Coastal properties face considerable rate increases
Statisticians say a storm is brewing and it has people living on the coast
paying more for homeowner’s insurance.
Computer models used to determine the probable maximum losses (PMLs) increased the weather-related risk assessments by about 50 percent throughout the U.S. Eastern coast, including Rhode Island.
This fact has resulted in insurers writing fewer new insurance policies for oceanfront homes and increased renewals. The industry has attempted to balance its overall risk by selling policies to clients with less risk attached to their properties.
John H. Lathrop, owner of Lathrop Insurance Agency in Westerly, said he has seen rates increase by a factor of three for his clients living on Block Island.
“Now, I have to find companies that write high-risk policies, like Lloyds of London,” he said. “I may be getting three times more in rates, but I am doing five times the work to match clients with an insurer. In the end, I am working more and making less.”
He said longtime residents of Block Island have been affected most as they face skyrocketing rates when renewing policies. Newer residents often have more money and can absorb the increases, he said.
Another trend affecting prices is “cottages being rebuilt as mansions,” which increases the overall risk by exposing more expensive homes to the elements.
“I’ve seen policies increase from $1,000 to between $4,000 to $5,000 a year for homes worth $500,000,” he said. “Between the taxes and insurance, it is extremely expensive to have a home on the shore in Block Island.”
Computer models, generated by companies like Jersey City, N.J.-based Insurance Services Organization, say the East Coast is due for a big hurricane. Insurers have been looking to bulk up their reserves in order to handle the ramifications of a catastrophic storm.
Experts in the industry say the financial damage could be similar to that following the Sept. 11 attacks – an event that left the reinsurer market reeling and still hasn’t fully recovered.
Reinsurers, which offer policies to insurance companies to cover catastrophic damages beyond their resources, have raised their rates significantly to recover reserves.
Sandra Glaser Parrillo, president and CEO of The Providence Mutual Fire Insurance Co. in Warwick, said her company has not made any significant rate changes in the wake of the coastal issue.
An average 14 percent rate increase was made a couple years ago and Parrillo said the company has made attempts to diversify its book of business to include more inland properties.
She said, however, the company has had to buy additional layers of reinsurance to cover the increased PML, although she wouldn’t get into details.
“It’s a frantic situation,” she said. “As a CEO, you lose a lot of sleep figuring out which way to go. What’s worked best is to take the conservative approach.”
Dennis Charland, executive director of the Independent Insurance Agents of Rhode Island based in Warwick, said this phenomenon has already made a significant impact on rates in Cape Cod.
The hurricane models forced at least two locally based insurers to withhold writing new policies, forcing a near crisis in homeowner’s insurance. The situation has stabilized a bit as the FAIR plan, Massachusetts’ insurer of last resort, has written homeowner’s policies.
Rhode Island may not be hit as hard since the bay protects much of the coastline, Charland said.
“That’s not to say we won’t be hit with high costs,” he said. “There’s been a lot of protections put in place, like the hurricane barrier in Providence, but it’s not enough to completely stop a hurricane the size of those in 1938 or 1954.”
Brian Berk, senior assistant vice president in the personal lines division at Lincoln-based Amica Insurance, said the computer models played a role in raising homeowner insurance rates in February by at most 20 percent for coastal property owners.
“These models said we should have made 32 percent increases,” he said. “But we don’t want to hit customers with too much of an increase.”
Another factor in increasing rates was the fact that Amica lost roughly $9.7 million insuring homes in Rhode Island since 2000. As of 2003, the company has 28,670 customers in the Ocean State paying premiums of $16.7 million.
Berk said since Amica is a national company, it can afford to limit rate increases by leveraging risk by writing policies across the country.
However, he said smaller insurers could have problems.
Charland said increased prices could force insurers away. The Department of Business Regulation says insurers cannot “aqualine,” or withhold policies based on oceanfront locations, and this could force them to choose to leave the state altogether rather than face a dim profit forecast.
“The Legislature could get involved if things go too far, and that could have an adverse impact,” he said. “The insurance industry as a whole could create a better way.”
Rich Attanasio, managing senior financial analyst at insurance rating company A.M. Best, said the industry from insurers to reinsurers has done a “fair” job adjusting to the risk posed by possible hurricane activity.
“Rates across the East Coast have increased and there are more deductibles put in place for wind damage,” he said. “Homeowner’s insurance has not been profitable for a while now, but I think it’s coming into line.”
He added that the amount of coastal development is on the rise, which indicates to him that overall there is more risk out there based on the number of homes. However, he said the recent computer projections did not indicate there was more risk out there.
“The risk has always been there,” he said. “It’s just that there is a better understanding of that risk.” Lathrop said the risk posed by hurricanes is largely overblown, particularly by reinsurers.
“Usually homes on the coast cost more and people spend more to protect them,” he said. “And, there are fewer trees near the coast to fall and damage a home.
“Local insurers know this, but reinsurers driving the costs are assigning risk based on zip code. These rate jumps are not completely justified.”
