Carriers Get Creative In Easing Coverage Woes Facing Homeowners On Flood Risks

"Generally, I think we're seeing easing of some of the price increases because the industry has had two back-to-back years of fairly robust profit, so we're seeing obviously some competition moving back to the marketplace, and that will start to impact the cost of coastal insurance," observed Donald Griffin, director of personal lines for the Property Casualty Insurers Association of America.

Mr. Griffin stressed that insurers will be slower to write coastal risks than in the past, and they may not write a lot of business there at all. In general, he said, the market may be seeing more of an easing on premium increases, but not necessarily decreases at this point.

"I don't know that that's entirely unexpected," he said, explaining that after the 2004 and 2005 hurricane seasons, it should take a few years for the market to settle down and recover, "just like it took consumers time to recover."

Mr. Griffin said legislators and consumers should not interpret the easing of price increases as a sign that concerns regarding the potential for heavy losses along the coast in the event of a major hurricane were overblown.

"I'm hoping the message is not misconstrued to think that everything is [back to the way it was] and we can continue to build and put ourselves in harm's way, and that, as an industry, we're just going to sign up and write that. I think those times are gone," he said, noting that while insurers will write more business, they will do so more selectively, "at what they perceive to be the appropriate premium."

From the perspective of agents, times are still tough, and capacity is still their top concern. "It certainly remains an extremely hard market," said Kenneth Auerbach, president-elect of the National Association of Professional Insurance Agents.

With standard carriers still reluctant to take on risks, many homeowners have been covered by excess and surplus lines carriers. N. Stephen Ruchman, past president of the Professional Insurance Agents of New York and president of Ruchman Associates Inc. in Rockville Centre, N.Y., said these carriers are still very active, but competition among them has not driven down prices. "They're holding their line," he said.

There has been some innovation in the E&S market, however.

PIA's Mr. Auerbach–who is also managing director and general counsel of E&K Agency Inc. in Eatontown, N.J.–pointed to the Coastal Agents Alliance as an example. A Nov. 26, 2007 NU story on coastal exposures in New York describes that alliance as a wholesaler based in New Jersey writing homeowners policies on a nonadmitted basis in the Garden State and on Long Island, N.Y.

Mr. Auerbach said the alliance is writing standard HO-3 policies for risks that were traditionally valued in the standard market.

In the Nov. 26 story, Tim Byrne, managing member of the alliance, said he uses a standard ISO form and acts essentially as an admitted carrier.

Beyond E&S insurers, Mr. Ruchman and Mr. Auerbach both hinted that some standard carriers may be considering some coastal risks, even if they're not some of the more traditional homeowners companies that had written the vast majority of policies prior to 2005.

"I just opened with two markets that are coming [into] the market, and they're writing homeowners," Mr. Ruchman said, noting that these markets are standard, "A-rated" carriers. "Companies that are starting to come in are ones that don't have large amounts of [homeowners] policies like other companies, so these people are coming in with a clean slate."

Mr. Auerbach, while maintaining that capacity is still a "huge problem," said "some carriers are looking to explore ways to kind of edge closer to the coast and fill the gap and try to be creative about where they can make money, where other carriers are just abandoning the market."

Some strategies companies have considered, according to Mr. Auerbach, are higher windstorm deductibles and requiring hurricane-proofing measures on homes. The reevaluation process among companies, though, is going slowly, he noted.

Some markets are willing to write homeowners policies in coastal areas as long as the book is balanced with auto policies or other personal lines in the same areas.

Mr. Auerbach said that in New Jersey, companies will look for an auto and homeowners policy from the same applicant. "I don't know if that would be considered a tie-in sale, but I guess not, because that is how they are filed, and those are their underwriting guidelines," he said.

He related a story regarding a coastal risk he insures on a high-value home, noting he will probably have to place an auto policy with the company considering the risk in order to write the homeowners policy.

But Mr. Auerbach pointed out that this client is an automobile dealer and doesn't have a vehicle in his name. "He will probably have to go and register one of the cars on his lot in his name so I can write it as a personal auto just for the purposes of getting him the homeowners," Mr. Auerbach said. "It sounds a little insane, but that's the best way I think I can serve that client."

Mr. Ruchman said companies he has seen entering the market also look for a balance with respect to auto and homeowners policies. In this case, though, the insurers are looking for an overall balance, rather than balancing each individual risk, so insurers are not risking any perception that the practice might be a tie-in or a packaged sale.

"What they would like to have is a balanced book, which is basically a homeowners matched with an automobile–but it doesn't have to be from the same insured. As long as it's a balanced book…they're happy with it," he added.

Up and down the East and Gulf Coasts, Lexington Insurance Company–a nonadmitted carrier in the AIG family–has remained active in the homeowners market, writing risks some standard carriers have backed away from since 2005.

