Christopher Swope was GOVERNING's executive editor.E-mail: email@example.com
Since 1851, when meteorologists began keeping reliable records, Delaware has been bothered by a hurricane only twice. Neither incident was a direct hit. The Gale of '78--that's 1878--whizzed by to the west through Maryland. A quarter-century later, the so-called Vagabond Hurricane of 1903 skirted off to the east, staying in the Atlantic long enough to strike New Jersey. Although both storms sank ships in Delaware Bay and caused structural damage and flooding in Wilmington, neither packed winds much worse than 80 miles per hour. That's an autumn breeze compared with Hurricane Katrina, which maxed out at 175 m.p.h. and blew ashore at around 125.
So it might surprise you to learn that Delaware is experiencing some problems with hurricane insurance. They started quietly last summer after Westfield Insurance Co. said it wouldn't renew 850 customers near the coast when their policies expired. Then, in December, Allstate deemed all of Delaware a "potentially catastrophe-prone market." Allstate is keeping its existing customers in the state, but as of January 1, the company has stopped writing new policies anywhere in Delaware--even well inland.
Delaware's woes hardly compare to the turmoil in Florida, Louisiana and Mississippi, where thousands of consumers can't find coverage at all and are falling back on state-run corporations as their insurers of last resort. Private insurance continues to be widely available in Delaware. Still, anyone purchasing a new home or shopping around for a new policy is likely to have a tougher time of it than ever before. That's especially true nearer to the shoreline, where homeowners must swallow significantly higher premiums and big deductibles.
The story is pretty much the same--or worse--throughout the Eastern seaboard, from Texas all the way to Maine. The past is the past, as far as insurers are concerned. What they're interested in now is what their weather models say about the future--and it isn't pretty. Insurers believe that generally warmer waters in the Atlantic will continue producing active hurricane seasons that look more like those of 2004 and 2005 than the quiet one of 2006. In other words, Delaware's century-long record of no serious hurricane problems is not providing climatological immunity. Some nervous storm-watchers even consider it an omen of coming disaster, long overdue.
Omen or not, insurers are adjusting their business practices. The result is a coverage crunch that affects more than just people on the oceanfront. Allstate is turning away new customers not only in the coastal counties of Texas, Virginia and Maryland but also anyone in Connecticut, Delaware and New Jersey, as well as Long Island and the five boroughs of New York City. People living as far as 60 or 70 miles inland now find insurers classifying them as high-risk, with doubled or tripled premiums to match. Customers also are getting hit with high deductibles pegged to as much as 5 percent of the value of their homes. In inflated real estate markets, where even modest homes can go for half a million dollars, that sticks homeowners with out-of-pocket responsibility for common but expensive storm costs, such as repairing roofs hit by falling trees.
The question for state governments, which regulate the insurance industry, is what they should do about this. In Florida, where insurance is front-page news these days, legislators and regulators can hardly ignore it. Premiums are rising so high that insurance threatens to crash real estate values and cripple the economy. "There's an old Frankenstein movie where the villagers march on the castle with pitchforks," says Steven Geller, the Democratic leader in Florida's state Senate. "If we don't do something on insurance, I think they're gonna march."
Further north, the problem ripples in subtler ways. In much of New England, The Andover Companies rewrote the fine print in policies to say that customers won't be renewed unless they install hurricane shutters for their windows. Not only can that cost thousands of dollars but metal shutters, common on modern buildings in Florida, don't match historic New England homes. Paul Crowley, an Andover customer and Rhode Island state representative who lives in the coastal town of Newport, is livid about it. "If you have a house that was built in 1700 or 1800 and it's survived for 200 or 300 years," he says, "then why do you suddenly need shutters on your windows?"
Crowley believes that insurers are playing off post-Katrina hysteria to get away with big rate increases. He's begun challenging the new climate models the insurance companies use to justify their rates and underwriting decisions. "Science has made tremendous advancements in predicting hurricanes," Crowley says. "But the insurance companies have taken scientific data and distorted it, either intentionally or unintentionally. The end result is they're taking probably hundreds of millions of dollars of increased premiums out of people who live in this area. We're not taking it lying down."
