By John Voket
RISMEDIA, May 21, 2007-A storm is brewing, and it may strike real estate markets nationwide in the months and years to come, especially in more disaster-prone coastal areas of the United States. But this storm is more about the cost and accessibility to homeowners insurance coverage than it is about the weather.
Earlier this year, while many parts of the country were gearing up for winter snowstorms, the New Jersey Association of Realtors (NJAR) was looking towards the warmer hurricane season, and lobbying its Statehouse about insurance companies discontinuing homeowner’s insurance to New Jersey residents. The Association’s members fear this escalating trend could have a detrimental impact on the availability and affordability of homeowner’s policies, and its affect the housing market.
“NJAR understands that insurance companies are trying to protect themselves in the event of a catastrophe, therefore we are calling upon the Legislature to address this issue before it becomes a crisis,” said NJAR Vice President of Government Affairs Jarrod Grasso. “If insurance companies are not adequately protected, taxpayers could be forced to pay for millions of dollars worth of damages. The Legislature must take action to keep insurance companies in our state, entice new ones to join our market, increase competition and keep costs down for homeowners.”
That is exactly what is happening one state away, where on April 22, The Buffalo News reported that insurers are cutting rates in Western New York and elsewhere to capture new business, after the nation’s property and casualty carriers posted their best underwriting results in nearly 50 years.
The industry recently reported that its earnings soared to more than $60 billion in 2006, after it raised premiums to cover its risk, but then didn’t suffer big losses. That means companies don’t have to focus on restoring their reserves, which were depleted in recent years, first by the terrorist attacks in 2001 and then by devastating storms.
So instead of retrenching, industry officials and brokers say, they are again aggressively seeking to grow their market share, which means businesses in Western New York could be paying 10 percent to 20 percent less for commercial insurance policies this year The News report stated.
It is certainly the kind of news homeowners have been waiting to hear about in storm-prone states like Texas. Four years after lawmakers there reworked laws and predicted big drops in homeowner insurance rates, Texas still ranks as the nation’s most expensive state to insure a home.
The Austin American-Statesman reported April 23, that historically homeowner’s insurance in Texas has been more expensive than in other states because of the size of the state and its exposure to severe weather conditions – specifically, hail storms and coastal wind storms. Wind and hail losses account for 84 percent of the difference in premiums paid by Texans and those paid by others around the United States, according to Jerry Hagins, spokesman for the Texas Department of Insurance.
Other factors affecting rates include the impact of Hurricane Rita on windstorm policy coverage along the Gulf Coast and the increasing costs of reinsurance. Reinsurance is the coverage insurance companies buy to protect against large or unexpected catastrophes.
Traditionally, premium costs increases also mirror escalating property values.
New Jersey Department of Banking and Insurance statistics show nearly 67% of homeowner’s coverage in the Garden State was sold by the top ten insurers in 2005. Recent downgrades in homeowner’s insurance services offered by top providers will force some homeowners to find another carrier in a market with fewer options.
Without sufficient competition among insurance providers, the cost of homeowner’s insurance will rise, which may contribute to a drop in the housing market.
“Homeowner’s insurance is a necessary component in securing a mortgage and buying and selling a home,” said Grasso.
Up the coast in Connecticut, concerns that residents are getting battered by insurers after damaging storms hit there has raised the ire of state Attorney General Richard Blumenthal. He has proposed legislation to the state’s General Assembly that would prohibit insurers from requiring consumers install hurricane shutters as a condition of insurance.
The legislation would also require an insurer to notify existing policyholders when the company applies to the Insurance Commissioner for approval of new underwriting requirements that could cost homeowners more than $1,000.
Blumenthal’s proposed legislation responds to a trend by insurers to impose onerous, expensive conditions – or cease writing policies altogether – in Connecticut and other coastal regions. Blumenthal’s office is continuing an antitrust investigation involving several companies at various levels in the insurance industry, including carriers, reinsurers, modelers and rating agencies.
“Insurers are reaping record-breaking profits, but still shifting costs to consumers,” Blumenthal said in a release. “They shirk risk by imposing expensive, extreme, and egregious conditions on homeowners. Policyholders deserve advance notice so they can act – at a minimum protest against approval by the insurance commissioner. This legislation would simply require insurers to do the reasonable and responsible thing: keep loyal customers informed. Policy changes that exact unexpected and unrealistic burdens must be made unacceptable.”
The type of activities Blumenthal described are affecting thousands of loyal homeowners in Florida. Since the end of last hurricane season, customers of companies like Allstate and Safeco have dropped hundreds of thousands of Floridians, some of whom have been loyally paying their premiums without a claim for up to 20 years.
Many of these policies have been canceled or transferred to another company after the eight hurricanes of 2004-05, as insurance companies try to more evenly spread out their risk exposure The Gainsville Sun reported. Many other insurers have stopped writing new policies in Florida, making the search more difficult as owners are forced to turn to the state-run Citizens Property Insurance Corp., originally established to be the insurer of last resort.
Adam Shores, spokesman for Allstate Floridian, said in The Sun recently, that the damage in inland Central Florida in 2004 shows there are no low-risk parts of Florida. Florida insurers paid out $25.1 billion pretax from 2004 hurricanes and another $10.8 billion in 2005.
The storms of 2004 alone wiped out the claims-paying capacity that Allstate Floridian had built up over 10 years, the company said. To rebuild reserves, insurers responded by raising rates, canceling policies and either halting or drastically reducing writing new policies.
Since 2002, the state’s top insurers have raised rates ranging from 53.8 percent for Universal Property and Casualty to 131.3 percent for State Farm.
In neighboring Louisiana, however, Allstate recently backed off the cancellation of 4,000 homeowner policies in Hurricane Katrina-damaged parishes, agreeing to reinstate them if policyholders can prove they are rebuilding or living in the properties.
The company said in mid-March that it would consider reinstating those policies as part of an agreement with state insurance commissioner Jim Donelon, who had threatened fines if Allstate refused.
Donelon’s office received hundreds of complaints from homeowners who said the company canceled their coverage after Allstate Insurance Co. inspectors wrongly concluded their properties had been abandoned. Donelon ordered his own inspections and concluded Allstate was using a flawed, “drive-by” inspection process. He ordered the company to reinstate the policies.
By working with lawmakers in New Jersey, the association of Realtors hopes to help clients there avoid the types of problems homeowners in these other states are experiencing.
“Rising insurance costs could derail home purchases, delay transactions and make homeownership increasingly costly, especially for young families and first-time buyers,” said Grasso. “This could have serious repercussions on the real estate marketplace in our state.”
Members of the NJAR are supporting a bill to establish a New Jersey Catastrophe Fund to help pay covered residential property damage insurance claims in the event of a catastrophe that would affect New Jersey homeowners and their property insurers. Under the bill, insurance companies in the state would pay annual fees into the fund.
If damages from a catastrophic disaster exceed $2 billion, insurers could dip into the fund after they deplete their normal reserves. In addition to providing security for the insurance market, such a bill would help fund efforts of emergency responders, improve preparedness and establish comprehensive mitigation, education and prevention programs, all of which would help speed up a costly recovery from a major disaster, and save lives.