Storm Passes, but Insurance Worries Stay
as posted at www.nytimes.com
August 30, 2006
by Joseph B. Treaster
MIAMI, Aug. 30 — Jim Pozo felt he got a break on Wednesday when Tropical Storm Ernesto turned out to be nothing more than a slightly windy rainstorm as it crossed South Florida.
And that was not just because his three-bedroom house near downtown Miami was unscathed. He had been worried, he said, that a storm causing even modest damage would push up his already sky-high insurance premiums.
“I don’t know how people can afford it at these rates,’’ said Mr. Pozo, a real estate broker and investor. Another big storm, he said “is just going to make it go up more.’’
All along the coasts, from Texas to New England, insurers suffering from hurricane jitters are raising rates and cutting back on coverage. But nowhere is the situation more severe than in Florida, particularly here in South Florida and in the Florida Panhandle, where storms in recent years have added billions to the insurers’ losses.
“Even though this was a very mild tropical storm, it reminds the insurance industry of the risk involved in underwriting insurance in Florida and will make them even more cautious,’’ said J. Antonio Villamil, the chairman of Gov. Jeb Bush’s council of economic advisers and the chief executive of the Washington Economics Group, an economic and business consultant in Coral Gables.
“The bottom line is, this storm didn’t help,’’ he said.
State officials are stymied on what to do about the problem. They can hope, like Mr. Pozo, that the next three months of hurricane season will be as benign as the first three. The officials have been struggling to restrain rising prices, but they know the more pressure they put on company profits, the more the companies will cut back on the amount of coverage they offer.
Insurers like State Farm and Allstate have already cut back significantly and, as a result, the state-run insurance agency — Citizens Property Insurance Corporation, the insurance company of last resort — has become the biggest insurer in the state with about one million policies.
Governor Bush and other officials are considering whether to call a special session of the State Legislature to wrestle with insurance issues. Florida has also taken the lead in pushing for the creation of a federal insurance program that would relieve some of the strain, not only on hurricane-prone states but also on states like California, where earthquakes are the demon.
Insurance prices have been climbing in Florida since Hurricane Andrew in 1992 cost the insurers $21.5 billion in today’s dollars. That storm stood for years as the most costly hurricane until Hurricane Katrina a year ago led to more than $41 billion in insurance payouts.
Insurance prices here escalated sharply after seven hurricanes hit the state in 2004 and 2005 and as weather forecasters predicted that the particularly bad run of hurricanes could keep going for at least the next decade.
Finding coverage at any cost is becoming increasingly difficult. Allstate, for example, has begun turning down renewals for more than 200,000 customers and turning them over to smaller companies with less robust finances, adding to feelings of insecurity among homeowners. State Farm has notified many condominium associations that it plans to stop insuring them.
Over the last year, insurance prices for many homeowners in Florida have jumped at least 20 to 40 percent, on top of several previous increases. And those homeowners have been the lucky ones. Along the beaches and even near the water, coverage costs have doubled this year for many homes and are now the most expensive in the country, industry officials say.
At renewal time this year, the annual premiums on Mr. Pozo’s house jumped to $6,000, from $4,000. Worse, the insurer that had been providing wind coverage for a 34-unit apartment building that Mr. Pozo owns refused to renew his policy.
Mr. Pozo had never filed a claim. The apartment building is not near water and is sturdily built of concrete blocks with a solid roof. The bank that holds Mr. Pozo’s $1.3 million mortgage insisted upon insurance.
The bank found an insurer willing to provide coverage, but at staggering rates and on unusual terms: month to month through the six months of the hurricane season. For the first two months, Mr. Pozo said, the premium was $1,600 a month. Then it jumped to $5,000 and for the remaining three months of the season, he said, it will be $8,400 a month.
To top things off, the special policy comes with a deductible of $100,000.
Mr. Pozo had no choice. He could either pay the insurance rates or lose his mortgage.
“The insurance companies just say it’s too hazardous, too risky,” Mr. Pozo said. “The bank has to protect itself.”
