Author: VU Faculty

One of your insurers has initiated a surcharge program for renewals of insureds who have had even a single claim in the past three years. Is this legal? Is it equitable? What do you think? To find out what our faculty think about this, read their heated debate.

"One of our carriers is proposing a surcharge system on homeowner's policies. They are proposing a 35% surcharge on a renewing homeowner's policy if there has been a claim in the previous 3 years. My problem with this system is that the surcharge would apply even if the claim was weather related ( wind, hail, lightning, etc. ). The only exceptions would be for a claim that was related to a numbered cat loss. Can the carrier surcharge for a weather related loss?"

Interesting question and probably something we'll see more of...or at least attempts to implement. There are several issues that must be considered, not the least of which is what you mean by "can they?" One question is whether they can legally charge to recover for past losses on an individual account. Another is, even if it's legal, is it "right?"

We ran this by our faculty and got the divergent responses below.


My knowledge is limited but I believe there is a general, probably mostly "unwritten," principle in casualty ratemaking, that "recoupment" is not allowed, meaning that next year's rates cannot be calculated so as to recoup losses sustained during this year.  It is the flip side of the principle that "excess profits" don't have to be taken into account in calculating future rates (except in the few states that have excess profits laws...I forget which ones they are, but I think Florida is one, at least for WC).

When I taught this at a very basic level, I used to refer to the phrase, "Les jeux sont faits, rien ne va plus" (the bets are made, finished — no more bets), which I believe is what the croupier says when the roulette wheel starts to spin. You win or lose based on that round, and then you start over again for the next round. Rates are usually intended to be predictive of FUTURE losses, not past losses, though such "group" loss experience and trends can be considered in promulgating future rates and premiums.


Here in Florida our statutes prohibit non-renewal solely on the basis of claims that are acts of God.  There is no reference to a premium increase in the statute. As long as the rate plan had been approved by the Department of Insurance, then it's legal. It may be bad P.R. and bad image, but it's legal.


The first issue is that personal lines like HO are usually subject to rate approval. In Minnesota, the Department of Commerce is very tough on weather related claims issues such as surcharges and cancellations. I would suspect that if this type of surchage was approved, the insurer presented a fairly good case. On face, the 35% does seem high for a single incident.

On the other hand, the HO market in Minnesota is pretty tight. It may have passed through based on the underlying non-claim pricing of the product. That being a very strong discount for not having claims.

In this example, the numbered cat exception may have been the give and take with the regulator. As to the final question, the carrier can charge anything they want if it is approved by the Department of Commerce. If they were able to convince the regulator to approve a surcharge for houses painted yellow, they could surcharge the policy.


It sounds like an attempt by the insurer to get out of the market. It is clearly not based on actuarial calculations but simply one loss — you get surcharged. I don't see how it could get past a regulator.


For PP auto the insurers do this on Physical Damage.

Is this only for new business? If thats the case, then there may not be a huge problem. It would be like any other "underwriting" charge such as "poor housekeeping."

But, if it is for existing homeowners, then I agree that it is unsettling for Homeowners. IF I were a DOI, I'd be very reluctant to approve for weather related items over which the insured had no control. Also I'd like to see a "one loss exception" before the surcharge went into effect.


I researched this concept a few years ago. Many companies I contacted seemed interested in a claims surcharge plan. However, of the few filed plans I could find and from all the discussions I had, individually, with insurers, I don't recall seeing a plan with, or any company interested in, a surcharge for one claim in 3 years. There was no interest in, nor any filed plan, that would, or did, levy a 35% surcharge for one incident.

Most used or preferred a "3 claims within 3 policy years" plan whereas some favored a "2 in 3 year" plan. One insurer had or favored (I don't recall) a "2 in 1 year" or "3 in 3 years" plan. All did, or favored, exempting claims caused by nature, whether or not a CAT number is assigned. Some even preferred to exempt claims which resulted in no payment (due to deductible or exclusion).

The percentages I saw, or that were discussed, started at 5% or 10% for one claim and increased by ten percentage points for each additional surchargable claim up to three. Charges for more than three claims were not shown or discussed. I believe that the insurers that filed such plans did so in states where statute or regulation prohibited, or seriously hampered, cancellation for policies with such claim activity.

One of the key points raised during these discussions was the statistical reporting that should compliment such a plan. Most of us intuitively believed that high claim frequency policyholders should pay a higher price for their insurance. However, we were unsure if existing statistical plans used by insurers could be modified, in a cost effective way, to enable the surchargable claims to be separately identified so that the filed surcharges could be actuarially evaluated for adequacy as experience developed.

I believe the matter was not pursued further because of lack of actuarial support.


This trend is unsettling. One of the premises of insurance ratemaking is that the premium should reflect what is likely to happen in the subject policy period. It should also reflect the experience of the group, not an individual exposure unit/insured. WC experience rating is hardly this onerous and tempered by the credibility of the individual insured.

This basically sounds like a post-expiration deductible or just a means to recover part of an existing loss rather than a true actuarially rate-based premium. I don't know anything that prevents this under most typical ratemaking statutes, except I hope that DOIs would look at this type of pricing structure closely and insist that the carrier demonstrate how a 35% surcharge is predictive of future losses.

Do you have an opinion? If you have implemented agency underwriting procedures that have been effective in this area, feel free to email your tips to Bill.Wilson@iiaba.net and we'll post them here:

Your comments here.