Dr. C. Edward Buckley III, a retired physician who lives in Durham, was surprised last fall when the annual insurance premium on his 6,000-square foot, four-bedroom house rose 28.2 percent – from $2,854 to $3,660.
Buckley, 84, couldn't understand why his State Farm homeowners policy should rise so much given that, during the prior year, “we had no hurricanes, no severe winter storms in our area.” Nor had he filed any claims on his policy.
Buckley didn't take the increase, which he labels “excessive,” lying down. He wrote both his insurance agent and the state Insurance Department about the premium hike, but their responses failed to convince him there was an actuarial basis to the increase.
Nevertheless, he decided to stick with State Farm and pay the higher premium.
“We can afford it,” he said. “But is it really justified?”
In recent years, some North Carolina homeowners – it’s unclear how many – have been blindsided by increases in their homeowners insurance premiums that are well in excess of any rate increases approved by the state Insurance Department.
For example, the most recent rate increase, which went into effect July 1 and which impacted Buckley's premium, boosted rates an average of 7 percent. That was well below the 17.7 percent increase sought by the industry, but ranged from region to region – from a low of 1.2 percent to a high of 30 percent in some beach areas.
In Buckley’s region, rates rose a relatively paltry 2.8 percent. That raises the question: How could his premium jump so much?
As it turns out, some insurance companies, including State Farm, have been taking advantage of their ability to run what is in effect an end-around the state’s rate-making process – which is perfectly legal under state law – in order to charge higher premiums. And, according to insurance industry experts and state regulators, insurers seem to be doing so more frequently because they’re frustrated with the rates approved by state regulators.
“The industry believes that the rate level in North Carolina is inadequate,” said Ray Evans, director of the N.C. Rate Bureau, which represents insurers.
Meanwhile, companies have found ways to raise premiums. To understand how, you have to understand the unique regulatory process in North Carolina.
When state regulators approve a rate for homeowners insurance, a maximum rate is established. But companies don’t have to charge the maximum rate.
“Once the ceiling is set, companies can deviate from it,” said Bob Mack, deputy commissioner of the Insurance Department’s property and casualty division. “But they only can deviate downward.”
State regulators must approve any deviations, or discounts.
In the past, competition in the marketplace drove companies to offer discounts for all sorts of reasons. Some examples: having fire alarms or new wiring or having multiple insurance policies with the same company. Companies also can choose to offer a blanket discount by setting a “base rate” that is less than the state-approved maximum.
Some insurers offer more than two dozen different discounts. Most of those discounts apply statewide, but some are limited to certain regions.
But since 2011, which was a bad year for storm damage to homes in North Carolina, some companies unhappy with the existing rate structure have been reducing or eliminating discounts.
“What we have seen is a movement on the part of companies to re-look at their deviations and adjust them accordingly,” Mack said.
That’s based on anecdotal evidence. The state doesn’t have hard data on discounts that have been phased out or lowered.
The Insurance Department’s ability to challenge changes in discounts is limited under state law because companies are free to charge up to the maximum base rate and discounts aren’t required. The major exception, said Mack, is if the changes sought by an insurer are discriminatory in any way.
What’s more, any reduction or elimination of a discount is magnified by an immutable law of mathematics – eliminating a discount triggers an increase that is larger than the discount itself.
For example, a 15 percent discount on a $1,000 premium is $150, reducing your premium to $850. Eliminating that discount raises your premium by the identical $150. But the percentage increase is 17.6 percent rather than 15 percent because the $150 increase is measured against the smaller base premium – $850 instead of $1,000.
In Buckley’s case, according to an analysis performed by the state Insurance Department after The News & Observer inquired about his bill, eliminating a major discount accounted for $448 of the $808 premium hike.
Eliminating that discount actually had “a ripple effect” because it was a discount State Farm previously offered on the base premium, said Insurance Department spokeswoman Kerry Hall. Raising the base premium affects other costs tied to the premium, such as replacement-cost coverage that amounts to 5 percent of the base premium.
In addition, the Insurance Department found, Buckley’s premium increased $242 because State Farm corrected an error it had made previously – an error that was in Buckley’s favor.
State Farm had given Buckley a 9 percent “home alert discount” that it offers for homes with safety features such as smoke detectors and security systems, which amounted to $317 for his prior policy. But the maximum home alert discount allowed in the state is $75, which is the amount of the discount Buckley received on his latest premium.
“That wasn’t a matter of State Farm changing or taking away that discount,” Hall said. “They were applying it incorrectly to him in the past.”
State Farm spokeswoman Anna Bryant declined to discuss details of Buckley’s premium increase but did write in an email: “Rates are determined using a variety of factors, and you cannot point to one individual aspect to explain a rate increase or decrease.”
Stuart Powell, vice president of insurance operations and technical affairs for the Independent Insurance Agents of North Carolina, said of the reduction or elimination of discounts by insurers: “That’s why you keep seeing complaints from people away from the coast” where prices haven’t been subject to the major rate increases imposed on coastal homeowners.
Some consent to rate
It’s a situation that creates a headache for insurance agents.
“Do car dealers like it when the prices of cars go up?” Powell asked. “If you’re a middleman ... any time the price goes up, it creates aggravation.”
“When you’ve had long-term clients, client you have had for years, and the price has been relatively stable and all of a sudden it jumps up, it oftentimes sends them out in the marketplace to find a better price,” Powell added. “Sometimes they find one and sometimes they don’t.”
Insurance Department officials recommend consumers go shopping for a better price when faced with a major premium increase.
As The News & Observer reported last year, insurers also have been taking advantage of a second perfectly legal way to circumvent the regulatory system and raise premiums – asking customers to pay more than the maximum rate.
Charging rates that exceed the approved ceiling is permissible under state law if the homeowner signs a “consent to rate” form agreeing to the higher price. Insurers that ask consumers for such agreements invariably refuse to renew the policy unless the homeowner agrees to pay the higher rate, which in some cases has been more than 50 percent above the state-approved maximum.
In 2012, 27.6 percent of homeowners statewide agreed to consent-to-rate requests.
Mack, the state regulator, said insurance companies used to turn to consent-to-rate when they viewed a homeowners policy as especially risky for one reason or another, such as ancient wiring or a decrepit roof.
But now, he said, insurers are using it as a pricing tool in order to generate more premium dollars from their customers.