Coastline populations increasing insurance prices

The U.S. population residing in hurricane-prone states continues to rise, a trend which is likely to impact adversely the nation’s coastal property insurance market for years to come, according to testimony by Dr. Robert Hartwig, president and chief economist for the Insurance Information Institute (I.I.I.). Hartwig appeared before the U.S. Senate Committee on Banking, Housing, and Urban Affairs.

“Despite the well-known vulnerability to hurricanes and rapidly escalating property values, coastal development in high risk areas continues at a furious pace,” Hartwig said, noting that 15 new condominium projects, with a total of more than 2,100 units, will be completed by 2009 in South Miami Beach, Fla.

“Rapid build-ups are also observed in many other coastal areas, including Galveston Island, Texas; Hilton Head and Myrtle Beach, S.C.; the Maryland shore; eastern Long Island, N.Y.; and Cape Cod,” he added.

Florida has the highest population growth among hurricane-prone states and is expected to gain 12.7 million new residents between 2000 and 2030, according to the U.S. Census Bureau. “Florida is the most exposed state in the country, by far, accounting for 27 percent of all hurricane exposed property. Adjusting for growth since 2004, insured coastal exposure in the state now exceeds $2 trillion. Although New York is a close second, it is statistically less likely to be hit by major hurricanes than Florida,” Hartwig said. “It is expected that the value of insured coastal property will double within the next decade as coastal populations and property values continue to soar.”

Hawaii’s population is expected to grow 21 percent between 2000 and 2030, and New York’s population is expected to grow 2.6 percent in the same period.

Hartwig, who spoke before the U.S. Senate committee’s hearing, noted that insurance prices are determined primarily by the degree of risk assumed by the insurer.

“Hurricane Katrina revealed that too many U.S. coastal structures are unable to withstand the forces of a major hurricane, the importance of prudent zoning and land-use management, and that private-sector insurers provide by far the fastest, most efficient means of economic recovery for communities affected by disaster,” he said.

Furthermore, he believes state-run insurers of last resort have offered little short-term property insurance rate relief to hurricane-prone regions, and may end up shifting the long-term risks of hurricane-related losses to policyholders and taxpayers who do not live near the coast.

“Depending on the state, the redistribution of costs is commonly achieved via laws that allow state-run insurers (which are often the largest insurers in the most hazardous areas) to recover their losses in excess of their claims-paying resources by assessing (effectively taxing) the insurance policies of homeowners and business owners throughout the state, including those well away from the coast and those who have never filed a claim,” Hartwig said. “In some cases, even unrelated types of insurance such as auto insurance and commercial liability coverage can be assessed.”

“The price of insurance is determined primarily by the degree of risk assumed by the insurer. Therefore, from an insurance perspective, the prospect of a long-term crescendo in coastal risk is a paramount concern,” he said. He noted “the industry wants to work in partnership with public policymakers, consumers and businesses in developing solutions to the formidable challenges posed by Hurricane Katrina and other disasters.”

Hartwig’s testimony can be viewed at www.iii.org/media/met/gulfcoasthurricanes/