This is a short blog on a complex subject – but you heard it here first. Insurance industries are embracing complex software programs that are engaged in CAT modeling – short for Catastrophe modeling – which entails incorporating an enormous amount of data into the risk analysis process.

The computers at Risk Management Solutions in California contain mathematical models of every U.S. disaster from the 1812 earthquake that toppled chimneys in St. Louis to the 9/11 assault that brought down the twin towers in New York, as well as 100,000 synthesized “extreme events.”

RMS runs its disasters through your community – and sometimes right through your home – to see how you’d fare in a hurricane, hailstorm, earthquake, epidemic or terrorist attack. The firm sells its knowledge to insurance companies to help them decide whom to cover and how much to charge.

This technology is reshaping the nation’s $626-billion property casualty insurance industry. It is using this massive assemblage of data to replace traditional uniform coverage at uniform rates with an increasingly wide array of policies at widely varying prices.

Traditionally, insurance companies group people facing similar dangers into pools. Company actuaries determine how the frequency of accidents or illnesses that have befallen pool members in the past and resulted in claims. Insurers set their rates based actuarial predictions. This approach encourages pools as big as possible, since the bigger the pools, the more the actuaries have to work with; the result is greater accuracy.

But insurers are in the business of speculating on the future. The question has always been: what if insurers could know more in advance? That’s the promise of CAT modeling and new data-mining methods that let companies use a person’s income, education or ZIP code to predict future claims. It is allowing insurers to raise rates or refuse coverage for the very people who need it most – low- and moderate-income families, for example, or those who’ve suffered such setbacks as unemployment.

As the industry expands its ability to “slice and dice” customers and applicants, one State Commissioner of Insurance worries that “the risk-transfer mechanism at the heart of insurance could break down – if that happens, insurance will stop functioning as insurance.”

May is Disability Awareness Month so I was happy when someone emailed me the following questions: “Should I have disability insurance in addition to a term life insurance policy.” The answer….ABSOLUTELY!

The facts may surprise you…

• 1 in 3 working Americans will become disabled for 90 days or more before age 65

• Odds of a disability are nearly three times greater than death between the ages of 25-65

• 48 percent of all home mortgage foreclosures are due to a disability

• One in four families that files for bankruptcy protection identified an illness or injury in their family as the major reason for bankruptcy.

That depends. If group term life insurance is free, paid for you by your employer, then yes…take the coverage. However, most of the time, if you are in good health, the answer is no. Why? Because mortgage life insurance and group term life insurance is more expensive.

The main difference between individual life insurance rates and group rates is that the premiums in group life insurance rates go up every five years (or so), because the risk of death associated with age increases. The downsides of group life insurance coverage are:

• You may lose life insurance coverage if you change jobs
• Limited life insurance coverage options and features to select from
• Group policies are more standard than individual life insurance plans

Mortgage life insurance is an insurance policy that will repay your mortgage in the event of your death. It rarely makes sense to buy insurance for a few reasons. First, you should not just insure yourself to provide funds to pay off a single liability, in this case your mortgage. Instead, you should take your overall financial picture into account when buying life insurance. Second, most of the time the mortgage life insurance policy’s death benefit decreases as what you owe on your mortgage decreases..thus making this type of insurance more expensive every year.

Your local fire department has a direct impact on the cost of your homeowners’ insurance. That’s a fact that is probably known to the fifteen percent of us that research everything thoroughly, and news to the rest. While it makes sense, it’s not something many of us consider when we’re looking for a new home.

A North Carolina television station did a little research on the issue and learned that you could be paying much more than you need to for insurance and the fire department has no real incentive to help lower your rates.

State fire marshals rate fire departments and that ranking is one of the criteria insurance companies consider for homeowners’ insurance. Generally speaking, fire departments in urban areas tend to have better ratings because their facilities are more concentrated – closer together – and there is an abundance of hydrants distributed throughout the town’s network of streets.

What the North Carolina reporter found was that the fire departments in cities and towns like Raleigh, Durham and Chapel Hill typically have good ratings. But in some new neighborhoods outside city limits, fire departments ratings can lead to insurance rates that are nearly 50 percent higher. That can amount to $600 or more.

“Most districts in this state can improve their ratings, especially the ones that have class 9 ratings,” says A.C. Daniels with the Office of the State Fire Marshall. Inspectors base the rating on many things, like water pressure in hydrants, equipment, response time and firefighter training.

“I don’t want people to feel like they’re getting ripped off,” says Tim Lucas with the North Carolina Rate Bureau. “People have to understand there is a risk. The further the fire truck has to get to the fire, the more they’re going to pay in insurance premiums.”

Lucas represents 180 insurance companies that write homeowners policies in the state.

