Nebraskans got bargain homeowners insurance, on average, over the past five years because their damage claims nearly matched the premiums they paid, according to a report from a Washington, D.C., think tank.
But that also means insurance companies lost money because they didn’t charge enough to cover their administrative expenses after payouts for damage from hail, fire, wind and other causes.
Other states, including Texas, had higher claims but also higher insurance premiums, so their homeowners’ insurers fared better financially, said a report by the R Street Institute of Washington, D.C.
Nebraska Insurance Director Bruce Ramge said Nebraska’s regulatory system requires insurance companies to report the rates they charge but does not require prior approval unless a market, such as homeowners insurance, becomes uncompetitive.
“Our market is sufficiently competitive” and insurers doing business in the state are financially solvent, Ramge said. In 2016, the latest year with complete figures, 644 companies wrote property and casualty insurance in the state.
Comparing monthly premiums with the cost of claims yields a “loss ratio,” a metric that insurance companies use to judge whether their premiums were too high or too low in relation to the claims they paid.
The R Street report said that in Nebraska from 2011 to 2016, homeowner insurance companies paid out an average of 93.8 cents in claims for each dollar in premiums they collected.
The average for all states was 52.9 cents per dollar, with the lowest, 27 cents, in Hawaii. Closest to Nebraska were Colorado, 88.7 cents; Montana, 86.6 cents; and South Dakota, 82.4 cents. Iowa’s five-year average was 48.6 cents.
For Nebraska, administrative costs no doubt pushed the homeowners insurance business into losses, said Ray Lehmann of St. Petersburg, Florida, a senior fellow at the institute and author of the report.
The high loss ratio doesn’t mean something is wrong with Nebraska’s insurance regulation, Lehmann said, but it’s a factor that deserves watching.
Continued losses weaken an insurance company’s ability to pay its claim obligations, he said, and one of the roles that state insurance regulators play is to ensure that companies remain solvent and pay their customers’ claims.
If insurers foresee continued losses ahead, they would stop selling policies in a state, he said.
“The concern would be that over the long term, insurers are likely to write less coverage in a market where they can’t make attractive returns.”
If loss ratios are too low, insurance companies are making excessive profits and competition may be lacking in a state, he said.
Despite the high loss ratio, Nebraska tied for 16th among the states on the methods it uses to regulate rates for home, auto and commercial insurance, with higher rankings for methods that let companies set their own rates according to market demands.
Lehmann said R Street is a charitable organization that analyzes how government handles public policy issues like insurance, technology, criminal justice, energy and general governance, with the idea that government does some things well but should stay out of areas where it does not.
Ramge, the Nebraska insurance director, said claims may have been higher than usual in the reporting period because weather, which causes most homeowner claims, varies widely.
Generally, an extended period of high homeowner claims in a region will cause rates to increase, but companies also look at long-range trends to set rates that are competitive so they can gain customers.
He said the department makes sure insurance companies are solvent so they can meet their claims obligations.
The Department of Insurance surveyed property-casualty companies in December about their experiences with the department. Of 167 responses, 100 were extremely satisfied, 59 were mostly satisfied, six were somewhat satisfied and two were not satisfied.
Loss ratios for homeowners insurance is one of several factors that the R Street report used to grade states’ overall property and casualty insurance markets.
Nebraska scored above average in the other categories, ending up with a grade of B-, down from B in 2016 and, overall, ranking 23rd among the 50 states. Iowa received a grade of B, down from B+ in 2016, and ranked 17th.
Besides having a lower loss ratio, Iowa got a higher rank than Nebraska because its insurance commissioner is appointed to office by the governor for a certain term and can’t be removed without cause.
Nebraska’s insurance director also is appointed by the governor, but, as in 18 other states, can be replaced at any time by the governor.
Some other states were ranked even lower on the report’s “politicized” scale for having elected insurance commissioners. “Insurance regulation is a technical matter and by and large should be insulated from the political process and prevailing political concerns,” the report said.
The R Street report showed Nebraska tied for fifth on fiscal efficiency, such as low taxes and fees; ranked 13th for solvency regulation; had the 15th lowest loss ratio for auto insurance; tied for 14th in insurers’ “underwriting freedom”; and was one of 10 top-ranked states for high-risk auto, homeowners and workers’ compensation insurance.