Policy Issues: Crossing off hurricane-prone areas is not the answer

Not that I can always blame them. Every time I start to get angry with carriers leaving the coast, I read about some regulator or "consumer advocate" who intones, "Insurance companies have an absolute responsibility to provide our citizens with adequate coverage at affordable rates."

Of course "adequate" means whatever coverage the speaker currently considers indispensable–flood coverage for flood plains, wind coverage for coastlines, health coverage for a specific condition. "Affordable" is code for "at a price I consider a bargain."
Such a position is just as unreasonable as that of carriers who shirk their responsibility and abandon insureds who most need protection.

And then, as if the fire needed more gasoline poured on it, meteorologists give us their predictions for the upcoming season. After poring over historical charts, analyzing oceanic and atmospheric conditions, making computations and swinging dead cats over their heads at midnight in a cemetery along the Mississippi, they emerge from their labs like Punxsutawney Phil to predict the number and severity of storms during the upcoming season. To avoid boring you with the the endless scientific details, I'll summarize their findings for those who live along the coast: "You think last year was bad? Hahahahahahahaha!"

Given the dangers of living in hurricane-prone zones, what advice and counsel can agents give their clients? Let's all just take a deep breath and work this through, using the trusted template of risk management.

First, like one person I read about in a recent issue of Fortune magazine, you could move to Tennessee. The man said he had lived in southern Florida for years, but the four-storm year just past, and predictions that the storms would just keep coming, persuaded him to head for the hills of Tennessee. Perhaps he moved into Jed Clampett's old place. Wonder if anyone told him about the New Madrid Fault?

But I digress. Moving inland is one example of avoidance, an accepted risk-management strategy. Anyone who chooses to remain in coastal areas, however, should consider the risk-management techniques prevention and reduction.

Given the potentially catastrophic power of hurricanes, there are few effective loss-prevention options. Storm shutters designed to withstand 200-mile-per-hour winds may seem to afford protection, until the 30-foot storm surge powered by such winds smashes full force into your home or business. In fact, a powerful enough surge could force you to revert to your first option–when the tide goes out, your house may be in Tennessee.

Loss-reduction techniques offer the most options. The aforementioned storm shutters could well mitigate wind damage, if no storm surge renders them moot. Other time-tested actions include removing from around your structure any objects (loose tree limbs, outdoor furniture, coconuts, etc.) that could become wind-blown projectiles, reinforcing roof tie-downs, taping or boarding over any exposed glass, moving personal property or business inventory to higher floors or at least elevating them off the floor at ground level, and lowering the water level in pools. For new construction, building at higher elevations, using storm-resistant methods and materials, and raising entire structures well off the ground (while resisting the evidently overwhelming urge to enclose the open area underneath and turn it into a rec room) all can prevent losses from flooding and storm surge–the greatest causes of hurricane damage.

After avoidance, prevention and reduction options have been considered, implemented and/or discarded, the risk manager is left with only two more techniques–transfer and retention.

In our scenario, risk transfer means insurance. Yet in many areas, carriers seem intent on withholding this option much as possible. Perhaps they feel that few, if any, of the insureds with the greatest exposures will implement any risk management procedures, choosing instead to dump the entire risk on insurers. Perhaps the carriers simply believe, as does our former Floridian, that losses can only get worse and the most prudent course of action is to run for the hills. Some carriers, convinced that the "adequate and affordable" mantra renders any chance of rate adequacy unobtainable, feel it is no longer economically feasible to continue providing coverage.

So is the last of our risk-management techniques–retention–the only real alternative for those who decide to dwell in hurricane-prone areas? Must those who choose to stay, despite the obvious dangers, shoulder full responsibility for the consequences of such a decision? Should they have to hear, in the words of the preacher in "Blazing Saddles," "You're on your own, son"?

I hate to think so. Back in Insurance 101, we learned of such ideas as "risk sharing" and "the law of large numbers." We were told that nearly any risk could be assumed as long as rates were adequate and the total risk could be spread among many other independent exposure units–those not likely to be affected by the same loss occurrence. So the risk of insuring coastal properties for windstorm was to be financially offset by also insuring large numbers of risks with little or no hurricane exposure. Basically, in return for insureds in other parts of the country kicking in money to pay for coastal windstorm losses, insureds along the coast would find their premiums paying for California forest fires or North Dakota hail storms.

Somewhere along the way, those ideas seem to have become quaint. Now, financial wizards decree that each area should shoulder its own burdens and that insurers must abandon those areas in which inhabitants are unable (or regulators unwilling) to go go along, to protect the premiums paid by those in other territories.

Nay, I say! Sure, hurricanes are bad and possibly going to get worse. But houses in mountainous areas will continue to burn, towns far from the coast will continue to suffer tornadoes, New England will be snowed under and blasted by Nor'easters, and mold will continue to grow everywhere. And if growing exposure to loss is a trend, then perhaps the overall level of premiums must rise. If we can adjust to the idea that future gas prices may never again be as low as they were in the past, then we can learn to live with a definition of "affordable" premiums that's been adjusted upward.

But we need to know what "adequate premium levels" are before we adjust our budgets or weigh the affordability of coverage. When carriers simply cut and run, we no longer can do so, or ably debate the demagogues.

A government whose idea of meaningful reform is changing the name on FEMA's business cards isn't likely to lead the charge. Our industry must step forward–not to take the entire hit, but to tell insureds what they can do to prevent and reduce losses and what will happen to their premiums. Carriers should clearly state how much risk retention it will take to make insureds' properties eligible for decent coverage. We must give property owners information and options to make good choices, and reward those choices by making available the safety net they need to get the proverbial good night's sleep.

If we continue along our current path, withdrawing coverage from hurricane-prone areas and dumping insureds into poorly funded and poorly run government pools, we must consider where such "protection of insurer assets" will lead. As other areas of the country experience their own sort of catastrophic losses, the number of "safe and profitable" property insurance areas will continue to shrink, perhaps until every insurance carrier is writing coverage in just one state.

For the sake of that guy in Fortune magazine, I hope it's Tennessee.

Chris Amrhein is an insurance educator and speaker with more than 30 years in the industry. He is also chief fun officer of www.insuranceisfun.com. Readers may contact Chris at chris@insuranceisfun.com.