Oklahoma's Tornado Tragedy Could Send Your Insurance Costs Higher

Oklahoma Tornado school
Getty Images
The tornado that devastated Moore, Okla., this week reminded everyone of how important it is to protect yourself from the potential financial impact of natural disasters. But as essential as homeowners' insurance is, catastrophic events like this also make it more likely that you'll end up having to pay more for that protection.

Higher Rates Have Already Been Coming
One reason insurance premiums are subject to government regulation is to protect policyholders from potential price-gouging from insurers. Yet regulators are also aware of the fact that if they force rates to remain too low, insurers won't be profitable and will go out of business, destroying the vital insurance market.

In recent years, a number of high-profile disasters -- including two major East Coast hurricanes and several tornado and storm events similar to what happened in Oklahoma City -- have caused big losses for major insurers.

With well-known insurance companies Allstate (ALL) and Travelers (TRV) suffering billion-dollar losses from claims from Hurricane Sandy alone, regulators have already faced more rate-hike requests from companies seeking to recover those losses.

In addition, low interest rates are keeping insurance companies from earning as much investment income as they did in past years. Insurers invest the premiums you pay, getting income from those investments until they have to make claims payments.

The lower the returns, the higher insurers have to set rates in order to earn the same net profit. Even policyholder-owned mutual insurance companies have had to raise rates, giving their shareholder-owned counterparts more latitude to follow suit.

Is There Any Potential Relief?
For consumers, higher rates seem almost inevitable in the short run. But the home insurance market runs in cycles, in which higher premiums give insurance companies a strong financial incentive to boost their presence in lucrative markets, increasing competition and eventually pulling rates back downward.

In the interim, your best bet to keep costs down is to tailor your policy to make sure it provides exactly the coverage you want.

Making sure your policy limits are up to date and your deductibles are as high as you're comfortable with can help you cut your premiums. Moreover, talking to your insurer and shopping around can potentially reveal discounts or other promotions that can save you money.

Even with those steps, you'll probably pay more for insurance than you want. But the cost is still a small price to pay to ensure that a natural disaster doesn't destroy your financial future.

Motley Fool contributor Dan Caplinger has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned.

Increase your money and finance knowledge from home

Introduction to Retirement Funds

Target date funds help you maintain a long term portfolio.

View Course »

What Is Your Risk Tolerance?

Answer the question "What type of investor am I?".

View Course »

Add a Comment

*0 / 3000 Character Maximum


Filter by:

Of course we hear very little about their profits and they still operate with two sets of books, one to show a loss to the government and another to show a profit to their shareholders.

May 23 2013 at 12:02 PM Report abuse +1 rate up rate down Reply

I'm sure the Oklahoma tornados will, (somehow), cause gasoline prices to go up as well.

Who are they trying to kid with this b.s. anyway?
Insurance companies are masters of the , "fear and consumption", brand of marketing. They have infiltrated the business world to the point that you can't even be in business unless you carry ridiculous amounts of general and professional liability, both of which skyrocketed in price after 9/11, yet losses due to acts of terrorism are disclaimed by the underwriters.

It is their job and business to pay out claims when disasters or incidents occur, so I don't see why the entire country should have to reimburse them whenever such events take place. They are rich beyond comprehension, and the notion that they are suffering because of one or two well publicized disasters is ridiculous.

May 23 2013 at 10:58 AM Report abuse +1 rate up rate down Reply

Legalized criminals...

Go to the store and buy a gallon of milk and ask yourself what your reaction will be if/when the clerk tells you that if you actually drink it you will have to return and pay more...

Or your neighbors will along with you...

American 'idiot' politicians and citizens go for this with no recourse or rebellion..? You deserve it...


May 23 2013 at 10:28 AM Report abuse rate up rate down Reply

Their losses are part of business. If they raise the rates everyone should drop their sorry asses. These are the things the government is supposed to be helping us with not allowing illegals to become citizens, or closing gitmo etc.

May 23 2013 at 10:10 AM Report abuse +3 rate up rate down Reply

Thats why I live where I live! No flooding, no Tornadoes, NO hurricanes. Why do I have to pay more! I should pay less.

May 23 2013 at 9:08 AM Report abuse -1 rate up rate down Reply

Sooooooo, let see if this is right, its OK for the insurance companies to make BILLIONS year after year but IF they get hit one year having to PAY out claims they will go OUT of business?? The feds have given them loop holes JUST like big oil , they arent "going" anywhere , they ARE however just greedy. When it COMES time to actually PAY a claim they STUFF it in your backside and pay you 20% of what they should..............asshats

May 23 2013 at 7:48 AM Report abuse +7 rate up rate down Reply

No sheeeet Dick Tracy...This is all the excuse Insurance companies need to raise rates.....

May 23 2013 at 6:11 AM Report abuse +6 rate up rate down Reply