As troubled bond insurers like MBIA and Ambac fight to maintain their triple-A ratings, officials at these firms are pondering how their businesses might look if they do indeed get downgraded.
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An executive of The Hartford told Florida lawmakers today that the group would need five or six more years of strong profits to recoup losses from 2004 and 2005 hurricane seasons.
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A backlash against insurers is building in several coastal states where homeowners’ insurance premiums have increased sharply, despite several years of rising industry profits and an uneventful hurricane season in the East.
In the Florida housing market, where back-to-back hurricanes have helped some rates more than double since 2004, the state legislature yesterday approved a measure aimed at reducing homeowner premiums offered by private insurance companies by 5% to 25% or more.
The legislature has been meeting since last week in a special session specifically aimed at addressing the state’s insurance crisis. The measure now goes to Republican Gov. Charlie Crist, who has made insurance-rate cuts a top priority since taking office this month.
That comes after several large insurers in California recently agreed to roll back homeowner insurance rates by as much as 20%, or a total of $439 million. The cuts, by insurers including Farmers Insurance Co., State Farm Mutual Insurance Cos. and Safeco Corp., came in response to the state insurance commissioner’s efforts since last summer to force down rates in the state.
Premium rates rose substantially in the state in the early part of the decade, and many California mortgage holders lost their coverage after devastating wildfires in 2003.
Insurance companies are regulated by the states, and officials in Connecticut and the Georgia housing market recently rejected some requests for further insurance-rate increases.
Also, regulators in both states are investigating whether insurance companies are maneuvering to circumvent rules aimed at making sure that homeowners in all areas, including riskier coastal zones, can get coverage.
Last year, home insurance rates along the Atlantic and Gulf coasts rose between 20% and 100%, or more. Homeowners also are paying more for less, because insurers are dropping policy coverage for wind, hail and mold damage in many states.
By contrast, rates outside of coastal areas last year rose between 2% and 4% nationally, according to the Insurance Information Institute, an industry research group, and are expected to rise modestly in 2007.
The backlash comes as the insurance industry has had three straight years of rising profits, despite 2005’s devastating Hurricane Katrina, the country’s costliest ever.
Property and casualty industry profits rose to $68.1 billion in 2006 from $49 billion a year earlier, according to A.M. Best, a ratings concern.
Insurance officials say the high profits essentially reflect the industry making hay while the sun shines. In most years since 1980, insurance companies have barely broken even or have paid out more in claims to mortgage loan holders than they collected, says Julie Rochman, senior vice president of the American Insurance Association, a trade group.
“It’s a good idea that insurers have good years so that we are around for exceptionally bad years like 2005,” she says.
Analysts and insurers say that if states force insurers to take on risks they don’t want or to price their policies too low, then companies might withdraw from unprofitable markets, creating shortages, or be unable to pay claims.
To read the rest of this Wall Street Journal article, click here.
An editorial in the Seattle Post-Intelligencer urges that since the ‘06-’07 winter flood season kicked off with record-breaking rain in the Northwest, we ask ourselves, as a nation, what we can do to mitigate the impact of floods and mudflows.
We can’t control the weather - that’s a given.
But what we can control is the level of financial protection that homes, businesses and communities have against the potentially disastrous consequences of floods caused by heavy rains and again by melting snow.
The most important thing Americans can do is make sure that 100 percent of properties at the highest risk for flooding — those located in Special Flood Hazard Areas — are protected with flood insurance.
Special Flood Hazard Areas received that designation because history, hydraulics and hydrology show that significant floods have occurred and will occur in the area. Banks and mortgage lenders require home buyers in SFHAs to get flood insurance in order to get a mortgage.
But it’s not just those with home mortgages who are at risk.
People who own their homes or businesses outright and renters also need to assess the risk and protect themselves with flood insurance on top of regular homeowner’s insurance. Not to do so is shortsighted and extremely dangerous, especially because the average annual cost of flood insurance, even in the highest-risk areas, is around $500.
To put that in perspective, individuals can financially secure their homes and businesses at a cost roughly equivalent to a year’s subscription to cable television. There’s no reason to put your home - and your ability to pay the home mortgage loan - at risk just to save $500 a year.
But what will it take to bring this integral hazard insurance coverage in Special Flood Hazard Areas up to 100 percent?
A solid grass-roots effort will require a real commitment from three critical groups: community leaders and local officials, real estate professionals and insurance agents. They all have crucial roles to play in educating the public about flood risks and in encouraging people to protect their properties adequately. The message can’t come from FEMA and the National Flood Insurance Program alone.
While we work together to achieve 100 percent coverage in SFHAs, we should also be aware that 20-25 percent of all insurance claims made annually come from low- to moderate-risk areas. When it comes to winter floods, water doesn’t pay attention to man-made floodplain boundaries.
