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Insurance market tightens as homeowner insurance coverage from one company pulled

Mississippi’s Coast escapes 2001 hurricane season

The good news is the Mississippi Coast escaped being hit by a hurricane this season. The bad news is that the availability of homeowner insurance took a hit when a company affected by the World Trade Center terrorist attack left the market.

Homeowners insured with General Star, which was being sold by Nationwide, have been notified that policies are not being renewed. The parent company of General Star is reportedly reducing coverage in high-risk areas after taking a beating in paying claims from the World Trade Center terrorist attacks.

Loretta Worters, vice president of communications, Insurance Information Institute, said there is no overall trend towards less availability of insurance coverage in Coastal areas of the U.S. prone to hurricanes. But there are concerns that the insurance industry is very vulnerable to losses from hurricanes, particularly since the U.S. is more densely populated along its coastlines than ever before. And storms seem to be increasing in frequency.

“There are more frequent and severe storms over the long term than ever, even though the last two years have been quiet,” Worters said. “It is a roll of the dice to see whether we are hit next year. Consumers need to be prepared, and the industry needs to be prepared.”

A recent article in The Wall Street Journal pointed out that the U.S. has never gone three consecutive years without being hit by a hurricane. Only twice before now, in 1931-32 and 1980-81, has the U.S. even gone two years without a hurricane hitting the mainland.

High odds of hit in 2002

“Experts are saying the odds are less than 1% that we won’t get hit in 2002,” Worters said.

And although no hurricanes hit the U.S., the year saw 15 named storms, which is five more than average, and nine hurricanes, which was three more than average. Four of the hurricanes were major ones with winds stronger than 110 miles per hour. Predictions are that 2002 will have a higher than normal number of hurricanes.

April Eaton-Robinson, spokesperson, Allstate Insurance Company, said insurance companies have to be there to pay claims of all customers. So companies have to be mindful of risks in areas prone to catastrophe. That includes not just hurricanes, but ice storms and hurricanes.

“Severe catastrophes can test the financial strength of companies,” Eaton-Robinson said. “So it would be irresponsible to take on more risk than necessary.”

Allstate, in order to continue offering coverage in areas of risk, embarked this past year on a company-wide innovative pricing plan. Eaton-Robinson said the plan’s intent is to offer customers the right price for their risk. There are a number of factors that go into setting rates such as the age of the home, types of building materials used, the customer’s claim history and the customer’s history of paying on time. In areas where risk losses are higher, that has to be considered as well.

“We look at a 20- to 25-year history of what has occurred in an area,” she said. “All factors help determine risk. This helps us continue to do business in areas of the country where other insurers are forced to pull out. I can’t predict the future, but right now what we are trying to do to stay in high-risk areas is work that pricing plan.”

Mark Mays, commercial manager at The Nowell Agency Inc. in Jackson, said there is good news and bad news with hurricane coverage. A lot of standard insurance companies are pulling out of the coastal areas and some are reducing coverage by using higher-percentage type deductibles instead of flat-dollar deductibles.

“But at the same time there are some new programs that are available that are taking the place of the retreat of the standard market,” Mays said. “In my opinion, it will not be uncommon in the future instead of having one homeowner policy to have one homeowner policy and one hurricane or wind policy if you live near coastal waters. I think there may be a short-term gap in the market, but in the long-term I think it will be filled by wind specialty programs. If for the same dollars in the future you have two policies that cover everything instead of one, it really isn’t a net negative result.”

Pricing the product correctly

Bill Lovell, operations superintendent for State Farm Fire & Casualty for the service area including Mississippi, agrees that pricing the product correctly should allow continued good coverage in areas like the Gulf Coast.

“We are not trying to eliminate any kind of policies,” said Lovell, whose company is the largest provider of homeowner insurance in Mississippi. “Our plan at this time is not to leave the market. We’re hoping we can stay in there and continue to price our product right, and offer options to policyholders.”

One of those options, the higher deductible for hurricane coverage, hasn’t been very popular on the Coast. But customers can pay more to now have the higher deductible for hurricanes. It is up to homeowners to decide whether it is better to pay higher premiums or face a higher deductible if the home is damaged in a hurricane.

“Fortunately, we don’t have many hurricanes in the Gulf Coast area,” he said. “It seems like that some years, but over the long run we don’t have that many hurricanes. It isn’t every year that you have a hurricane.”

Availability of insurance on the Coast is always a concern, says John Wells, deputy rating director, Mississippi Department of Insurance.

“In this day and time when we have some other problems that affect things statewide, certainly when a company is looking at their writings here, they do take a strong look at the Coast because of the windstorm exposure down there,” Wells said. “The state is currently going through what would be defined as a hard market.”

In the late 1970s and early 1980s the insurance industry was in what was considered a soft market. Companies could average 15% on investment income. Wells said now that interest rates have declined precipitously and stock markets investments are also down, insurance companies have to tighten up to make a profit or to break even on the insurance end of their business.

“Then you throw in our present tort system problems here in Mississippi,” Wells said. “We have all seen evidence of that with these high jury awards. And the events of Sept. 11 have certainly slam dunked the reinsurance industry.”

Insurance companies buy insurance from reinsurance companies to protect themselves from claims over a certain amount. For example, an insurance company may cover the first $250,000 of a policy and then buy reinsurance for claims above that level. Because of the huge losses from Sept. 11, reinsurance rates have gone up.

Wells said the availability of insurance on the Coast is still good, and that the one carrier that left the Coast also left the entire state. Nationwide Insurance is reportedly working to bring in a new carrier to pick up General Star’s business.

The Department of Insurance would like to see more companies offering policies on the Coast.

“We are constantly looking to get more players in down on the Coast,” Wells said. “More competition is good. Basically we have three companies — State Farm, Allstate and Nationwide — that write most of the business on the Coast. People get mad when insurance rates go up, but they get really mad if they can’t buy any. We have to make sure there is a market, and keep it at the most reasonable price we can.”

An irony is that the state has done a good job in improving fire protection and reducing claims from fires. At the same time there have been ice storms, tornadoes and, several years ago, Hurricane Georges.

“If you look at our weather-related losses, these companies have taken it on th
e chin i
n the past seven or eight years,” Wells said. “Fire losses are way down, but wind and hail, freeze and theft are what is getting us now.”

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