Audra, who has Austin, TX renters insurance, just bought a Texas renters insurance policy and asks us:
Why are renters insurance policies issued for a year? I’ll only be in this college apartment for nine months and I don’t love the idea of paying for three months of coverage I won’t use.
This is a question we hear frequently and there’s a few things to be aware of when it comes to renters insurance policies that are issued for a year.
Why Are Renters Insurance Policies Issued For A Year?
Many people have short term leases and it is common to wonder why renters insurance policies are issued for a year. There are multiple reasons for this that range from underwriting to practicality. Learn more…
Although it’s not your ideal answer, one reason for this is because that’s the way it’s been for a very long time. Systems are set up that way. Homeowners policies, of which renters insurance is a subset, are issued for a year because that’s what mortgage companies want. This is also how they’re set up to pay out of escrow. Other policy terms are difficult to find and for a homeowners insurance policy there’s not much reason to issue them for less than a year.
But Why Are Renters Insurance Policies Issued For A Year?
Continuity in underwriting is the primary practical reason. There are multiple variables that go into calculating the premiums for a renters insurance policy. These include details about you, the property itself, the neighborhood, etc. Actuaries, the people who do the math to set rates based on certain types of risk and historical losses, work with statistics. The longer the experience period they’re working with, the more accurate their data is. It’s just not possible to properly create a rate filing on three to six months of data. This is because there are too many unknown factors beyond the usual ones that affect renters insurance. Once actuaries set the rates, it’s important that underwriting uses them in the specified way. If twelve month loss predictions are used to write a three month policy, the numbers become nearly useless as a predictive factor.
Because The State Said So
That’s as good a reason as any. Most states like to see rate filings based on twelve month policies. Not only do they know it’s the most accurate way to do it, but it’s also less hassle for someone behind a desk who has to actually read those filings when they’re all for the same period. Unfair or improper rates are much easier to identify when they’re comparing apples to apples.
Why Are Renters Insurance Policies Issued For A Year? Because That’s What Their Insurer Tells Them To Do!
Most insurance companies have what’s called reinsurance. This is basically a large policy written by another insurance company to cover certain types of significant, catastrophic losses. Lloyd’s of London is where insurance started and they still handle quite a bit of insurance and reinsurance. They do this through the use of syndicates.
Those syndicates, or groups of investors, are organized for a year. After the allotted period of time, the syndicate is dissolved and re-formed to take on another year’s worth of risk. It makes sense for your renters insurance company to write policies based on the length of their reinsurance policy. Doing otherwise would expose them to more risk than necessary.
One of the most important things to remember though is that generally a policy term is the length of time the carrier agrees to cover you for. Generally speaking, you’re not obligated to that period of time and if you cancel at, say, the nine month mark, unearned premium is refunded to you. For more information on why renters insurance policies are issued for a year, and whether that’s an appropriate length of time for your personal needs, contact the renters insurance experts at Effective Coverage at (800)892-4308 or click above for a free online nationwide renters insurance quote today!