Trying to Sort Out the Homeowners Insurance Mess

I hope everybody had a happy Thanksgiving.

Today I was reading one of a number of insurance industry email newsletters that come daily. It's the modern way to keep up with what's going on. One particular article caught my attention and relates back in an interesting way to our ongoing discussion of the Long Island homeowners insurance situation.

The article says that a new company is rolling out a big car insurance program across the country in something like 35 states including New York. But the auto insurance market in NY is, if anything, super competitive and super saturated. The big direct writers and one-company-agent companies have long held most of that market and so they are battling it out for the most part amongst themselves. '35% Savings' and 'New Low Rates' are all over the place.

But there is so much money to be made on car insurance overall that new companies continue to want to enter the fray. It's very good for consumers because the competition keeps prices low and service levels high.

So what does this have to do with homeowners insurance on Long Island, you may well ask. Well, I did too. So I went to the new company's web site and looked around. There was the car insurance product, branded under their name. Then when I looked at the homeowners insurance page, a different link showed up in the sidebar. It said 'view a list of the 40+ insurance companies we represent'. A very impressive statement, but it doesn't show up on the auto insurance page at all.

Why? Because like GEICO and Progressive and AIG and any number of 'auto only' programs, this new company doesn't want to get involved with property insurance except as a selling agent or broker! Yes, auto insurance is profitable right now. But more importantly, car insurance is homogeneous across the country. There are variations in state law, but for the most part, it's something the insurance carriers can work with.

But since 9-11 and Katrina, insurers have begun to realize that HUGE amounts of property in the form of homes and businesses can be wiped out in one event, and that those events can actually occur. The industry was able to pay for Katrina but what about here, with our row upon row of million dollar homes?

So part of the key to solving the Long Island homeowners insurance issue in the short run is diversification, spreading it out to more companies. In the longer run, there are other possibilities including government backstops, all-peril insurance policies, catastrophe bonding, and some exotic financial instruments that are beyond the scope of this blog (meaning I don't understand some of them either)

More to certainly come. Next: What's happening in Flood Insurance.

Mild Hurricane Season Brings Record Insurance Profits

The past few weeks have brought third quarter earnings reports from some of the major insurance carriers, and it's been interesting. As has been discussed here during our articles about the homeowners insurance situation here on Long Island and elsewhere along the coast, insurance carriers spent the last year and a half goint into a very conservative mode, cutting back on their coastal property risk (by cancelling policies in the case of Allstate, Encompass, Vesta Shelby and others) and raising prices.

What has happened is that this ended up being one of the mildest seasons in years for catastrophes such as hurricanes, and so we are seeing reports in the newspapers and financial publications that the companies are showing record profits. Sort of like what happened to the oil companies whe prices rose a few months back.

Unfortunately, and maybe rightly so, these record profits will, if the industry is not very careful, create a public relations nightmare. While they are canceling policies and restricting coverages, crying that they need to protect themselves from catastrophe risk, the idea that their shareholders are making tons of money does not seem to be in the best public interest.

In addition, they are not encouraged by tax laws to put this money away for possible future losses, as would seem to make sense. Unfortunately insurance carriers are not allowed to set aside money on a tax-deferred basis for future losses. And we all know that savings, whether it's your personal IRA or other retirement plan, or planning for catastrophes, is driven by the tax code.

One of the parts of the overall future plans to help insurance carriers and the public to deal with the problems in the homeowers and flood insurance areas will be the ability to put money away on a tax-deferred basis to cover possible future losses. This will apply to both insurance carriers and insurance customers.

For the carriers, they would then be able to take some of these record profits and put them away for the inevitable bad year. Unfortunately Congress could not get agreement on this quickly enough to help with the current profits, which would have made for a great opportunity to get started.