The fact is, floods happen everywhere in the U.S. From November 2005 to April 2006, federally declared flooding disasters occurred in eight states from California to North Dakota, causing flood damage to thousands of households. As the nation enters into yet another active winter flood season, Americans need to act now to ensure they are protected before the floods and mudflows strike.
The National Flood Insurance Program is committed to doing its part. Every single NFIP flood insurance policy represents someone who has made the smart decision by buying flood insurance.
It also represents a legal promise by the NFIP and Congress that in the event of a flood, their claim will be paid.
The soaring cost of homeowner’s insurance may be starting a new retirement trend in the United States, the chief economist for the National Association of Realtors said Friday.
“There will be a whole new set of destinations because of the hurricanes and the rise in the cost of insurance,’”David Lereah said Friday at the NAR’s convention in New Orleans. “People are going to think twice about wanting to live on the water.”
This would have a negative effect on home mortgage loan demand in states such as Florida.
Afterall, a decade of severe hurricanes that have pounded the Sunshine State, the Gulf Coast, Louisiana, Texas and places up the Eastern coastline, has increased the price of homeowner policies and the difficulty in obtaining them, Lereah said.
“If we could sift out all the other problems (hurting home sales), the problem that will remain is the availability and affordability of insurance,’ he said. “Start in southern Florida and work your way up to [the Maine housing market].”
In Florida, which has had 12 hurricanes since 1995, the cost on homeowner’s insurance has risen “tenfold,” Lereah said. It’s causing some families to leave the state, he added, looking for protection from the storms and the insurance costs.
“We’re talking people who lived there 20, 30 years,” Lereah said. “A lot of them are moving to the Smoky Mountains.”
In California, people are seeking safety in Washington and Oregon, Lereah said.
The Louisiana housing market, which was hit by Hurricanes Katrina and Rita in 2005, is currently having problems getting insurance for home buyers. Agents say prices have shot up from $1,000, to $3,000 or $4,000 annually, putting a damper on home sales in the state.
“I think we need for the federal government to get involved and create some sort of backstop,” Lereah said. “If you’re a private insurance carrier you think twice about getting involved in an area where there is not a backstop.”
The shift in politics with the Democrats taking control of both houses of Congress, should be good for both real estate agents and buyers, Lereah said. Democrats lean more toward assisting the home-owning sector than other sectors of the economy.
As you go through the process of applying for mortgage loans of any kind, there will be many areas in which you can save time and/or money. One of them is homeowner’s insurance.
Most property owners leave it up to their insurance agents to obtain the right coverage at a reasonable cost. But this can be a costly mistake.
Real estate expert Bob Bruss delivers a couple tips below regarding various coverages and how to cut premium costs, while explaining how increasing coverage can pay off with major savings.
DON’T INSURE FOR THE MORTGAGE BALANCE. Millions of homeowners make a very expensive mistake by insuring their homes for the amount of their home loan balance.
The costly result is often unnecessary overinsurance for more than the home’s replacement cost. But lenders don’t complain and neither do insurance agents because they collect sales commissions on the unnecessary over-spending.
Overinsurance usually occurs when high land value (which won’t burn in a fire) is included in replacement-cost insurance. For example, approximately 50 percent of Bruss’ home’s market value is in the indestructible land value. Therefore, he is required to insure only for his home’s replacement cost, which is about $200,000 less than his mortgage balance.
Worse, many homeowners are vastly underinsured because they carry replacement-cost insurance for only their low mortgage balance. In the event of a major fire loss, these homeowners will be shocked to discover their insurers don’t have to pay the full loss amount.
What to do: The best way to avoid being over- or underinsured is to ask your insurance agent to estimate your home’s replacement cost. Disregard land value. To illustrate, suppose you own a 2,000-square-foot house and in your area it will cost $200 per square foot to reconstruct your residence if it burns to the ground.
The result is you should carry about $400,000 replacement cost insurance, even if the market value of your property is greater.
In other words, your home mortgage balance has absolutely nothing to do with the amount of homeowner’s replacement cost needed.
RE-SHOP FOR PROPERTY INSURANCE EVERY THREE YEARS. Your insurance needs change more often than you may realize.
Over the years, for example, Bruss saw his need for homeowner, rental property and business insurance has changed. A few times hd discovered he could save several hundred dollars by switching his insurance to a different broker who was an agent for a “no name” insurance company.
However, he stuck with his same agent for the last 30 years because (1) he periodically suggests how Bruss can save on his insurance premiums or improve his coverage, and (2) on the few occasions when Bruss had claims, the agent made sure he got paid in full even when he had to battle with the insurance company on Bruss’ behalf.
That’s what a good insurance agent is supposed to do.
However, if you are unhappy with the premiums being too high or the lack of full payment for your claims, you ought to switch to another insurer in a heartbeat.
Never remain in a situation that doesn’t feel right. There are too many agents and too many policies out there. Keep options open at all times.
Additional ways to save on insurance premiums include: