Homeowners Insurance

One of the more annoying messes in the wake of Katrina was, at least among those homeowners who had flood coverage, how claims settlement could be delayed by wind and flood coverage being provided in two policies, each with somewhat different terms.

Some Gulf Coast politicians would have this, as well as many other wind vs. water issues, resolved by expanding the National Flood Insurance Program to provide wind cover as well.

However, in a Times-Picayune blog post made over the weekend, comes word of an idea being circulated by Adam Scales, an associate professor at the Washington and Lee School of Law:

Rather than having homeowners buy two policies — a flood policy from the government and coverage for fire, theft, liability and wind from a private insurance company — Scales advocates making companies sell policies that would provide all the coverage people need and having the government reimburse the companies for flood claims.

The idea is that changing the flood program from a retail venture to a reinsurance program operating behind the scenes would allow consumers to collect one insurance check and start rebuilding their homes and the broader economy while leaving any disputes for the companies and the government to resolve. Mandatory coverage would also solve the problem of not enough people having flood insurance, and would put the program on better financial footing.

“It would push disputes up one level to the wholesale level. Now you would have an argument, say, between State Farm and the federal government about how to deal with the aggregate loss,” said Scales, who began studying the flood program after watching New Orleans fill up with water on television. “It clearly makes the wind-water distinction meaningless to the average consumer.”

Part of that sounds quite a bit like an idea I floated post-Katrina.   If coverage exists, then the insured’s claim ought to be paid, with the question of how much of it is wind versus water pushed to the back room for lawyers and accountants to deal with without interfering with the customer’s recovery.

Of course, that would require that some of the differences in coverage terms in flood versus traditional homeowners insurance be smoothed out.  For example, the maximum amount of coverage available under the NFIP is lower than what can be obtained in your typical homeowners program.  And even if limits were the same, the nature of what personal property or ancillary structures are or aren’t covered can vary between the two contracts.

But we’ve known that updating the NFIP standard contracts to fit modern personal insurance needs is one of the items on the flood insurance reform agenda…albeit further down the list from near-insolvency and questions of rate adequacy….and from the foolishness of expanding the program to cover wind.

One of the central themes when it comes to discussing the high cost of property insurance in catastrophe-prone locations is that of whether people who live in harm’s way should bear the financial burden of the risk they face…or is covering such risk seen as a social need sufficient to justify subsidies paid by folks in safer locations, either through insurance rate-setting, or via a government construct.

Interestingly, it seems that a coalition of consumer and environmental entities are questioning the wisdom of enabling folks to live in environmentally sensitive areas…which tend to be highly correlated with “riskiest to insure.” 

Seen in Insurance Journal:

An unusual alliance of insurance and environmental groups is urging lawmakers to focus on policies that encourage property mitigation and environmental protection in catastrophe-prone areas, rather than expanding the government’s flood insurance or “bailing out” Florida’s catastrophe plan. [...]

Americans for Smart Natural Catastrophe Policy said it “strongly opposes proposals that encourage people to build homes in hurricane-prone, environmentally-sensitive areas by creating new programs to directly or indirectly subsidize their homeowner’s insurance.” The group cited proposal to make wind coverage available in the federal flood insurance program as the type of public policy it opposes.

A post on Sam Friedman’s blog at National Underwriter has me thinking.  (Danger, Will Robinson!  Danger!).   I posted a response at NU, but I’m going to extend my thoughts here.

Sam writes:

One of the most important and interesting developments at the recent NAIC meeting came in under the radar and took most insurers by surprise–a controversial call to force homeowners carriers to collect and disclose data on the race, gender and income bracket of their prospects and clients. In responding, insurers are damned if they do and damned if they don’t support the proposal. [...]

Obviously, Mr. Squires is eager for insurers to collect and provide access to such data to see once and for all if insurers are actively engaging in redlining, or are passively doing so–via disparate impact (in other words, even if their intent is non-discriminatory, the end result comes out that way, unfairly disadvantaging one racial, gender or economic group).

Just as obviously, insurers don’t want to collect such data because, for one, it might very well expose them to lawsuits over their underwriting patterns–however neutrally they are applied–and it might annoy or provoke those asked to list their race, income, etc., on a homeowners insurance application.

Mr. Squires argues effectively that he is not reinventing the wheel here. Essentially, he says he is simply calling for the same data required of home mortgage lenders under the federal Home Mortgage Disclosure Act. He told the NAIC that HMDA and other fair-lending laws helped improve access to credit for low-income and minority markets, and suggested the same might be said of insurance down the road.

