If you live on or near the Atlantic or Gulf coasts, you know that it's getting harder and more expensive to get windstorm—specifically hurricane—insurance for your home. Consumers in some states have cried foul as property casualty insurers hike premiums, add hefty deductibles or just stop issuing these policies altogether.
So, why do hurricane insurance losses keep rising, and why are insurance companies demanding more money for hurricane policies?
If it seems as though the United States is experiencing more hurricanes that are more destructive than ever before, it's not your imagination. According to Munich Re—an insurance company for insurance companies—North America's weather-related losses increased by five times over the last three decades. Munich Re says climate change caused by human actions is a big factor causing these changes.
Nature is also partly responsible. The number and severity of hurricanes seem to naturally occur in cycles that last about 20 years and are spaced about 20 years apart. "The National Oceanographic and Atmospheric Administration says we're in the middle of a cycle of more frequent storms," says Lynne McChristian, a spokesperson for the Insurance Information Institute. "We're in this decade of disasters."
It's not just now, either. "The long-term trend is increasing in frequency and severity of national catastrophic events, such as hurricanes and tornados," says Chris Hackett, director of personal lines policy for the Property Casualty Insurers Association of America. "The top 12 most costly hurricanes occurred in the last eight years."
The Insurance Information Institute, an industry organization that explains insurance to the public, says that hurricanes, tropical storms and tornados accounted for 76 percent of U.S. weather-related losses from 1992 to 2011. In 2012, the insurance industry paid out $57.9 billion for losses in the U.S. Compare that to an average yearly payout of $27 billion from 2000 to 2011.
More severe weather isn't the sole reason for skyrocketing losses. The lure of coastal views and proximity to beaches means "more construction on the coasts in the most disaster-prone areas," says Hackett. "The values of the insured properties are increasing, so the potential losses continue increasing over time, and the population and building increase. In New York, it's estimated that about two-thirds of insured property value is in the coastal areas. About 70 percent of total insurance property value in Florida is on the coast."
Additionally, many of today's coastal homes are no longer little bungalows intended for a weekend stay. "In Florida, people will knock down a modest home and put up a condo or a mansion," says McChristian. "This concentration of higher-end real estate and more people puts them all in harm's way."
When high-end properties replace modest ones, insurance company payouts balloon. In the aftermath of Hurricane Katrina in 2005—the most expensive storm in U.S. history—the property casualty insurance industry paid out the 2013 equivalent of $47.4 billion. Hurricane Andrew, which hit Florida and Louisiana in 1992, cost the industry about $23 billion. To date, Sandy has cost about $18.75 billion, but some estimates of the eventual cost put it at $50 billion.
Rebuilding coastal homes in the same places they were before hurricanes demolished them also adds to the costs. "We must evaluate whether it is the best use of resources to rebuild in the exact same place," says Hackett. "If you do the same thing over and over again, the property will inevitably be destroyed again. Repetitive destruction and rebuilding costs the most money," Hackett says. State-supported hurricane policies that keep rates "artificially low inadvertently encourage more coastal construction and more people living there," says Hackett.
Insurance companies have reacted in various ways to these changes. Last October, North Carolina's homeowners insurance companies requested a 30 percent increase in premiums for beach and coastal areas. A settlement with state insurance regulators set beach and coastal premium hikes at 19.8 percent, but some discounts are available. Residents in other coastal states face similar increases.
While nearly 20 percent may seem high, "what you pay for insurance is a signal about your risk," McChristian says.
In the fall of 2012, two of the top three homeowners insurance companies in North Carolina—Allstate and the North Carolina Farm Bureau—stopped writing new policies unless customers also purchased their auto insurance policies. In other states, such as Florida and Texas, insurers have also stopped writing policies or raised rates and stiffened insurability requirements. Nationwide, North Carolina's other major homeowners insurance company, continues writing policies.
Some insurers are now explicitly excluding hurricane damage coverage. Windstorm deductibles have become universal. Deductibles cost homeowners more, but they "are simply a technique used by insurers to reduce loss costs," says Jeremy Wilkinson, spokesperson for the National Association of Insurance Commissioners. Deductibles also reduce the overall costs of policies.
Standard homeowner deductibles are dollar amounts such as $500 or $1000, but hurricane deductibles are based on a percentage of the insured value of the property, usually 1 to 5 percent, though in Florida it can be up to 10 percent. Insurers set their own deductible percentages except in Florida, where the state mandates them. Each time a storm occurs, expect increases in premiums and deductibles --if you don't lose the insurance altogether.
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