Wall Street Journal: Coastal Residents Knock Insurers

Jan 3, 2013

The following article was published in The Wall Street Journal on January 3, 2013:

Coastal Residents Knock Insurers


By Valerie Bauerlein and Leslie Scism


Homeowners in the coastal South are pushing back against insurers they say are charging too much for hurricane coverage, even as the damage from superstorm Sandy is costing the industry billions of dollars in the Northeast.

In Beaufort, S.C., a retired executive has spearheaded an effort to pressure Gov. Nikki Haley and her insurance department to investigate how insurers set rates. In Alabama, a church-based group helped push for a state database they say will show the disparity between how much coastal homeowners pay in premiums and how little they get back in claims.

Don Duplantier walks through his flooded home as water recedes from Hurricane Isaac in Braithwaite, La., in September.

Both groups belong to a coalition with representatives from eight states that claim insurers are overcharging for the risk they face in their particular parts of the shoreline. The group favors creating a quasigovernmental, multistate reinsurer that would collect hurricane premiums and pay damages after catastrophic storms.

Homeowners in the coastal South—who generally are obligated to buy hurricane protection to get a mortgage—have been particularly prone to rising policy prices because of a history of costly storms and a building boom that left the insurance industry exposed to potentially astronomical claims.

Since 1970, the U.S. coastal population has grown by nearly half, lured by new homes and resorts. Insured property values in hurricane-prone regions on the Atlantic and Gulf have risen 42% to $10.2 trillion since 2004, according to AIR Worldwide, a risk-modeling firm.

At the same time, three of the industry’s costliest hurricanes have occurred in the past two decades. Insurers expect to pay as much as $25 billion in claims from Sandy, which would make it the third-costliest storm in U.S. history, after hurricanes Katrina in 2005 and Andrew in 1992.

Payouts from Sandy are likely to push many insurers to a fourth-quarter loss, although analysts say the industry has ample capital to pay out claims. Meanwhile, historically low interest rates have diminished the returns the companies get on premiums they invest. Both factors are likely to prompt insurers to seek more rate increases.

“Undoubtedly, the weather has changed,” said Liam McGee, chief executive of Hartford Financial Services Group Inc., in a presentation to investors in early December. “As an industry, we have to assume this is the new normal.”

Leading the pushback against rates in South Carolina is Daryl Ferguson, a former telecommunications-company executive who moved to the Hilton Head Island area in 2000. Mr. Ferguson interviewed scientists, actuaries and regulators and became convinced that the southernmost part of South Carolina is far less vulnerable to hurricanes than other parts of the Atlantic and Gulf coasts.

Mr. Ferguson notes that just two devastating storms have struck the area in modern times, one in 1893 and Hurricane Hugo in 1989, and yet, according to industry figures, South Carolina has relatively high insurance rates.

Mr. Ferguson began presenting his findings to civic clubs and persuaded some local leaders to form the S.C. Competitive Alliance, to help him lobby for an evaluation of rate-setting policy.

He said high insurance rates are tamping down development and a disproportionate fear of storms is hurting tourism. “We think we can save $1 billion in insurance and get another $1 billion on the tourism side,” Mr. Ferguson said. “That’s huge.”

Russ Dubisky, who heads the S.C. Insurance News Service, an industry trade group, said he understands the frustration of the alliance, because coastal South Carolinians do generally pay higher rates than neighbors in Georgia and North Carolina. He said insurers weigh the concentration of risk in setting prices, and an unusually high 28% of South Carolina’s insured property is in coastal counties. That coastal exposure totals $230 billion, according to trade group Insurance Information Institute.

“There’s no escaping the fact that South Carolina is at risk,” said Robert Hartwig, president of the New York-based institute. “Is it at the same risk as South Florida? Typically you would assess it isn’t the same case. But is it risk-free or anything close to a low-risk state? The answer is no.”

South Carolina regulators have created a task force of engineering and actuarial experts to consider approving a catastrophe model that could help evaluate risks and rates. Their report is expected early this year.

Meanwhile, a coastal Alabama church-based group called the Homeowners’ Hurricane Insurance Initiative is lobbying against rates they say are rising so quickly they are causing foreclosures among working-class people and retirees on fixed incomes. “It’s a justice issue,” coordinator Michelle Kurtz said.

Ms. Kurtz, a preacher’s wife, said the average Alabama homeowner pays $870 a year in premiums on a house valued at $150,000. The policy on her $150,000 house in coastal Baldwin County is $3,300 a year, up from $1,200 before Katrina.

In May, the Alabama Legislature required insurers to publicize the number of policies issued, premiums charged and amounts paid in claims, searchable by ZIP Code. The Alabama homeowners contend that coastal residents are paying steeper rates than parts of the state hit by a spate of tornadoes that left widespread damage in 2011. The database isn’t yet available to check that claim.

Insurance Commissioner Jim L. Ridling said he sympathizes with coastal residents and has worked with them on measures such as requiring insurers to offer discounts to homes that meet certain standards. But he said homeowners must face reality. “The tornadoes were the largest single catastrophe in Alabama’s history in terms of dollars,” he said. “But it was one event compared to 10 hurricanes in 15 years.”

The grass-roots efforts highlight what insurance-industry officials say is a recurring problem.

“After a state goes through a period of time without experiencing a major hurricane, we tend to hear from property owners that the cost of insurance is too high,” said the Insurance Information Institute’s Mr. Hartwig. We heard this most recently in the Northeast,” before Irene in 2011 and Sandy this past autumn.

“If the experts are to be believed, there is likely to be more violent weather, not less” in the years ahead, Mr. Hartwig said.