The short answer I posted in the responses section still applies — if the goal is to collect the same demographic information that is already captured by mortgage brokers, then analysts ought to simply collect both insurance and mortgage demographic data, and merge the two data sets, avoiding pestering consumers unnecessarily.

However, with some additional thought (dusting off older thoughts, actually), I can offer a few points that ought to be addressed in any proposal to analyze industry data for evidence of “redlining” or other forms of unfair discrimination:

Read the rest of this page →

David Rosmiller has posted a decision from the Fifth Circuit Court of Appeals on the Broussard Katrina-slab case:

We REVERSE the judgment of the district court entering JMOL in favor of the Broussards. We REVERSE and VACATE the jury’s award of punitive damages. We AFFIRM the district court’s admission of testimony from the Broussards’ expert witness. We AFFIRM the district court’s denial of State Farm’s motion to change venue. We REMAND the case for a new trial.

The Broussards were the State Farm policyholders who brought one of the landmark Katrina slab cases. The judge in the case essentially ruled from the bench that State Farm was liable to pay policy limits since they “failed to prove” the damage wasn’t caused by flood, and let a jury determine punitive damages.

(Yes, I know that a lawyer could wax poetically to point out the technical inaccuracies in that last statement. However, I’m not a lawyer. Net effect was that it was a big slap-down upon State Farm.)

So, with the appellate decision, State Farm looks to get its day before the jury in this case.

As someone who’s been in claims limbo for over six years due to my wife’s car accident, I can empathize with the Broussards over what waiting for the appeal, and now the new trial, must feel like to them.

Hopefully, the aftermath of this and the other Katrina homeowners cases will lead to better coordination between wind and water claims, as well as less of a need to plug extremely paranoid scenarios into the cat models…all of which should mean not-quite-as-astronomic costs for Gulf coast insureds.

Speaking of promoting conservation and sustainability, this press release from AIG caught my attention:

LexElite Eco-Homeowner, available as an endorsement to the LexElite® homeowner policy, responds to the unique risks faced by homeowners who generate their own power and feed surplus energy back into the local power grid. If a homeowner’s alternative-energy system has a covered outage, LexElite Eco-Homeowner will protect the homeowner against lost income generated from selling surplus energy back to the local energy company and will cover the extra expenses incurred to purchase replacement electricity. LexElite Eco-Homeowner also covers expenses for inspection, re-connection or permitting fees assessed by a utility or governmental authority when the homeowner’s alternative energy system is brought back online.

In addition, LexElite Eco-Homeowner enhances the coverage for eco-landscaping. Plantings considered eco-landscaping will be covered at 10 percent of the aggregate limit of the home, double the limit of a typical homeowner policy. The policy also increases the per-tree sub-limit from $500 to $5,000.

I suppose I should feel guilty for saying this of a competitor…but dang that’s cool.

Even though the tone of the article is such that it sounds too good to be true, perhaps Floridians … especially those serving in Tallahassee … would be well-served to check out this article which appeared on the Times-Picayune website this past weekend:

Private insurers are banging down the door to take policies from Louisiana Citizens Property Insurance Corp., a sign that they are once again ready to compete for customers in the hard-to-insure south Louisiana market.[...]

And companies are rushing to be a part of that process in hopes of beating competitors to the best selection of Citizen’s 165,000 policies. They’re also eager to begin collecting premiums and socking money away before the storm season.

And for the first time since the storms, Citizens customers may have a choice about where they purchase their coverage. Because many homes that normally would be insured by private companies have ended up in Citizens since the storm, certain houses are expected to be in demand and may receive multiple offers.

Could someone send a memo to the insurance industry trade associations—that is an example of the type of message our PR engine should be generating.

Did you ever get the feeling that some Floridians would like folks in the other 49 states to subsidize the risk of living in a hurricane prone state?

Seen in the Sun-Sentinel:

“Some disasters are just too large or unpredictable for the private market to manage alone,” said Charles Bonfiglio, president of the 150,000-member Florida Association of Realtors.

That’s why Florida congressmen Ron Klein and Tim Mahoney pitched the Homeowners Defense Act last year that was passed by the House of Representatives but stalled in the Senate. The hearing Monday — held by a subcommittee of the House Financial Services Committee — was intended to start building support for what’s expected to be an uphill battle to rally support for the Senate’s version of the bill.[...]