The subject of property and casualty insurance is not noted for stirring such passions. Yet in a sense, it is the backbone of all economic growth: Without it, you can't get a mortgage or start up much of a business. So when the market gyrates as it is now, it rips open messy questions most people prefer not to think about. For example, why are humans so drawn to living near the oceans? Should government try to discourage them from doing it? And if they do it anyway, are other taxpayers and ratepayers, those who live in safer places, obligated to subsidize them?
Indeed, part of today's insurance problem is that coastal development goes on unabated. It is continuing even in Florida, despite the eight hurricanes that hit the state in 2004-05. Florida's population increased by 322,000 last year, according to the Census Bureau. Developers have built homes, offices and shopping centers in coastal areas to absorb all those people, and the real estate boom of the past decade greatly inflated the value of the property.
This phenomenon explains why the insurance industry, in an odd twist, has become an advocate for local land-use planning. It also fuels the industry's argument that rate regulation by the states discourages rational thinking about development. "If insurance had been priced on the basis of risk, I don't think you'd have seen the level of growth that has occurred," says Robert Detlefsen, public policy director for the National Association of Mutual Insurance Companies. "Look at Florida. They're not willing to change their economic growth model, which is all predicated on more population growth and more coastal development."
Growth doesn't explain everything. A major factor in today's crunch is the rising cost of insurance that the insurers themselves buy to help cover their own catastrophic losses. That's called reinsurance, and its prices aren't regulated. In the Katrina year of 2005, reinsurers reported $40 billion in losses globally. Since then, they've raised the rates they charge insurance companies by as much as 300 percent.
The real sea change, however, is in the way insurers look at the sea. In the past, they've gauged coastal risk using weather models that relied heavily on historical storm data. By that standard, places such as Delaware looked like relatively safe bets. But the 2004 and 2005 hurricane seasons convinced insurers that looking backward is no longer much help in predicting future storm damage. They say that unusually warm surface waters in the Atlantic, whether due to global warming or the earth's natural cycles, presage more and costlier hurricanes in the near future.
The new climate models predict hurricane activity five years forward, incorporating the best guesses of climatological experts. It isn't just the insurers that are pushing this idea. Risk Management Solutions, one of the modeling companies insurers listen to, went to the new approach about a year ago. Meanwhile, ratings firms such as Standard & Poor's and A.M. Best, which assess the financial health of insurance companies, also want to see five-year-forward modeling.
If all this sounds like an esoteric computer exercise, the new modeling has real-world consequences. Insurers are building into their planning the expectation of greater annual losses--an average of 40 percent greater in the Southeast and 25 to 30 percent in the Northeast. Then, based on these adjustments, the insurers are turning around and asking state regulators to allow higher premiums. Companies such as Allstate also are responding by pulling back from the coasts in order to limit their exposure. "We're entering this period where the waters are warmer, the air currents and sea currents are changing and all the evidence suggests storms will be more intense and more frequent," says Allstate spokesman Michael Trevino. "That concerns us."
J. Robert Hunter doesn't buy it. Hunter watches insurance issues for the Consumer Federation of America. He says he's seen it all before, back when he was state insurance commissioner in Texas in the early 1990s. After Hurricane Andrew hit Miami in 1992, Hunter explains, insurers went to the states with new scientific models and asked for big rate increases. "They said the models would bring rate stability," Hunter recalls, noting that at the time, he went to Governor Ann Richards and sold her on 300 to 400 percent rate increases on the coast. "Ha, ha, I sure fell for that one."
Hunter calls the new modeling a "vehicle for collusive pricing," and claims that what insurers are doing now is "overriding the science with their own gut feelings." He's quick to point out that even in the calamitous years of 2004 and 2005, the industry turned record profits. In 2006, a year that climate experts predicted would be disastrous but wasn't, profits climbed even higher. Hunter believes insurers are reneging on the bargains they made with state regulators and consumers more than a decade ago. "It was either mismanagement by the insurers after Andrew, or it's price gouging today. It's one or the other. Take your choice."
