By DAVID CLOUSTON

Salina Journal

Tornadoes that hit Chapman and Manhattan on June 11 helped make June the month with the highest insured property damage and crop losses in recent history.

Now, the effects of those and other losses have begun showing up in higher premium rates charged by many property and casualty insurers, as customers renew their policies.

Since July 1, the Kansas Insurance Department calculates that automotive coverage premiums -- not including motorcycle and recreational vehicle policies -- have gone up an average of 3.74 percent.

Homeowner coverage premiums have risen, on average, 5.75 percent.

Company spokesmen for insurers American Family and State Farm said Thursday that the storm losses are not solely to blame for the increases. Those losses will be absorbed over a period of years. The more immediate culprit is simply inflation and overall escalating day-to-day costs of doing business, they said.

Premium rates change each year, rising and falling depending on losses and claims by those insured, said Assistant Kansas Insurance Commissioner Bob Tomlinson. The number of customers that individual companies have insured in the state also makes a difference in their ability to spread out their losses.

New flex rate system

Starting July 1, property and casualty insurers in the state also began using a new flex rate system approved last spring by state lawmakers. As long as premium rates do not increase or decrease by more than 12 percent a year, companies can make the adjustment and notify the State Insurance Department of the change after it takes effect.

"Prior to that time we had what was called a 'file and use system,' " said Tomlinson. "You would file with us, and we would either approve or disapprove the rate, then you would be allowed to use (that rate)."

The Insurance Department plans to monitor the new rate system carefully to ensure that it's nondiscriminatory, he said. Because the flex rate is an average -- a company could file for a rate increase of 3 percent, and have some customers paying as much as 7 percent to 9 percent more and others less -- "We are interested in whether it changes the marketplace, specifically in rural areas," Tomlinson said.

The Insurance Department estimates that June property and crop losses exceeded $396 million. The Chapman and Manhattan tornadoes alone were blamed for more than $87.5 million of that figure. Insurance Commissioner Sandy Praeger estimated insured property and crop damage for January through June 2008 at nearly $596 million.

The previous record month for damage was May 2007, the month of the Greensburg tornado. Damage for that entire month of May was about $230 million.

One way companies such as American Family Insurance look at their business is by loss ratio versus expense ratio, said company spokesman Steve Witmer.

Witmer said the ideal ratio is around 1:1, meaning companies pay out in claims roughly what they take in, in premiums. But in recent years, there have been heavier than anticipated claims, of greater than expected severity.

Thus American Family's combined ratio in 2007 was 1.11:1, meaning the company paid out $1.11 for every dollar it took in, he said. In 2006, the ratio was 1.13:1, and in 2005 it was 92.8:1.

Revenue from the company's financial investments helps offset losses from insurance underwriting, as the company experienced in 2007 and 2006, Witmer said. Now the company is facing a double-whammy, with losses from both its underwriting and its investments.

When that happens, the company has to rely on its built-up reserves, Witmer said. Suggestions that the company will increase premiums to offset its investment losses are not true, he said.

Insurance rate making is based on looking forward, taking into account past loss experience, Witmer said.

"You can't factor expected investment returns into rates," he said. "That's just how we operate. It doesn't factor into the equation."

State Farm spokeswoman Tamara O'Connor was less definitive. She said investment losses do help determine future rates, "but they pale in comparison to what claims and the regular cost of doing business have on influencing rates."

"The biggest factor was based upon our noncatastrophe experience -- that's inflation, and the cost of goods and services increases for everyone," she said.

State Farm homeowner policy holders saw an average of 0.6 percent increases in their premiums, effective in April. Auto policies went up an average of 1.7 percent, effective in October, O'Connor said.

Another factor influencing individual premium rates is the use of customers' credit history information to set their rates.

Most major insurance companies in America already use credit history-based scoring. American Family began setting rates that way for homeowners' policies effective Aug. 1, 2007, and will begin setting auto polices the same way effective Dec. 1.

Insurance scores aren't the same as credit scores. Although both use credit information, insurers use their own mathematical formulas to predict the likelihood of insurance claims being filed, and how expensive those claims might be.

Insurers have determined people who use credit responsibly are likely to file fewer claims, said Salina American Family agent Tim Newell.

A homeowner with stellar credit who's eligible for the company's best premium rate can realize up to a 24 percent discount on his or her policy, while someone with poor credit can face a surcharge of up to 50 percent, he said.

The company will reconsider a customer's score if the customer can document that his or her credit history suffered from circumstances not within his or her control, such as a bankruptcy due to treatment of a medical condition, or a divorce, Newell said.

On the other hand, people who merely overspend on their credit cards and discharges their debts through court will have a hard time convincing the company to give them a break on their rates, he said.

n Reporter David Clouston can be reached at 822-1403 or by e-mail at dclouston@salina.com.

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