account for 5 percent of all the money paid out from it, and for almost 8 percent of all the claims reported,” said Koorndyk.

Koorndyk added that the MCCA has reimbursed insurance companies more than $421 million for 885 major motorcycle injury claims since 1978.

“That is a huge drain on the MCCA fund. What it’s going to do is it’s going to continue to drive that cost up. Also, the personal injury protection portion of the auto policies are going to be driven up, as well, because a high percentage of injured motorcyclists collect from auto insurance if they’re in an accident with an auto,” he said.

The law requires motorcyclists to buy $20,000 worth of medical insurance annually, which costs a rider at least 25 years old about $200 a year. But that coverage only replaces payments from auto policies when a rider is injured in an accident that doesn’t involve a vehicle.

“If they’re involved with a car, they can collect from the car insurance, in addition to the $20,000. $20,000 is nothing, and that’s all they have to have to ride without a helmet,” said Koorndyk.

Koorndyk also said there may be some good news on the horizon that could lower auto-insurance premiums. He said the industry has been urging the state to get more aggressive regarding insurance fraud and auto theft, and the state House recently responded by passing a bill that has the potential to address those issues.

HB 5701 would create a new Insurance Fraud and Theft Authority that would be required to provide $21 million in financial support to state or local police and prosecutors to investigate and charge those who are suspected of committing fraud and theft. The bill was sponsored by State Rep. Pete Lund, R-Shelby Township. It is in the House Committee on Insurance and would go into effect Jan. 1 if approved by the Senate and signed by the governor this year.

“We’re very much behind anything that would lower car insurance rates,” said Koorndyk, “and a fraud authority would very much help accomplish that.”

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