Florida leaders say they can’t bear the risks alone and need help from the federal government. Insurance Commissioner Kevin McCarty told lawmakers that, “to some extent, Florida subsidizes” the federal flood insurance program because it pays about 41 percent of the premiums and has only received about 16 percent of the claims. Now, he said, other states need help and the best way to do it is to spread the risk across the country.

Of course, prior to Katrina, the total losses paid by the NFIP in the 36 years of its existence were $15 billion…and, if I’m not mistaken, difference between McCarty’s 41% and 16% would be, well, Katrina, which is a rather unique and unusual situation that shouldn’t be considered too heavily in any analysis (or at least that’s what the OIR tells me when I mention 2004 or 2005 in any Florida rate filing).

Seen at wsj.com (subscriber link):

Raising the stakes in the battle between insurance regulators and property insurers in the influential state of Florida, the state’s insurance commissioner took the unusual step of suspending Allstate Corp.’s license to sell auto insurance in the state in retaliation for the company’s alleged failure to fully respond to a subpoena for information about its homeowner insurance.[...]

The Florida Office of Insurance Regulation is clarifying that the suspension applies only to new automobile policies written by three of five Allstate subsidiaries operating in Florida. Two other subsidiaries that still write homeowner insurance are not affected.

Insurance Commissioner Kevin McCarty suspended Allstate’s license after he said the insurer failed to fully comply with a subpoena issued by his office in October demanding that the company provide information about its communications with insurance trade groups, risk modelers, and ratings agencies in connection with its request for premium increases in homeowner insurance of up to 42%. Mr. McCarty abruptly ended hearings scheduled yesterday at the state capital in Tallahassee, Florida after the insurer balked at answering some questions and didn’t produce all the documents requested.[...]

“They can’t remove themselves from homeowner and keep their most profitable line,” said spokesman Ed Domansky at the Florida Office of Insurance Regulation.

I don’t have any connection to Allstate.  Therefore, I can only guess at what their cat risk aggregation looks like in Florida, even after recent actions.   However, I can imagine scenarios where giving up a profitable auto book as the price to improve some nightmarish storm scenarios wouldn’t be a bad call, especially in light of a softening auto insurance market.

Having said that — reasonable government relations folks at most insurers will tell you, even when the DOI seems unreasonable, a certain level of submissive compliance should be maintained.  Hell hath no fury like that of a defied Commissioner.

Seen at Insurance Journal:

Acknowledging the ongoing concern over coastal property insurance in his state, Connecticut Insurance Commissioner Thomas Sullivan maintained that the state’s coastal property insurance market is in pretty good shape with more than 100 insurers still writing in the state, even though the cost of coverage is high.

“We have a problem with affordability, not availability. Some increases are steep but we do have a competitive market,” he said, suggesting markets in neighboring New York and Massachusetts are much worse.

Of course, anyone who’s looked at a map and has some understanding of hurricane exposure would think that’s somewhat obvious.

After all, coastal Connecticut is “coastal” only to Long Island Sound, and is somewhat protected by being 50 miles away from open ocean. Long Island and Cape Cod are far more exposed than New Haven or New London.

I would be remiss if I didn’t point out that the New York Times has an article today discussing changes in homeowners insurance over the past decade:

The insurers say they have had to take defensive measures to stay in business and pay claims as operating costs have climbed. “If you’re being overly generous in covering risks and you’re not taking in sufficient premium, it doesn’t make business sense,” said Richard Ward, the chief executive of Lloyd’s of London, a large insurer of homes and businesses in the United States.

Yet some industry experts and consumer advocates say that efforts by the insurers to increase profits, after years of taking losses on home insurance, are shifting more of the burden of repairs and reconstruction to homeowners. The cutbacks in coverage, consumer advocates say, have contributed to the slow recovery of the Gulf Coast from Hurricane Katrina and will most likely hamper recovery from the recent wildfires in California.

The article isn’t quite as pro-consumer-biased as some I’ve seen. While the article does mention how homeowners was a loss-leader product in the 90’s, and recent changes have been made to address that, I would have been happier to see some reference to how homeowners profitability compares to other industries with similar volatility, and some mention of just how bad some of the mega-catastrophes that keep cat management folks up at night could be, unlikely though they may be.

Similarly, I also think the author of the article could have included what should be an obligatory exhortation to readers to double-check the limits on their homeowners policies (and/or to look into “inflation guard” automatic-coverage-A-increase features), as well as a reference to one of the holes in the National Flood Insurance Program—the relatively small maximum limits permitted.

However, all-in-all, it’s an interesting article to read on an otherwise slow news day, particularly if one is hiding from the Black Friday crowds.