When policy makers delve into the insurance problem, they quickly find that there are no easy answers. States may regulate policies and prices, but they can't force a company to do business within state borders. So efforts to help consumers by making insurance more affordable and available must be balanced against the insurers' need to make a profit. The insurers hold the trump card: They can always pull out of the market, or at least threaten to.
For their part, insurers argue that wobbly markets will eventually right themselves if legislators and regulators resist the urge to meddle. "There is usually a knee-jerk reaction by policy makers, that there must be some new law or regulation or something we can do to fix this," says Tammy Velasquez, director of state affairs for the American Insurance Association. "Competition and free pricing are the easiest fix, if not the most politically viable way to go."
One form of regulation the industry does like to see is building codes. Florida's recent run of hurricanes pretty clearly showed why: Most of the buildings left standing were the ones built according to a code passed after Andrew. Insurers have stepped up lobbying not only for building codes but also for stronger local building departments to enforce them. Louisiana passed a mandatory statewide building code after Katrina, but Mississippi has not. Neither has Alabama or Texas. Florida's code exempts the Panhandle, which was initially seen as too poor to stomach the higher costs of building to code, but which is among the most vulnerable parts of the state.
Tough building codes are more common in the Northeast, which is one reason why there has been a hostile reaction to insurer demands for hurricane shutters in coastal areas there. Connecticut fought back in December with new guidelines requiring insurers to accept alternative means of mitigating window damage, such as plywood shutters or impact- resistant glass. In addition, deductibles are limited to 2 percent of home value, at least for people who live more than a half-mile from the coast. "We walked a fine line here between availability for homeowners and protecting the solvency of the companies," says Connecticut Insurance Commissioner Susan Cogswell. "The important thing to us was choice--to give people the opportunity to put up some sort of mitigation that was acceptable, or have a larger deductible or a combination of both."
In the long run, states may have no option but to place more risk on the shoulders of taxpayers. One idea that is stirring a lot of debate lately is a proposal for states to set up rainy-day funds--or perhaps more accurately, "windy day" funds. Such funds would act as a backstop for insurers in the event of a catastrophe. In return for assuming some of the risk, states would expect to see insurers drop their rates a bit or write policies more widely.
This isn't a new idea. Florida's Hurricane Catastrophe Fund is credited with making today's turmoil there less calamitous than it might have been. California has a similar fund set up to help cover losses from earthquakes. This year, legislators in Massachusetts, New York and New Jersey have introduced bills to create catastrophic funds, and there's talk about combining to create a large regional fund. Assemblyman Michael Panter is the leading proponent in New Jersey. "It will bring increased competition and lead to premium decreases," he says.
State funds might help fill the gap for small- and medium-scale disasters. But the prospect of another Katrina-sized calamity is creating some state agitation for a federal role in backing up disaster insurance as well. This view is especially prevalent in Florida, where legislators such as Steven Geller get prickly about the perception of their state as a peninsula of fools living on a Caribbean bull's-eye. Geller prefers to call Florida's wild ride of the past few years "the canary in the coal mine"--an early indicator of a growing national crisis that will ultimately require a federal solution.
Geller ticks off a list of worst-case scenarios, reminders of the dangers lurking in many backyards. There's the possibility of a monster hurricane hitting Houston or New Orleans again--or Boston or New York. Mount Rainier might blow its volcanic top next to Seattle and Tacoma; earthquakes will always be an issue in California. And an earthquake in the middle of the country, along the precarious New Madrid fault, could have enormous fiscal and energy consequences. "Virtually every natural gas pipeline in the nation is built over that fault," Geller says. "You'll see the explosion reflected off the moon."
Some insurers agree with Geller. Allstate, for example, is lobbying for catastrophe funds at both the state and federal levels. But others think that between the insurers and the reinsurers, there's enough capacity in the private market to survive the next Big One. "If people know that at the end of the day the federal government is going to step in, then what you're doing is making it cheap to live on the coast," says Robert Detlefsen. "You're not making people think about those decisions. You're going in the wrong direction in getting incentives for people to do the right thing."
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