It’s something you probably wouldn’t know unless you’re a law student or involved in a lawsuit with an insurance company, but the industry holds an exemption from federal antitrust laws. The history of this exemption and how it came about goes back through the entire history of antitrust legislation, but the definition of the exemption for the insurance industry stems from the McCarren-Ferguson Act of 1945 – the last major law enacted on the issue.

The law states that exempt activities must meet these three tests: (a) constitute the “business of insurance”; (b) be “regulated by State law”; and (c) not constitute “an agreement to boycott, coerce, or intimidate, or [an] act of boycott, coercion, or intimidation.”

Generally, these requirements have been defined by a series of cases in the years following passage of the McCarren Ferguson Act. If you’re wondering why the industry is so homogeneous, here’s a telling segment of a report delivered to Congress by the General Accounting Office in 2005:

“For example, ratemaking and related activities deemed by courts to constitute the business of insurance have included concerted actions among insurers to set agent commission rates; to fix the rates of various types of insurance pursuant to joint agreements and rating boards; to classify and re-classify risks; to agree to pay damage claims on the basis of agreed-upon labor rates; to limit or refuse to offer certain types of coverage; and to jointly undertake activities to limit risks by, among other things, revising policy language.”

That’s why they come and go as they please and write your policy in their best interests. There’s no room for negotiation because there doesn’t have to be.

It will NOT cost you a dime to replace your existing term life insurance policy. The medical exam is paid for by the life insurance company. It will only cost you a little of your time to take the medical exam.

However, DO NOT cancel your existing policy until the new policy has been placed into force. That means you have been approved and already paid your first premium.

It’s a good idea to shop around every few years. You may need additional coverage…or you may have stopped smoking or lost weight which can cause your rates to decrease.

I hope everyone has a safe and happy Memorial Day! Check back tomorrow for a new blog post.

Drinking and driving can cost motorists more than a lost license, a fine and jail time, according to a major South African Auto Insurance Company. The claims manager at South African Mutual and Federal said that a motorist driving under the influence was de facto considered uninsured, according to the policies they issue.

“As a major insurer, we know from many years of experience that consumers often pay insufficient regard to exclusion clauses in their policies, said Keith Kennedy. “A key policy exclusion in motor insurance stipulates that driving with a proven alcohol level above the statutory limit invalidates your coverage.”

“If you drink and drive, you are driving without insurance and that leaves you liable to a whole host of undesired consequences,” said Kennedy. The financial impact of a multi-car collision could run into figures that permanently damage a person’s economic well-being. Drivers are vulnerable for claims and lawsuits from other drivers, passengers and insurance companies as well.

“Most people would be ruined for life covering the cost of the physical damage to vehicles,” according to Kennedy. “The price of a new windscreen and airbag replacement – excluding the cost of bodywork repair – could exceed 50,000 rand on a luxury vehicle.” That is merely one car in the collision and does not take bodily injury into account.

Drivers found to be over the legal limit are arrested and the maximum penalty for drinking and driving is a fine of 120,000 rand and/or six years’ imprisonment (One dollar equates to about seven rand). One other unique feature of drunk driving policy in South Africa is that along with loss of license, a driver could have their car confiscated by the Asset Forfeiture Unit.

The six o-clock news stories about identity theft have pounded the problem into our collective consciousness. The insurance industry has responded with some half-hearted policies that basically cover the cost of restoring your identity, but not the cost of the losses you may have incurred. It may not be a problem that the property and loss industry sector can ignore much longer. A recent survey exposes the depth of the problem.

The Experian-Gallup Personal Credit Index survey released in early October indicates that approximately one in five (19%) consumers report that financial information has been stolen (including a bank credit card number) and one in seven (14%) consumers report that other personal information has been stolen.

Most of us would anticipate that this activity amounted to unauthorized charges on a credit card, which much of it does: 63%. What is surprising and a little alarming is that 55% reported unauthorized charges or withdrawals from their checking account, and that 39% reported improper use of their personal information to open an account or engage in a transaction. And 22% of respondents, nearly a quarter, reported that someone obtained a new credit card in their name.

These numbers are enormous. Taking responsibility for the threat has yet to rise in proportion; 57% believe that “it won’t happen to me.” On the other hand, 70% “I would do more to prevent it if I knew what to do.” Unhappily, an insurance policy is not one of the tools currently available.

Believe it or not, most term life insurance companies treat all tobacco use including cigars, pipes and chewing tobacco in the same category as cigarettes. However, certain life insurance companies allow those that use pipe, cigar, or chew to qualify as non-smokers. This one difference alone can save you as much as 50% on your premiums!

My recommendation is to shop around and be sure to use a brokerage firm, like AccuQuote, to determine which life insurance company will give you the best term life insurance rate.