Martha Ball has lived her whole life on Block Island, a pork chop-shaped slice of heaven off Rhode Island’s coast. She had no real worries for years about the insurance on her centuries-old, Cape-style home. She paid her bills, filed no claims, and that was that.
But then she started hearing from her neighbors that her insurer, Massachusetts-based Norfolk & Dedham Group, had dropped hundreds of policyholders on the island.
Ball, 53, called the firm last month, and learned that when her policy runs out this summer, she’ll need to find another company too.
“That shouldn’t be allowed. It’s just not right,” she said.
Ball’s saga has become a familiar one for coastal homeowners from Maine to Texas. For at least a decade, they’ve endured higher rates, but now they’re facing a future where there also are fewer companies and greater restrictions.
Safeguard against disasters
Industry experts say firms are trying to recover from past losses and safeguard against future disasters. Last year, companies paid out a record $27.3 billion in losses to policyholders, most of it from the four hurricanes that hit Florida and caused damage in 15 other states. Between 1990 and 2002, home insurers paid out, on average, $1.17 in losses and expenses for every $1 they earned in premiums, according to the Insurance Information Institute.
“It’s not cheap to insure a home here nowadays,” said Robert Hartnett, president of Interstate Insurance & Finance Co. in Tiverton, R.I., who has clients in coastal towns in Massachusetts and Rhode Island. “Ten years ago, it was dirt cheap. The insurance industry is saying the free ride is over, this is the way it is.”
According to the National Hurricane Center, the population of East and Gulf coast states has grown to 86 million. By 2008, it’ll be 90 million. The insured value of residential properties in states along the East and Gulf coasts totals more than $8 trillion, according to AIR Worldwide Corp., a Boston-based risk management company.
“You’ve got population density, the frequency of storms, and the fact that everyone wants to live in these coastal areas,” said Loretta Worters, a researcher at the Insurance Information Institute. “Someone’s got to pay the bills for those losses, and that’s the insurance industry.”
Coastal homeowners had few problems acquiring modestly priced policies until Hurricane Andrew struck southern Florida in 1992. The storm left $15.5 billion in insured losses, and claims four times higher than those from any previous storm.
Companies went bankrupt. Reinsurance companies upped their rates. The industry was pinched by homeowners’ losses on one side, and higher prices from its own insurers on the other.
Hurricane Andrew showed insurers “the way they were doing their catastrophe policies was crude, at least in relative terms,” said Robert Klein, director of the Center for Risk Management and Insurance Research at Georgia State University in Atlanta. “Their underwriters were not paying attention to having a high concentration of exposure in (high-risk) areas.”
Storm-related deductibles
Since then, companies have abandoned coastal markets, and those that remain are attaching new restrictions. In the past three years, observers say, coastal insurers have added storm-related deductibles, which can cost up to 15 percent of a home’s insured value. The extra coverage has been extended to people who live nowhere near the beach. For example, some insurers in Rhode Island require the deductible for people living up to two miles inland; in New Jersey, the requirement can extend to five miles from the water.
At the same time, insurers are raising rates, though some experts say the requested hikes for 2005 are less than previous years. Still, insurers in at least a few East and Gulf coast states have requested double-digit rate increases this year, according to insurance regulators in surveyed states. In North Carolina, for example, where insurers filed for a 50 percent rate hike for beach properties, those coastal rates will rise about 15 percent, compared to the average hike of 2.5 percent statewide, under a recent agreement.
The shrinking market and higher costs have forced tens of thousands of homeowners to turn to state-run insurance pools of last resort. In Massachusetts, 30,000 homeowners enrolled in that state’s FAIR plan program in 2004 after losing their carrier. The policies can be as much as 50 percent higher than the voluntary market, according to John Golembeski, president of the FAIR plan in Massachusetts and Rhode Island. According to the Property Insurance Plans Service Office, every East and Gulf coast state it surveyed had enrollment gains in their FAIR plans in 2003, the latest year available.
Wendy Northcross had to be insured in the Massachusetts FAIR plan on March 1 after she and her husband were dropped by the Hanover Insurance Co. The chief executive officer of the Cape Cod Chamber of Commerce said she saw her monthly premium spike from $800 to $1,250 for her home in West Barnstable, Mass., in a year’s time.
Northcross said the chamber is hearing similar stories from its membership. “It’s really been just freaking people out,” she said.
Forecasting advances
Experts attribute the changed insurance landscape primarily to advances in weather forecasting, which has enabled insurers to better calculate potential losses.
A 2003 model from RMS, a risk management firm based in Newark, Calif., shows a hurricane striking New England would cause between $13 billion and $15 billion in damage, mostly to Massachusetts and Rhode Island, according to Golembeski.
Still, there’s been no downturn in the coastal real estate market. Nick D’Ambrosia, vice president of operations for Coldwell Banker Residential Brokerage for the mid-Atlantic region, said the number of available properties in his area is at an all-time low.
“Even if a purchaser is put out of the market at this time,” he said, “there’s another to take his place.”
Experts believe that trend will continue. “Clearly, people aren’t deterred by the cost of insurance,” said Robert Hartwig, chief economist at the Insurance Information Institute. “This is the price of paradise.”
Copyright 2005 Associated Press. All rights reserved. This material may not be published, broadcast, rewritten or redistributed.
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