In the suburban town of Palmetto Bay, just south of Miami, Carla and Richard Gordon were hit with a 51 percent increase in the cost of their wind insurance, which rose to $3,871 a year. They had a separate policy on their four-bedroom Mediterranean-style home, two miles from Biscayne Bay. It jumped 31 percent, to $2,400 a year. The wind policy carries an $8,000 deductible.
Like many people, the Gordons are having a hard time understanding the steep increases. Their home was destroyed by Hurricane Andrew, and when they rebuilt they wanted to make sure they were secure.
“We have every single safety thing you can put in a house,” Mrs. Gordon said. “Our house was built above and beyond the codes. We have orange curved roof tiles. But they’re made of cement, not clay.”
The Gordons had expected the stronger house would get them a break on their insurance prices. But it has not worked out that way.
Mrs. Gordon, an elementary school teacher, said her next-door neighbor was paying even more for wind insurance, about $5,900. Mr. Gordon’s brother lives in Hollywood, about 20 miles north of Miami. His premiums doubled, to about $4,000, Mr. Gordon said.
“Everybody I know has gotten major increases,” Mr. Gordon said.
Still, the insurance companies say regulators are preventing them from raising prices enough to reflect the true cost of providing insurance in Florida.
In the last two years, the insurers have paid out $31 billion for claims in Florida, or about three-quarters of the $41 billion they paid for damage from Hurricane Katrina in half a dozen states, according to Robert P. Hartwig, the chief economist for the Insurance Information Institute, a trade group in New York.
Florida, like Mississippi and Louisiana, created a state-run insurance company to provide coverage when companies like Allstate and State Farm would not. Without the ability to get home insurance, people would be unable to get mortgages and housing sales would stall.
But after Hurricane Katrina and the other recent hurricanes, these state-run insurance companies are all in financial trouble. In Florida, for example, the state-run company, Citizens, was more than $2 billion in the red at the end of last year.
To bail it out, the State Legislature allocated $715 million in tax receipts for Citizens this year and permitted it to sell bonds. In addition, Citizens was allowed to raise money from the private insurers with assessments that the companies are then passing on to policyholders, further adding to the policyholders’ costs.
The coverage the state-run companies offer is truly a last resort. Unlike most private home insurance policies, those provided by the state, at equally high prices, do not provide for the full cost of replacing a destroyed house, and instead of paying the cost of replacing furnishings, the state policies reimburse at the depreciated value of furniture and clothes. Imagine, for example, the value today of a couch purchased 10 years ago for $1,500. Insurance from a state-run insurance agency might pay $150 toward a new couch that today might cost $2,500.
Some of the steepest price increases, industry officials say, have come in Pensacola and other towns in the Florida Panhandle that were heavily damaged by Hurricane Ivan in 2004 and Hurricane Dennis in 2005.
Mr. Hartwig said the insurers had paid most of the three million claims from the seven hurricanes in the last two years. But the South Florida landscape is still dotted with homes with blue tarpaulins tied down over them as temporary roofs. Except in the Panhandle region, there has not been much flooding in Florida. That is in contrast to the damage from Katrina, where flooding was the main destroyer.
A consequence of the high insurance costs in Florida, and especially the high deductibles, is that homeowners are taking extra steps to prevent damage. As the first winds of Tropical Storm Ernesto were brushing South Florida earlier this week, Mrs. Gordon hired a handyman to put up storm shutters.
“I don’t think this storm is going to be too bad,” Mrs. Gordon said, “but I have an $8,000 deductible.”
United Policyholders is a non-profit organization founded in 1991 and dedicated to educating the public on insurance issues and consumer rights. UP publishes educational materials and serves as a resource for individual and business policyholders and residents of communities with insurance problems. UP’s Amicus Project provides information to courts of law to support policyholders’ legal rights. UP unites policyholders and their advocates by sharing information. Write to UP at 110 Pacific Ave., PMB 262, San Francisco, CA. 94111, call us at (510) 763-9740, or visit our website at www.unitedpolicyholders.org.
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