The Homeowners Insurance Adventure Continues

These days, the insurance industry, especially in catastrophe hurricane exposed areas like Long Island, is changing very quickly. This is very different from not too long ago. Insurance companies and their employees tend to be very conservative, resisting changes sometimes for years before caving in. Agents tend to be the same, because our job is to protect against risk of loss, as opposed to many other business and personal models, where taking risks is part of the fun.

These days, change is fast and drastic. I have not posted here in about a month and a half, but in that time, several more carriers have stopped or severely cut back on writing home insurance on Long Island, especially within a half mile of the water. The latest one I heard about was State Farm, who stopped writing new policies within 2500 feet of the Bay. Adirondack Insurance recently severely limited their new policies in all of Suffolk County regardless of distance to water, and New York Central Mutual is not only limiting new policies, but they recently became part of the group that is actually canceling people.

Allstate continues to cancel thousands of policyholders, though they have made some efforts to bring other companies to the table so that their Long Island agents still have something to sell. There are almost no new players coming in to the New York market, except for some 'excess lines' carriers such as Lloyd's of London and Lexington Insurance Company. These carriers write policies at a much higher price, but at least they make coverage available.

If it turns out you are forced to seek insurance from one of these non-standard companies, be sure the agent you are dealing with has experience with them, especially with waterfront home insurance issues, and knows what to look for. We have seen policies that COMPLETELY EXCLUDE wind damage! What is the point of having insurance if you are not covered for a hurricane, which is just a big windstorm with a name? Some of these policies also carry exclusions for pets, underground oil tanks, and other unusual clauses. We have also seen policies that offer 'actual cash value' coverage on the structure itself, which takes depreciation based on age, as opposed to a 'regular' homeowners insurance policy which insured at replacement cost.

Of course, these policies still do not cover flood damage even though they may cost 2-3 times more than what was considered normal for Long Island home insurance only a couple of years ago. Flood insurance continues to be available through your local agent via the FEMA National Flood Insurance Program, and excess flood insurance is available from a number of companies, when the $250,000 maximum building coverage through the FEMA program is not enough.

Remember also that if your policy is through an excess and surplus insurance company, you are NOT protected by the New York State Guaranty Fund. That fund provides up to $1,000,000 in coverage if an insurance carrier defaults or becomes insolvent. Lloyd's prides itself on never having defaulted on a claim in over 100 of years of existence. And Lexington is part of AIG, the world's largest insurer. Still, the fact is they are not subject to regulation by the New York State insurance department, nor backed by the Guaranty Fund.

Another solution that is being used is the New York Fair Plan, otherwise known as NY Property or NYPIUA. That is a state-run operation that was designed to provide basic fire insurance for properties in blighted areas or which have other problems. But the policies provide NO liability insurance, no theft coverage, no coverage for burst pipes, and have many other restrictions. Again, in some cases, this may be your only practical option, but you need to be aware of just what you are buying. We have come across insurance offices here on Long Island telling their clients that they are getting a homeowners policy from NY Property, and nothing could be further from the truth.

As always, for more information, visit our sites at www.NYInsuranceWithService.com or www.FloodInsuranceNY.com.

What is a Hurricane/Wind deductible and why is it on my Homeowners Insurance policy?

If you are a resident of the Long Island area and have not looked at your homeowners insurance policy lately, you probably should. One of the big changes that has come about over the last couple of years is the addition of a special, higher deductible for hurricane damage. Sometimes the higher deductible is for 'wind and hail', not just specifically hurricane. It depends on the insurance company.

So what does this mean? Quite simply, it means that if Long Island is hit by a hurricane, instead of your standard policy deductible of $500 or $1000 (the amount you have to pay in a property loss, after which the insurance company pays) may instead be tens of thousands of dollars! Usually, the deductible is a percentage of the amount of insurance on your house, ranging from 2% to as much as 10%. By law, the insurance companies must put both the percent and the dollar amount on the face of your policy.

These are being dictated by the reinsurance companies, the place where insurance carriers go to protect themselves againts catastrophic losses (those that affect large numbers of policy holders at the same time). These are your giant off-shore companies, many based in Bermuda or in the London market. They are not subject to the same state regulation as our 'domestic' carriers, and so they can decide what they want to charge and what coverages they will provide, and our Long Island homeowners insurance carriers pretty much have to live with it or assume more risk themselves, which they don't want to do.

As an example, if your house is covered for $400,000 and you have a 5% hurricane deductible, you would have to shell out $20,000 after a hurricane before your insurance company would be involved. And one of the biggest problems is that there is no standardization among the insurance carriers. Some have deductibles that activate with ANY hurricane that hits Long Island, some for category 2 storms, some just for any wind or hail whether or not it's associated with a hurricane.

There has been some talk in the state legislature about allowing a tax deductible savings plan that people can put money into each year to prepare for paying these large deductibles if a hurricane hits. The Small Business Administration (SBA) may also get involved in offering low interest loans but that is not guaranteed at this point in time. You can also buy an insurance policy to cover the deductible, from Lloyd's of London, for about 10% of your deductible. So in our example above, it would cost $2000 a year to cover your $20,000 deductible, not a very good bet.

This is an evolving area and as insurance agents here on Long Island, and in particular in Suffolk County, we need to be paying attention. But as consumers, readers of this article need to look at their own policies and make sure you understand what coverage you have so it doesn't come as a surprise when the inevitable storm hits.

Controlling Car Insurance Costs - The Big Picture

Car insurance in New York is a highly competitive business. You can't pick up a newspaper, listen to the radio, watch TV, or drive by billboards without being assaulted by cute little lizards with Australian accents, companies urging you to honk, etc... As we all know (or at least think we know) competition is very good for consumers, resulting in lower rates and better service as companies trip over each other trying to win your business.

Or does it really work that way? In theory, it should, and certainly we as agents have experienced rate reductions with our carriers, as well as new programs that have lowered costs a good amount for many people. But in a report by New York City comptroller William C. Thompson Jr., as reported in the Insurance Advocate, an industry trade magazine for the tri-state area, it seems like the competitive process is not working well enough or fast enough to be fair to the end consumer.

Now it would be pretty obvious that Mr. Thompson has a particular 'bias' towards his constituents, the residents of New York City. The city tends to be a difficult place for insurance companies to do business, with a high concentration of values, a lot of traffic congestion, and pockets of massive fraud. Still, his statistics apply to the whole state and present a picture that suggests insurance companies have a long way to go to get to rates that are fair to all.

He points out that in 2005, premiums of $10.5 billion were reported, against losses of $5.1 billion, leading to record profits among auto insurers. (Did you think they were doing all this advertising because they just like us a lot as people?) Those premiums are up 29% since 2000, while losses are down by over 20%!

In fairness, he notes that premiums have dropped somewhat and continue to drop. Insurance companies tend to be very conservative, and they are very careful because one good year does not make for a trend in lower costs. In addition, because of injuries that take a long time to treat, and lawsuits that can take years going through the courts, as well as insurance department rules that cause it to take time to process rate changes, we can't expect rates to change this month based on last month's claims.

Still, five years is a long time, and he makes very valid arguments for lower rates and more scrutiny from regulators and municipalities in trying to get the best rate for the buying public. Insurance is not an optional purchase, it's more like a tax on people, with private companies given the right to collect that tax. In that sort of situation, maybe not totally unlike rail, gas, and electric utilities, it's part of the government's job to make sure that private companies are not taking unfair advantage.

You can view Mr. Thompson's full report at http://www.comptroller.nyc.gov/.

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