Do you wonder if the recent wave of catastrophic hurricanes will cause your car insurance rate to increase? Normally, the answer would be no. However, with the multiple, severe storms of 2017, the losses auto insurers face are much greater than normal. Read on for our analysis of who will pay a higher car insurance rate.
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Wind, Rain and Storm Surge, Oh My
Wind, rain and storm surge are the three ways in which hurricanes typically damage vehicles. The effect these hazards have on your vehicle can vary. Below is a description of how damage is most likely to occur:
- Wind: The typical impact on vehicles from hurricane winds is falling branches or trees. Garaged vehicles are unlikely to be damaged by wind. Even vehicles parked outside can be moved away from dangerous items overhead. Therefore, wind damage is typically not financially threatening to insurers.
- Rain and storm surge: Rain and storm surge also isn’t typically financially threatening to insurers. The reason for this is that people often evacuate areas that are flooding. People evacuate by loading up their car with their most prized possessions and driving away from the rising water.
The reasons above explain why damage to vehicles is usually limited in hurricanes. However, the storms of 2017 were different.
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How The Storms of 2017 Were Different
Fortune magazine* estimated Harvey flooded 300,000 to 500,000 cars in Houston, Texas alone. They also estimated 200,00o to 400,000 cars flooded by Irma. Additionally, Maria flooded even more vehicles. In total, approximately one million vehicles were flooded.
Many of these vehicles weren’t insured. In this case, uninsured vehicles are good news for both insurance companies and the drivers that do insure their cars. Insurance companies benefit from cars not being insured because they won’t need to pay for the damage.
For drivers that do insure their cars, uninsured cars are good news for a similar reason. For drivers, more uninsured cars means lower costs to insurers. This translates into a lower rate increase going forward.
What’s the cost of the flooded cars?
The insurance council of Texas says that roughly 85% of drivers have auto insurance. However, only 75% of the insured drivers have comprehensive insurance. Multiplying 85% times 75% equals 64%. This means 64% of drivers had comprehensive insurance. Comprehensive insurance is the type of insurance that pays for vehicles damaged by flood waters. Insurance companies will reimburse only the 64% of drivers that purchased comprehensive insurance. Drivers in the other 36% must pay to buy a new car or pay for the repairs with their own money.
That leaves 640,000 cars for which the insurance industry will need to pay. The estimated average value of these cars is $10,000. Multiply $10,000 times 640,000 yields a $6.4 billion price tag.
How will this affect my car insurance rate?
To determine the impact on car insurance rates, let’s assume 2016 and 2017 are the same, except for the additional $6.4 billion in losses. $6.4 billion represents a 4.3% increase losses for the year. Using industry standard loss ratios, prices in 2017 needed to be nearly 5% higher to achieve target performance.
Fortunately, a series of storms like this do not come through every year. This analysis assumes storms like Harvey, Irma, Maria and Nate have a frequency of every ten years. Assuming costs are passed equally to all drivers across the country, this would translate into a 0.5% increase.
Many insurance companies share the risk of catastrophic events with reinsurers. Reinsurers are other insurance companies that sell insurance to insurance companies. The hurricanes of 2017 will lead to increases in reinsurance prices. These prices will then lead to higher prices for drivers.
In short, we expect the cost of car insurance to go up in flood prone areas. Some areas could experience a 1% to 2% increase as a result of these storms. The increase will go into effect over the next year or two. Drivers in areas not prone to hurricanes are also likely to see some incremental increase in their car insurance rate. Fortunately, the impact will be much less for these drivers.
The Problem Drivers Already Face
Many drivers are already experiencing rapid car insurance rate increases of 3% to 5% per year. Adding to that increase is problematic for many drivers.
Consumers have suffered a flat income years. While income has been flat, insurance prices have skyrocketed. Unfortunately, having even faster rate increases makes the cost of insurance even more difficult to bear.
Consumers Deserve to Know Which Insurers are the Best
The corporate culture of insurance companies is well established. Catastrophic storms will not change that culture. Instead, catastrophic storms are when companies show their true colors. Finally, consumers can put the cute advertisements aside and measure actual company performance.
Unfortunately, most people don’t know how good their insurance company really is. Finally, it’s possible to know. The ValChoice analytics engine grades companies on value, claims handling and service. Get a report on your company so you know how good of an insurance provider they really are.
At ValChoice we believe that anyone required to buy a product or service deserves to know the quality of the service they must buy. Transparency has never before been available for insurance. Technology drives the change that makes transparency possible. Hence, our mission is to provide this much needed information to consumers.
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*Fortune magazine article citing number of automobiles damaged, http://fortune.com/2017/09/20/hurricane-irma-harvey-damaged-cars/
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