Insurance trends for 2008
What is the forecast for insurance rates this year?
Robinson: The FAIR Plan has submitted a request for another 25 percent rate increase for homeowners insurance in coastal areas – specifically, all of Cape Cod and areas west and north of the Cape. It is my personal opinion that the Insurance Commissioner will allow a modest increase and not the full amount requested.
Miller: Homeowners can expect stable rates from insurance carriers and a 25 percent increase from the FAIR Plan. We have probably seen the last of large rate increases from traditional insurance companies, as their strategies have proven to work in managing their models. The lack of storms and reduced reinsurance costs have made the area profitable.
Helm: Consumers may benefit surprisingly from increased interest shown companies collateralizing their property offerings with new 2008 changes to the Massachusetts Auto Insurance market. With competitive auto rating, we will see companies being creative with crossover policy offerings with a positive impact on homeowner policies. The recent shareholder approved acquisition of Commerce Insurance Co. by the Spanish powerhouse Mapfre, assuming final approval is permitted by regulators, may provide some interesting options. Mapre owns its own reinsurance company, making it possible to contain and control those expenses and take advantage of Commerce’s great reputation and distribution network in the commonwealth.
What about wind deductibles?
Miller: Wind deductibles will not rise for traditional insurance companies. The 1 percent, 2 percent, and 5 percent deductibles, as they relate to the building values, will continue depending on carrier and location of the property.
Gordon: For the time being, I think wind deductibles are stabilizing. But consider this: I live on River Street, am more than 3 miles from the ocean, and I have a 2 percent wind deductible. Yikes.
Helm: Windstorm deductibles have been around now for a few years and I don’t expect any changes. My concern is that when a storm does cross Massachusetts, and it will, that many property owners are completely unaware that they have such a deductible even though it appears on their policy. There will be some very unpleasant surprises.
Insurance rates have risen because of recent and devastating hurricane activity – even though the damage occurred far from the Cape. Will the recent mild seasons have any positive impact on rates?
Robinson: The last two years have been very quiet for hurricanes all up and down the Atlantic coast and the Gulf of Mexico, even though many forecasters had predicted several hurricanes. As a result, the cost of reinsurance (the insurance that insurance companies purchase to protect themselves from catastrophic events) has declined. This will take the pressure off any major increases for the time being.
I would expect some companies will seek modest increases for inflationary reasons, others for “catch-up” rates, and others may seek no increase. Many companies are still shying away or managing the number of exposures they have in coastal areas.
Miller: I believe the long-term future is very strong for stable rates with the potential for modest reductions in pricing – carriers are starting to see an opportunity in coastal areas as reinsurance costs are reduced modestly. We potentially could realize 10 percent reductions from carriers that may want entry into the coastal homeowners’ market place. A modest Category 2 hurricane will definitely influence rates and capacity.
Gordon: The last two hurricane seasons have helped slow the increase. We’ve heard that reinsurance costs were down 20 percent to 30 percent this year, though they are still up 60 percent over where they were three years ago.
Should we expect more or fewer insurers in the market?
Robinson: The good news is there is a new company that has entered the Cape Cod market. Narragansett Bay Insurance Company started to write homeowner policies on the Cape in April 2007 on a limited basis.
Recently, it received $200 million of new capital and is now willing to write a lot more policies. If a homeowner is eligible for a number of their credits (such as safe homes, home upgrades and improvements), if they are not too close to the shore and if the elevation of their home is above sea level, the premium can be quite a bit less than the FAIR Plan and other companies in the market.
Hopefully, Narragansett Bay’s entry will bring other companies into the market and create some more capacity and competition.
Miller: I do not hear about any other carriers abandoning the marketplace. Some will continue to review their models and make adjustments appropriately in regards to applying wind deductibles and taking some reasonable rate increases.
Gordon: With the FAIR Plan still significantly underpriced, it’s easier to exit coastal areas than to try to compete with this heavily subsidized state alternative. Cost increases are neither an easy nor convenient solution, especially for coastal property owners. But without charging for the single-highest expense in its cost structure – the risk of a major storm – pricing distortions will continue to drive more business to this insurer of last resort. For the trend to reverse, or even to moderate, FAIR Plan prices must rise to reflect the new economics of coastal insurance protection.
