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.
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