All State

Insurance giant, Allstate has fired a test shot across the bow of the insurance industry by dropping coverage for former clients in the Gulf States. Those are the States that are frequently hit by hurricanes. 2006 was not a bad year for the insurance industry because more natural disasters occurred in countries other than the United States where property values are high and the resulting claims paid are bigger dollars. However, Allstate and the other insurance companies learned a hard lesson when Katrina destroyed most of New Orleans.

Some guru who used to work in the Actuarial Division of Allstate (old Charlie* who was getting too aged to actually work in Actuarials) finally figured out that writing policies in areas where storms are very frequent and cost lives and cause severe property damage, was akin to writing life insurance on people who were a bad risk, actuarially. Allstate began by dropping policies in New Orleans and is now refusing to write policies for areas of Florida. In Florida, residents already pay more for property insurance if they live along the coastlines. But the higher premiums still do not cover the risk, so the people at Allstate, in whose hands you are safe, decided to do a little serious risk management.

There is a limit on how much a company can increase premiums to cover the bad risks in their portfolio and dropping selective customers has been done before. In the automobile insurance industry, many carriers opted to drop motorcycle insurance because they believed these policies were costing them more than they were earning. What they may not have counted on was that those bikers often moved all of their insurance to another company. Life insurers commonly charge more for insurance if you are in your later years since you will not live long enough to contribute the value of your insurance payout in premiums. If a company gets a reputation for high rates, people will shop elsewhere, often without looking at the details or reasons for those higher rates. Allstate wants to keep its customers in the non-hurricane regions.

This may be good news for those of us who live in Northern Ontario. As insurance companies, and I am sure others will follow Allstate’s lead, drop their high-risk policies in places where hurricane and tornadoes are regular occurrences, the rates for the other policies should drop. Once these companies see the growth in their coffers because of fewer claims, they will no doubt look to eliminate other high-risk areas. Flood, earthquake and volcano-prone area could be mapped and the insurance sales personnel in those locations marked redundant, saving more money. Profits could rise into the double-digit billions!

Before we who live in the North where our most common natural disaster melts in the springtime get too jubilant, consider what may happen when the insurers get picky about other coverage. Already there are murmurs about people who smoke not being covered for health costs if they become sick from a smoking-related illness. Next will be those who imbibe too much or use ‘recreational’ drugs. Poor diet and obesity will soon follow.

Those drivers who have an accident while talking on their cell phones would be a good target for no insurance coverage. Can you imagine a rider on your car insurance that says if you have an accident while driving and using a cell phone your policy is void? And it would not be too hard for the insurer to prove your liability by tracking your call (someone, somewhere knows when you use your phone) and matching it to the time recorded by the ‘black box’ in your automobile. Ten percent over the speed limit when you had that accident? Sorry, you lose your house on Park Place, lose all your savings and go directly to jail. Do not collect $200 from your insurance company.

Perhaps we are entering an era of ‘my fault’ insurance. If you do something dumb to cause your own demise, loss of health or property, then you have to pay your own way. If you are planning on buying that vacation home in Florida you ought to consider that someday the winds and rain will come and your dream home may be lost or severely damaged. High insurance costs are already coming into the market in Florida as people move away from the coastal areas. But what happens if you cannot insure your little bungalow built on former swampland in Florida? Will you buy or look elsewhere? Is the current glut of vacation homes on the market in the Gulf States an indication that maybe Charlie at Allstate knows something we all should know?

We will know when risk management in the insurance industry gets serious. That will be when Allstate changes its name to Some State Insurance.

(*Not his real name, because when the Federal Government takes Allstate to court for not offering equal coverage to all states, Charlie will be the fall guy.)