Gone are the days of the $20,000 shacks next to Matunuck Beach in South Kingstown.
Across Rhode Island’s seaside communities, homeowners have been building or upgrading existing properties, with the R.I. Coastal Resource Management Council issuing nearly 11,500 building permits between 1970 and 2005 in its area of jurisdiction.
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But as the real estate values and population of those communities have increased, so has the financial and humanitarian risk of natural disaster.
Now, in the wake of major hurricanes elsewhere in the country, coastal property owners in southern New England are feeling the crunch of higher premiums and increased deductibles for their homeowners’ insurance.
The increases are so steep, state officials and industry leaders are wondering if the situation might require intervention.
Several factors have contributed to the situation, described by at least one state legislator as a “looming crisis.”
According to Brian Spero, a lawyer with Partridge Snow & Hahn LLP, the industry is still feeling the aftershocks of last year’s hurricanes Katrina and Rita. Reinsurance companies – the mostly offshore-based funds that underwrite smaller insurance companies to cover large claims – felt the effects of the Gulf Coast hurricanes strongly.
About $40 billion in insured property was lost in Katrina alone, according to a report by the Insurance Information Institute. Those claims from the hurricanes have led reinsurers to increase the rates they charge to local insurance companies, and the companies have passed the cost on to consumers, Spero said. In some cases, the cost for reinsurance has doubled.
Dennis Charland, executive director of the Independent Insurance Agents of Rhode Island, said several other factors have affected Rhode Island’s market, contributing to the local rise in rates.
Among them, he said, is the likelihood that Rhode Island will experience a major hurricane. Generally, the state has averaged a major storm every 10 to 13 years, Charland said. The last storm to touch ground here was the 1991 Hurricane Bob, which killed 10 people and caused nearly $3 billion in property damage.
Meanwhile, risk-management companies have been reevaluating the models they use to determine the damage a hurricane could cause.
“The projections that insurance companies have looked at in the past are grossly inadequate,” Charland said. As the state’s coastal properties have been built out, the old projections of possible damages have become severely outdated.
In Massachusetts, where some insurance companies have withdrawn their coastal property coverage altogether, but insurance companies doing business in Rhode Island are prohibited from denying insurance solely based on location.
But companies may charge higher rates for coastal properties in the Ocean State. They sometimes charge higher premiums depending on ZIP code or street.
Some companies have looked at expanding their definitions of coastal zones and flood plains for the properties they cover. And some insurers also have looked at increasing minimum deductibles for residential properties to as much as 5 percent.
In a memo released in June, Joseph L. Torti III, associate director and insurance superintendent at the R.I. Department of Business Regulation, said those practices are legal, so long as they are applied equitably throughout the state.
“As always, insurers must demonstrate that rates are not excessive, inadequate or unfairly discriminatory considering the risk accepted,” Torti wrote.
But with the rising rates of insurance, the situation has caused some to recall the workers’ compensation crisis in Rhode Island in the early 1990s.
Mark Higgins, dean of the College of Business at the University of Rhode Island, said the state could look into creating a homeowners’ insurer, just as it created The Beacon Mutual Insurance Co. to provide more affordable workers’ compensation coverage. More than a decade later, Beacon remains the top workers’ comp carrier in Rhode Island.
Property insurance involves a much greater degree of uncertainty than workers’ comp, Higgins observed, because “with a hurricane, you don’t know where it’s going to go and you don’t know what’s going to happen.”
In the Bay State, large numbers of homeowners now get coverage through the Massachusetts Fair Access to Insurance Requirements (FAIR) Plan, a high-risk pool similar to that used for drivers who can’t get other coverage.
The Massachusetts Property Insurance Underwriting Association provides the coverage; losses are shared among member companies in proportion to their share of the total premium volume.
Between December 2003 and June 2005, a recent state report shows, the number of FAIR Plan policies on Cape Cod and the Islands increased by 237 percent, and many homeowners who have paid off their mortgages now forgo insurance altogether.
In Rhode Island, the success of a similar insurance fund for high-risk coastal homeowners could hinge on how much time passes before a major hurricane strikes, Higgins said.
If that happened shortly after the fund’s creation, the fiscal fallout would be huge, he said. But if Rhode Island went more than 10 years without a major hurricane, the fund probably would have enough reserves to absorb the losses.
State Rep. John Patrick Shanley Jr., D-South Kingstown, said that besides the possible creation of such a fund, legislators are considering joint bonding with neighboring states to create a fund for reinsurance.
State Rep. Paul Crowley, D-Newport, although he was unavailable for comment last week, has led the legislative response to the issue. At a news conference in August, Crowley called for the General Assembly to hold public hearings on the “potentially devastating crisis,” stating that a swift response may be in order when the legislature convenes in January.
Charland said he does not believe that is a good idea: “A state legislative response, I think, would be detrimental to the industry in this state.”
On the federal level, Congress could enact changes to help companies, he said. Currently, insurance companies are taxed at 40 cents on every dollar they put into their reserves, he said. If the tax were reduced, companies could save more and rely less on reinsurers.
The situation may work itself out by market forces, Charland added.
Although reinsurance companies have hiked their rates in recent years, they have gone without a major catastrophe this year. Once the money lost during 2005’s disasters has been recouped and the reinsurers have become more stable, local insurers and consumers may see a reduction in rates, he said.
Also, with rates rising, more companies may enter into the market, giving rise to more competition, Charland said. And that could usher in a situation where rates start to come down as early as next year.