Helm: Narragansett Bay Ins. Co. started writing selective risks in the past year and does a good job to offer inland Barnstable and Plymouth County property owners some real product and rate relief, but Narragansett’s wind/coastal surcharge rating structure makes it unrealistic to place coverage with them if you are within ½ mile to the coast. We are seeing other specialty carriers returning to inland markets on a very selective basis.
Beyond Narragansett Bay, are there other alternatives to consider as a homeowner?
Robinson: There are very few alternatives other than Narragansett Bay presently. The FAIR Plan continues to grow, picking up most of the business left behind from companies that have left the market. Most companies don’t want to increase their exposures to new policies – so the FAIR Plan becomes one of the few willing to write policies.
A couple of companies will write a few new policies, but not many. There are some non-admitted (not filed or approved by the Massachusetts Insurance Department) insurance companies that will write policies, but because they are not approved by the state, they are not part of the guarantee fund that was established in 1971 to protect policyholders. We recommend homeowners use admitted insurance companies.
Gordon: The fact that the FAIR Plan is beginning to approach market rates, at least in some areas, will slow the exodus of carriers from the coastal band. This recent FAIR Plan rate approval will stabilize the market, but at higher rates. Consumers will have to pay closer to statistically sound rates, which are of course higher than rates charged by the FAIR Plan today.
Are there any long-term solutions to the residential insurance squeeze?
Robinson: This past summer, a special commission was created by the Massachusetts Legislature to look into the crisis and to make recommendations to the Joint Committee for Financial Services on Beacon Hill
I was among the appointees to the commission, representing the Massachusetts Insurance Agents Association. There are some administrative improvements that can take place, and I know some are under way, including better payment plans and more information available to consumers. However, there are no easy answers.
Helm: There are two problems. Political realities are such that there needs to be creative thinking to encourage carriers to re-enter the market. You asked earlier about windstorm deductible. There are commissions consisting of insurance company representatives, insurance agents, and members of the Legislature that have convened to develop input on things like wind insurance pools. Companies would be able to exclude loss from wind as a covered peril, and pool would give the consumer the choice of either self-insuring wind or purchasing a separate policy. Property owners would be rewarded by making modifications to their property to reduce their risk. Consumers must also modify their expectations of what insurance is for. Insurance should be thought of as protection of financial loss due to a catastrophic event, and not for the replacement of a few shingles or water stained ceiling.
Any other insights you have for homeowners?
Robinson: Hopefully, we will never get hit by a major hurricane as some predict. However, homeowners need to do all they can to protect their homes, whether it is cutting down trees that could hit their houses, installing hurricane shutters or placing tie downs on their roofs.
The other thing is to continue to pressure legislators, and not just local ones. It will require the full body on Beacon Hill to pass any legislation that will help the problem.
Homeowners need to stay in touch with their agents and stay abreast of the situation because it is always changing. Let’s hope that there are fewer and fewer hurricanes ahead – not like the number and severity we had a few years ago.
If we get more hurricanes (anywhere in coastal United States), the situation for homeowners insurance may only get worse.
Helm: You can’t do much about changing the course of a storm, but the homeowner and property owners need to take real steps to risk manage their exposure to loss which will make themselves and their property ‘marketable’ to current insurance companies. New and existing structures can be modified to control loss by the use of hurricane shutters and placing costly equipment like heating and air conditioning units inside above flood prone areas. Owners should consider raising coastal homes to meet or exceed new flood code height requirements. Protecting property now may allow years of enjoyment that would otherwise be lost if the home is destroyed and re-building is not permitted. At some point, companies will offer credits for such improvements, or mandate them as a condition of coverage, as is the case in other hurricane prone areas throughout the country. Installing shutters on coastal homes can give the owner a sense of security that protects from wind and flying object, but they also reduce the risk of off season theft and vandalism. Anything that one can do to reduce a loss (and requisite deductibles) makes sense.
Published in Cape Business Health & Wealth March/April 2008
