Advisers along the Gulf and Atlantic coasts are sending a storm warning to their clients: Beware of impending sharp increases in the cost of property insurance or equally steep reductions in coverage.
Driving the price rise is turmoil in the reinsurance business, where depressed investment returns have eaten into capital and led reinsurers to pull back, increasing risk for property insurers and leading to higher premiums in the near future.
“In coastal areas, the bottom line is that the insurers aren't in the roofing business anymore,” said Stephen P. Byrne, a financial adviser at an eponymous firm in Gulfport, Miss., explaining that insurance coverage for non-catastrophic damage has become uneconomic. “Clients have to be aware that the burden has shifted to the homeowner.”
When Mr. Byrne renewed his $300,000 homeowner's policy last month, his premium had been lowered, but the deductible had increased from a flat $1,000 to 5% of the home's value. “The lower premium is understandable because I'm taking on more risk,” he said.
Other advisers in Florida and along the Eastern seaboard have noted similar hikes.
Renewals are 30% to 40% more expensive for properties on or near the New Jersey shore, said Jim Freisen, director of financial planning at Robert J. Oberst Sr. & Associates in Red Bank, N.J.
“I've told clients to go out and get another estimate or quote from another provider to see if they can get something cheaper, but we haven't heard anything back yet,” he added, noting that his own policy went up as well.
A key factor in the price hikes and coverage cuts in high-risk areas is the rising price of catastrophic reinsurance for policies in those areas, due largely to investment- and catastrophe-related losses among reinsurers.
Last year, reinsurance companies' statutory policyholders' surplus (the insurance equivalent of shareholder equity) fell by 9% to $37 billion, according to Standard & Poor's in New York. Along with the financial beating, reinsurers were hit with losses from Hurricanes Ike and Gustav.
Still, reinsurers remain well-capitalized, said Taoufik Gharib, a credit analyst at S&P.
Nevertheless, with a slimmer capital base and the prospect of possible losses from hurricanes and other natural and man-made disasters this year, reinsurers have pulled in their belts.
“We've seen some tightening in the market, some reaction to the fact that reinsurers have lost in excess of 20% of their available balance sheet capacity because of the investment environment in 2008,” said Lara Mowery, managing director and head of the global specialty practice at Guy Carpenter & Co. LLC, a New York-based risk and reinsurance specialist.
Contrary to fears that the cost of catastrophe reinsurance will spike, rate increases on July 1 renewals nationally were in the 15% range over year-earlier levels, she said. Renewals on catastrophe reinsurance generally take place on the first of January, April, June and July.
But insurers with exposure to the Gulf Coast are paying 30% to 40% more for reinsurance this year, while those in the Northeast are paying about 8% more, Ms. Mowery noted.
Barring a major negative downturn in the financial markets or a catastrophe, Guy Carpenter doesn't foresee major rate hikes in January.
Higher reinsurance costs take time to trickle down to the end consumer, varying by line of business, carrier and state, where insurance regulators can deny a huge rate increase, analysts said.
The relationship between reinsurance pricing and policyholder expense is most apparent in Florida, where the reinsurance portion of a carrier's pricing is significant, Ms. Mowery said.
“Over the last 12 months, there are companies in Florida that have lost surplus because of a mismatch between the reinsurance structure and pricing,” she said.
Florida officials are embroiled in a dispute with State Farm Florida Insurance Co. of Winter Haven, which has decided not to renew homeowners' policies in the state, claiming that doing so would threaten its solvency.
The suspension of new business, coupled with non-renewals and -rising reinsurance costs, has contributed to the company's deteriorating earnings, according to a June 18 note from Oldwick, N.J.-based A.M. Best Co. Inc.
“Florida is unique in the fact that carriers have been leaving the state,” said John Morrow, an adviser with Channel Resources Inc. in Panama City, Fla. “We look for new carriers who will step in and place coverage on properties, but in many cases, the coverage is more expensive, and there's only so much choice.”
Some insurers won't cover properties within a mile of the shore, Mr. Morrow said.
“People who live in harm's way basically have to be prepared to pay the piper,” he said. “I mean, if the risk is higher because you live on the beach, and not 10 miles inland, then you should be prepared to assume that risk.”
E-mail Darla Mercado at [email protected].
