Friday, April 12, 2013

The effect of State Farm's dropping insurance rates


State Farm is California’s biggest provider of homeowner’s insurance and any change in the premium rates that the company makes will have a ripple effect across the state. The company recently announced that it will be reducing insurance rates for over 1 million policy holder from April of this year. This will mean, on an average, a reduction of insurance premiums by approximately $100. State Farm insures about 1.6 million homeowners in California and the benefit of the rate reduction should be available to around 85% of them. The rate are expected to come down by 8.5% in San Francisco, 12.3% in Los Angeles County, 12.4% in San Diego County, 14.1% in Orange County and 21% in Sacramento County. The total annual savings to homeowners in the state is expected to be in the region of $160 Million.

Balancing pervious rate increases
State Farm had increased rates by 6.9% in January 2009 and again by the same amount in February 2010 and this reduction should allow homeowners to pay in 2013 what they were paying for insurance on 2008.
The reductions in insurance rates are based on a new system that does away with the old ZIP code based risk assessment. The new system works on micro-zones and breaks down risk factors such as fire risk and geological factors based on the latitude and longitude of the home. This allow for a much greater fine tuning to the risk assessment and consequently a revision in the insurance premium rates. State Farm says that this new system will allow the company to provide its customers with more competitive insurance quotes and better service.

The California system seems to works
It would appear that California’s system of regulating property and casualty insurance rates is working. The new fine-tuned policy being adopted by State Farm is a logical fallout of the state’s efforts to keep insurance rates low and the market competitive.

The move by State Farm should cause other insurers to take a look at their pricing structure to determine if they are overcharging for insurance and to find ways to reduce premiums. This will trickle down effect will benefits homeowners across the board. And if the other insurance companies do not follow suit, the California insurance commissioner has the authority to begin proceedings to study the question and determine why they have not cut their rates. But with insurance being such a market driven business, the chances of this happening are small. Insurance premium costs are a major factor in determining the choice of insurers and none of the other companies will want to risk losing out.

Using the savings
Many studies show that most homes in California are under insured. While it may be tempting to pocket the savings or spend the money on something else, examining the risk coverage and looking for weak areas where the coverage could and should be improved and using the money to cover the shortfall is always a good idea. The fine tuning that State Farms has done means that local risk factors can be more clearly identified and more balanced coverage will be possible. Additional savings by reducing the amount of coverage where it is not required can be used to increase risk coverage where the risks are higher. The approximately $100 savings that State Farm policy holders will benefit from can go a long way in achieving this.

Contacting an insurance professional to discuss policy modifications makes a lot of sense right now.

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