It’s our job to keep the process of buying a new home a positive experience. Keeping your costs low, not just at purchase, but for the rest of your life plays a huge part. We started with the most obvious culprit, homeowners insurance. While insurance isn’t exciting (to most of us), what we found out was extremely enlightening and should change the way you purchase insurance entirely.
Former Farmer’s elite Dan Garzella spent the first decade of his career in the top .5% of commercial agents in the nation. Now an independent broker and president of The Garzella Group, we asked this 34-year-old insurance prodigy why premiums raise before you ever file a claim, and how to avoid throwing away money.
Are there factors that can cause premiums to skyrocket before a covered peril even occurs?
G) “Yes. There’s a lot of reasons. Just like makeup would be a product, homeowners insurance is a product. The insurance company, like any business, needs to make a profit on that product in order to make money.
- You’re used to subsidize their losses. They look at the profitability of the product in the state and they also look at it in the nation as a whole. So you could have no claims on your current policy, ever, but over the grand scheme of things that product is unprofitable and the way they subsidize their losses is by increasing rates as a whole, so the rates continuously go up.
- Deals have to be given to pull in NEW customers, and you pay for that. Basically, you’re taken for granted. Now the insurance companies at the same time your rate has been going up systematically over time, they’re still making a profit, but they can’t take – say, a 10% discount and give it to their entire premium base – all clients that they currently have – because what that does is it drains their existing premium base that they know they’re going to keep 80% of the time for no reason. Instead, they offer those ‘new business price points’ to the new clients. They also need to grow on the front end so they can continue to eat up market share and business type things that you wouldn’t think about being the homeowner. So, the existing clients’ rates go up and up and then they’re amazed when they come to someone like me and I can save them a thousand dollars or more. I can cut their rate by 30 or 50 percent. How is that possible? Well you’ve been with the same carrier for 5 to 10 years.
- Something offsetting their equation. The third factor is the profitability formula for insurance company is premiums + investments. As they’ve taken these premiums they’re typically put in an investment account and they’re making money off of the investments divided by losses plus expenses. And so if any part of that equation is upset in any manner, you’re going to see rate increases as well. A greater example of that would be when the economy collapsed in 2007/8/9, the insurance companies were taking in premiums and actually were having less losses because people weren’t driving as much, so there’s less accidents then there have been. Their expenses remain constant, but their investment portfolio was negative. They weren’t making any money off of that because of the way the economy was, and so because they weren’t making anything on the investment portion of the equation, their profitability of the company, which would normally be positive, was actually negative. And so those clients who weren’t having any claims saw rate increases as well.”
Can these costs be avoided by working with an independent broker?
G) “The difference is if your rate goes up, we can put you with a different carrier. If you have the agent with the one option, your renewal process is automatic. Those agents won’t even make a phone call, but if they do, your phone call would be, ‘Hey, this is Joe with ABC Insurance co. and your policy is coming up for renewal in August, when you get it, please take a look at it, if you have any questions let us know.’
In the background when their rates go up 30%, clients call and say, ‘Hey, why did my rates go up 30%?’ The agent can tell them all the information that I just told you, which they don’t want to hear. They don’t care about the company’s profit and they don’t care about everyone else’s exposure, they just care about them and their history.
And so the conversation that they are used to having is ‘Okay, we can increase deductibles to try to lower the premium,’ whereas the conversation they have with me is, ‘Don’t worry about it, I’ve got 14 other carriers. We’ll run it through all of our different carriers and see who has the best offering’ and then we’ll give you the option and see if you want to move forward with it or not.”
– Bottom line is that most people don’t take the time to look at the money they’re shelling out on their cookie-cutter policy. When it comes to buying homeowners insurance, working with a broker such as Garzella ensures you a team of people behind the scene working for you and your bottom line. And there’s something to be said for providing an office you can actually walk into and a staff at your disposal. To contact the Garzella Group, call 480-264-7226, and tell him Lux sent you.
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