Today, as Florida homeowners continue with the cleanup from their second big hurricane in less than a month, they are finding that they are bearing a greater share of the cost themselves than they would have in the past.
As part of the restructuring that induced insurers to remain in the Florida market after heavy claim losses from Hurricane Andrew more than a decade ago, insurers now include hurricane or windstorm deductibles in their policies. They can go as high as 5 percent of the home's value in high-risk areas. Thus, the homeowner would have to pay the first $12,500 in repairs on a $250,000 house.
The state also set up the Florida Hurricane Catastrophe Fund, a state-run reinsurance mechanism into which insurers pay premiums and against which they can make claims when their own losses exceed certain thresholds. In the event the fund is unable to meet its obligations, it can issue bonds to be repaid with future premium revenue.
The tightening in Florida is an extreme example of what is a nationwide movement by the insurance industry to try to limit losses as property values rise and the potential cost of catastrophes such as fires and storms increases. A loss of investment income in slack financial markets has added to the profit pressure insurers feel.
Robert Rusbuldt, chief executive of the Independent Insurance Agents & Brokers of America, said the homeowner's insurance market in the Washington area has been fairly stable, despite some severe storms in the past few years.
But on Maryland's Eastern Shore, and other areas close to the water, some carriers are refusing to write policies because of the potential for wind damage, said Pamela Randi Johnson, the state's associate insurance commissioner for property and casualty. The state is looking into setting up a wind damage pool to cover that risk so that carriers will be encouraged to resume insuring in those areas.
She also said that some insurers have adopted special wind/hail deductibles like Florida's, which are a percentage of the policy, rather than a flat dollar amount. For example, Johnson said, if a house is insured for $100,000, the wind or hail damage deductible would be $2,000 instead of, say, $250.
Some carriers in Virginia have similar provisions.
The District has some special problems, such as the terrorism risk, in writing commercial insurance. One solution would be "pooling" the risk, as Florida has done.
"I think pooling arrangements are a good idea, but the District of Columbia is too small," said D.C. Insurance Commissioner Lawrence H. Mirel. "A regional pool would be good but that takes federal legislation," he said.
In Florida, carriers have stopped writing new homeowner's policies in the southern part of the state, at least until the path of Hurricane Ivan becomes clear, Rusbuldt said. "Right now, my agents and brokers don't have any product to sell. It's hard to stay in business very long that way," he said.
While Florida is "something of an anomaly" because of the recent storms, "there is a ripple effect," Rusbuldt said. He said that North and South Carolina have state "wind pools" because in the eastern parts of the states "you cannot find an insurer that will include wind in a standard policy."
Much of that ripple effect goes back to the aftermath of Andrew in 1992. At the very moment Hurricane Andrew was lashing the Florida coast, a senior official of American International Group, one of the nation's largest insurance companies, sent a memo to senior managers advising: "This is an opportunity to get price increases now."
The memo sparked an outcry when it became public, but in the decade since, it has turned out to have been prescient. As other insurers joined the clamor for rate increases and many threatened to pull out of the Sunshine State, it became clear that, as one industry official put it yesterday, "There was a choice: You could either have a private insurance market or not. If you wanted to have a private market, steps had to be taken for government to come up with a private-public catastrophe-sharing mechanism."
"These were all approved by the legislature," Julie Pulliam of the American Insurance Association, an industry group, said of the many changes that followed. "That was necessary in order for insurers to write more coverage. If we didn't have the deductible, we would just have fewer carriers writing in Florida."
When financial markets were rising, as they were in the late 1990s, insurers hungry for funds to invest cut rates to attract premium dollars. If investment performance is strong enough, a carrier can tolerate a certain amount of underwriting loss -- periods when claims exceed premiums. When financial markets do poorly, as they have in recent years, insurers become much less tolerant of losses.
"The homeowner's [insurance] market for the last couple of years has been very difficult for insurers. It's been a tight market . . . in most places in the country. Rates are increasing, high deductibles," Rusbuldt said. "The reason is, companies were losing money on homeowner's" insurance and "nobody's in business to lose money," he said.
While many insurers still offer "full replacement coverage," meaning the policy will pay to rebuild a house just as it was, that is expensive, and getting more so as construction costs rise. Some carriers offer policies with specific dollar limits or limits plus an inflation adjustment. These are typically cheaper, but may not be adequate in case of a disaster, experts warn.
Carriers are also taking other measures, such as stepping up property inspections and demanding that owners cut away overhanging trees and do other things to head off potential losses.
Insured losses from Hurricane Charley are expected to reach about $7.4 billion, compared with $15.5 billion for Andrew ($20.3 billion in today's dollars), according to the Insurance Information Institute. Losses from Frances are still being assessed and could run anywhere from $2 billion to $6 billion, according to insurers.
Claims from Frances are expected to be more numerous than those from Charley but less costly per claim, said Joseph J. Annotti of the Property Casualty Insurers Association of America. "Charley moved through like a seven-mile-wide tornado. Frances was an all-consuming glob," reaching a much wider area but less likely to blow houses completely away, he said.
In addition, much of the damage from Frances is expected to be from flooding, which is typically not covered by private insurers. Such coverage is available from the federal government, though in many cases homeowners either don't know about it or don't think they need it.