This sort of thing will help consumers as well. Right now in the Long Island homeowners insurance market, most people anywhere near the water (and we're talking 3-5 miles here, which includes most of the island) face a deductible on their home insurance policy of anywhere from $5,000 to $20,000 or more. (Most deductibles are in the form of a percentage of the coverage on your house - if you don't understand your coverage, please ask your agent or visit our web site at www.NYInsuranceWithService.com for contact info and we will explain it to you at no cost or obligation) . One proposal currently being reviewed would allow people to set up tax-deferred savings accounts, similar to an IRA, that would be used to cover that deductible in the event a major storm struck.

As always, for more info please visit our site and/or contact us. Insurance is one of those areas that the public needs to educate itself, because your policy these days can come back to bite you at the time you need it most.

Mommy, Where Do Insurance Companies Come From?

Hi All. Sorry for the long break between posts. I was away for five days at the annual Rotary International Northeastern U.S. conference, and another five wonderful days visiting Mickey and friends in Florida. Nice to get away but somehow life keeps happening behind your back and likes to spring on you when you come home.

In any event, I thought it would be interesting to write a little about the origins of insurance in general, and homeowners insurance in particular. A lot of people tend to think of insurance as one of those pain-in-the-neck things that the State or their bank makes them buy, but the truth is that a lot of the things we like so much, ownership of property being a big one, driving a car another, would be impossible without some mechanism to spread the risk.

A couple of thousand years ago, people lived in mostly small huts that could be rebuilt with a neighbor's help in a couple of days. And if you lived in a big house, you probably had plenty of money, and slaves to do the re-building if there was a fire or other damage. The concept of insuring something of value started with seagoing trade between nations and continents, and so the field of Marine Insurance was born. Marine insurance is the oldest and probably most interesting of all insurance. It continues today both in the Ocean Marine type as well as Inland Marine which is used to write everything from giant cranes and bulldozers to your diamond engagement ring insured on a rider to your homeowners insurance policy.

Back in the early days of shipping trade along the Mediterranean Sea (thing Ancient Greece), ships started to bring gold, spices, silks, and lots of other interesting stuff from foreign ports of call back to sell in their home areas. After a while, the value of the cargoes carried got so high that the ship owner/captain could not afford the risk to the cargo. Although standard shipping rules even in those days did not make the captain responsible for all losses, even if he was not held accountable, he still might lose all the revenue from the sale of a lost cargo, and that could put him out of business and land him in debtor's prison.

So someone came up with the idea that wealthy merchants could absorb all or a part of the loss that might happen from certain agreed-upon perils such as storm loss, stranding, barratry (fraudulent acts of the captain or crew) or other 'perils of the sea'. In return for their promise to pay a certain amount to the owner of the cargo in case of loss, they received a payment from the owner called a 'premium'.

This would be done at the local taverns down near the seaports. A captain would post on a board that he was bringing a certain amount of such and such cargo from a named place, and local merchants and others would write their names under the posting including the amount of risk they were willing to accept. This is the direct beginning of the term 'underwriter', and in a broad way is still the way insurance is transacted by Lloyd's of London, the most famous insurer in the world.

For instance, if someone wants to insure the legs of a famous movie star for $10,000,000, it is presented to Lloyd's or another similar company (Lloyds is actually a group of many syndicated made up of people and organizations with money they would like to invest in this type of insurance). One or more syndicates will step forward and offer to accept all or part of the risk for a certain premium that they calculate.

The people who calculate what rates to charge for insurance are called actuaries, and are some of the best math and accounting people on the planet. They make or break the success of insurance companies, and the good ones are very highly paid for their efforts.

More next time. Meanwhile, for more info visit our site at www.NYInsuranceWithService.com

Long Island Homeowners and Flood Insurance Issues, Continued

It's been a few weeks since I had a chance to write a post. Mostly it's because we have been renovating my office. We have had two or three work crews at a time here daily. Now it's getting down to the trim and painting, so it's just a little slower. You can see pictures of how it's coming out at my other blog, www.aroundbabylon.com.

Anyway, my being busy has not stopped things from happening in the Long Island homeowners insurance and flood insurance market. Since I last wrote, several more companies, some of them fairly large players, have either announced that they will no longer be writing homeowners insurance either here on Long Island or, in some cases, in New York State.

