Why the recession will increase your insurance premiums

This week I received the invoice for renewing our homeowner's insurance and was startled to see a 20% rise in the annual premium. This in the absence of any change in coverage or the filing of any claims in recent years.

I drove to our insurance man's office and had a long talk with him about this. The 20% increase was, he said, an across-the-board rise for all policyholders in the company (or at least in the region). This puzzled me, because there have been no Katrina-level catastrophes in the past couple years, and I asked if the housing crisis was impacting insurance companies. Not exactly, he said, but it's all related to the recession.

Insurance companies pool premium payments and invest the proceeds in government-backed instruments, using the income from those instruments to pay claims and business costs. Everyone who has renewed a C.D. or has an interest-bearing account knows how interest rates have plummeted in the past year. Insurance companies ladder the maturities of their purchases to smooth out short-term interest rate changes, but the fall in rates has included the entire yield curve, so the fall in income from those investments couldn't be avoided. When the income from those instruments falls, insurance companies have to make up the difference by increasing premiums for policyholders.

That answered my question and made perfect sense. I didn't press him as to what government-backed instruments were in the company's portfolio. It could be something as safe as Treasuries, but I'll bet there were a variety of mortgage-backed securities and credit-default swaps and other junk mixed in.

As I left I did ask whether this was company-specific or industry-wide, and he affirmed the latter, stating that he knows of some rival companies that are increasing premiums by 40-50% for policyholders.

My insurance company is State Farm. The increase was 20% compared to a policy renewal in April of 2008. I'm curious as to what experience other homeowners with other insurance companies are experiencing. Feel free to share comparative numbers in the Comments section.