Part of the problem is that here on Long Island is where the largest concentration of high valued homes exists. So many companies tried to write lots of business here to increase their cash flow, but are now in panic mode because after seeing what happened with hurricane Katrina, they now realize that they have a big exposure here that is not offset by customers in other areas that are not subject to 'coastal' issues.

For instance, it's not that people in upstate New York never have claims. And they DO have 'catastrophic' claims using the insurance meaning, which refers to something that affects a lot of people all at once, as opposed to a fire at someone's house, which might melt some siding on the house next to it, but generally does not affect a whole area.

In some upstate counties, for instance, they can have major ice storms that damage a lot of houses. But it's still not nearly the same as here on Long Island, because the houses tend to be much further apart (less concentrated) in most upstate areas, and the values are lower. As we all know, a house that sells for $450,000 here can still be had for $200,000 in most other parts of the country, maybe even less in some.

Interestingly, some of these areas that you would not expect have flood issues as well. Newsday a couple of weeks ago had an article about a number of people who live in Pennsylvania, along the Delaware river, just 'downstream' from the reservoir system that provides water to New York City. It seems that because of droughts that have occurred in the past few years, the water people now try to keep the reservoirs at 100% of capacity. But the flip side of that is when it rains a lot, BILLIONS of gallons of water overflow the reservoirs and have been creating flooding problems along the Delaware river!

There are a lot of post-Katrina changes coming to the Federal Flood Insurance program through FEMA, and some of them won't be pleasant for those living in primary and secondary flood hazard areas. More to follow on that, but in the meantime if you have questions, you can contact us through our web site at www.FloodInsuranceNY.com

Insurance Groups Disagree on Catastrophe Insurance

As we look back at Katrina with a year of perspective and new information on what can happen in a major hurricane, the insurance industry continues to hash out what needs to be done to try to make the next such event 'less awful'. And they don't agree among themselves. I read an interesting article recently about one of the major points of disagreement.

I think most non-insurance people would probably think that ALL the insurance carriers would immediately agree to what would amount to a Federal government bailout the next time there is a major catastrophe whether natural (a la Katrina) or man-made (think 9-11-2001). But the reality is quite different.

The American Insurance Association (AIA), which represents over 400 insurance companies writing $120 billion in premiums, came out with a National Catastrophe Agenda that contains specific steps they believe are necessary to prepare. They have recommendations for government officials, individuals, businesses, and insurance carriers. They believe that if we all work together doing things like strenghtening and enforcing building codes, giving tax incentives for retro-fitting changes to existing homes, improvements in the FEMA Flood Insurance program, and numerous other areas, we can greatly improve our overall readiness and restoration afterwards.

The one piece they don't necessarily want, believe it or not, is a federal backstop for major insurance losses. Their feeling is that, so far anyway, the private reinsurance market has been able to take care of 'backstopping' catastrophes through the standard industry practice of insurance companies buying their own insurance, in the form of reinsurance, for the large losses. They know there is work to be done with State insurance departments about how reinsurance costs are passed along (or not) to the consumer, but still overall they believe that there are sufficient resources in the private sector and prefer not to increase government costs and regulation.

On the other side of this issue, is a major player. This player is, first of all, quite large enough to be entitled to their own point of view. They also have gone along for many years with NO reinsurance protection, believing they were large enough to spread their catastrophe losses over their huge client base across the country. Unfortunately, four hurricanes in a couple of weeks in Florida, followed by Katrina a year later, pointed out a weakness in their plan.

That player is Allstate. Now that they have found just how badly they could be hurt because they wrote as much insurance as they possibly could in coastal areas, (not just right on the water, the danger zone goes 10 miles inland. That's why Long Island is having a particularly nasty time with homeowners insurance right now. Pretty much everything on Long Island is within 10 miles of a shore) they are in full-blown panic mode. Their management has a clear obligation to their stockholders to do something about this situation, hence all the canceled homeowners insurance policies all over Long Island and the downstate New York area.

Anyway, Allstate says the AIA proposal is badly lacking in that one key area - a Federal government 'backstop' that would basically bail out Allstate and maybe a few of the other really big players in a major catastrophe. This basically amounts to getting reinsurance that they should have been buying all along, but guaranteed by the government. They also figure that if it's a government program, even though they would probably have to put large amounts of money into the program, they would also probably be allowed to include those costs in their rates. Currently in New York, insurance companies are NOT allowed to include reinsurance costs in calculating rates. Rates have to be based on loss history that can be demonstrated with historical data. Reinsurance doesn't come in to play as far as the State Insurance Department is concerned.

These programs always get SOME funding from within the industry. The most common example is FDIC insurance for bank accounts. Banks pay a percentage of their income into a fund that is then used to cover insured accounts at failed banks. But when something really bad happens, like the Savings and Loan debacle of the 1980's, the taxpayer ends up footing most of the bill. In addition, the S&L bailout showed that big companies (in that case, banks, but it applies to big insurance companies too) tend to be a lot less prudent and careful when they know their mistakes will be covered by taxpayer dollars.

It's all very interesting. And it will affect our daily lives here on Long Island in the form of higher homeowners and flood insurance costs going forward, no matter how you slice it. As always, for more info you can contact us through our web site at www.NYInsuranceWithService.com.

The Long Island Homeowners Insurance Mess Continues

It's been a couple of weeks since I actually have had the time to post here on the blog. Our office has been swamped with calls and visits. The chief reason this time is that another homeowners insurance carrier has pulled out of Long Island.

This time it's a carrier who specialized in waterfront property, and rather than make a decision to gradually lower their concentration of customers on Long Island for home insurance, as Allstate did, this company was put into receivership by the Texas Department of Insurance and was required to cancel ALL their policies in New York as of August 24, 2006.

The company, Vesta Insurance otherwise known as Shelby Casualty was a relative newcomer, having only entered the home insurance market in the past few years. But almost all their policies were for homes right on the water, and so between that and the fact that they all are running out the same day, it's been hectic for all agents trying to find other carriers. About 8600 homeowners insurance policies were affected.

On the plus side, recent analysis of weather patterns now suggests that we may NOT be in for a more active storm year than usual, and that the chances of a Katrina-sized storm hitting us this year may actually be lower than normal. This is good news, but it still does not mean that there is NO chance, and it looks like when (not if) such a storm does hit, the dislocation in the Long Island insurance market is going to be tremendous.

Meanwhile there was a good opinion piece in this past Sunday's Newsday considering whether hurricane/windstorm needs to be put in the same category as flood insurance, unemployment, and several other key types of insurance that are considered potentially so large that only the government has the resources to assume the risk, based on their taxing power.

This article is fine as far as it goes, though it does not get into the fact that building codes also need to be changed, people need to take proactive steps to protect their property, and a number of other issues need to be addressed. This problem is not going to go away, and it's not going to be solved simply by insurance or government support of insurance carriers.

As always, for more information on flood insurance and homeowners insurance on Long Island, visit our sites at www.NYInsuranceWithService.com and www.FloodInsuranceNY.com.

Scary Stuff

Well, back to our ongoing discussion about the Long Island and New York homeowners and flood insurance situation, and hurricanes in general. CBS News has an article today in their online version that has some scary information. Check it out here. I didn't realize that because of various geographic and weather issues, it would not take a category 4 or 5 storm, only a category 3 to really do some major damage to our area.

I live 2 blocks south of Sunrise Highway, and I bought flood insurance a couple of weeks ago. Coverage in those areas that are not considered high hazard is reasonably priced ($352 for the FEMA maximum of $250,000 on the structure and $100,000 on contents) and it's worth it for the peace of mind.

The one thing this article really points out is that the insurance companies, municipalities, and residents are basically in denial and are using the 'keep your fingers crossed' method of preparing for the inevitable. It might not happen this year, or next, but at some point it will.