Jim Erickson, personal lines underwriting manager for Lexington, said he has seen activity picking up, "especially in some of the areas that are more cat-exposed–Florida, the Carolinas, Mississippi; Alabama. We've seen an uptick in submissions for those areas."

While some standard carriers' appetites have changed in recent years, Mr. Erickson said Lexington's approach has remained the same. "We're still willing, and we've always been willing, to write anywhere in the country," he said.

The Chubb Group of Companies has also remained active in coastal areas. Peter Spicer, vice president and new product manager for Chubb Personal Insurance, said the company's product line typically appeals to more affluent customers.

He added that Chubb has been able to find success providing homeowners insurance in coastal areas by individually evaluating each risk.

"We will go on site and do a replacement-cost valuation of the home," Mr. Spicer said, noting that while the appraiser is there, they do a loss-control evaluation as well. "So relative to the industry, we're going to have a much better comfort level with our insured's home and what the exposures to that home are," he said, adding Chubb is confident it is getting proper insurance to value on its risks.

Mr. Auerbach noted one problem is that many insurers aren't underwriting in this way. "Carriers are not underwriting [risks] in a very surgical manner, if you will. I've had carriers come in and nonrenew homeowners that have never had losses and are really quite distant from the coast. They're relying, in most cases just to make it easy, on ZIP codes, which are often very inaccurate as to the location of a particular risk."

Lexington and Chubb are also seeing increased interest in coverages beyond those provided in a homeowners policy–particularly when flood is involved.

For Chubb, this demand has come from agents. "[W]hat we have seen is an increasing demand by our independent agent force for solutions outside the traditional homeowners policy–and mainly in the flood area," Mr. Spicer said.

While flood insurance is generally provided through the National Flood Insurance Program, this coverage has limitations. Mr. Ruchman noted that the federal flood program offers a $250,000 limit, even if the dwelling to be covered is a $1 million home.

Mr. Ruchman said some companies are offering excess flood coverage to address these limitations. Lexington has offered this coverage for many years, he noted, and other markets have begun to offer it as a response to concerns arising from recent hurricane seasons. Mr. Ruchman said the policy is generally taken up by sophisticated buyers and sophisticated agents, "and somebody that has money, because this is not a cheap policy."

Lexington began offering excess flood coverage in 1998, said Mr. Erickson, and the company has seen a pickup in demand since the 2004 and 2005 hurricane seasons. "As we start to get closer to the hurricane season, we generally see an increase in submissions for Florida and the Carolinas, because obviously people are now becoming more concerned about the exposure of flood with the hurricanes," he said.

The coverage is designed to sit on top of the NFIP policy, kicking in once the $250,000 building and $100,000 contents limits are reached. "We will write building and content limits. We don't have any aggregate cap on that. We can write a $20 million building limit and the appropriate contents that comes with that," noted Mr. Erickson.

The excess policy follows the NFIP form and doesn't provide any additional coverages beyond those stated in the national flood policy.

Mr. Spicer said Chubb offers two different policies related to flood: an excess policy and a primary flood policy.

The excess policy is an admitted product Chubb began offering in 2007. It can sit atop an NFIP policy, but does not have to, Mr. Spicer said–explaining that some of Chubb's clients view the concept of flood insurance as strictly a catastrophe coverage.

"They're not concerned about the partial loss, which does $50,000-to-$60,000 of damage. They're concerned with the house being wiped out or a lot of the contents being seriously damaged," said Mr. Spicer, noting such clients may buy only the excess policy with no underlying flood coverage. In this case, he explained, the insured is basically taking on a $250,000 deductible on their building, and $100,000 on personal property, in case of a flood.

Chubb's excess policy does not follow the NFIP form, and can provide coverage beyond the federal policy, Mr. Spicer added. For example, he said if a damaged building is a second home, rather than an owner-occupied primary residence, the NFIP policy will pay actual cash value, while the Chubb excess policy will pay replacement costs on contents and the building.

Chubb's primary flood policy has been offered since 2006. Mr. Spicer said it is offered separately from a homeowners policy and is not associated with the NFIP. "This is completely independent of the national flood insurance, and should not be confused with the NFIP 'Write Your Own' program, which many carriers participate in," he added.

The policy offers limits of up to $15 million for home and contents, and provides broader coverage for contents than does NFIP, Mr. Spicer said–including coverage for items in a basement.

"The NFIP policy has a very specific list of things that it will cover inside a basement. And what we've done is we offer a limit of $15,000 for contents in a basement, but you can buy up limits from that $15,000 up to $50,000," said Mr. Spicer.

Even with a degree of increased awareness and demand among consumers about flood coverage–due mainly to the barrage of wind-vs.-water claim disputes that arose after Hurricane Katrina–many consumers remain unaware or unconvinced about the necessity of this protection.

Mr. Spicer said this is particularly true as Chubb tries to sell its coverage away from the coast. "And this is something I think the NFIP struggles with as well–that it's much more difficult to market flood insurance in inland states and inland areas, even though…those areas are just as subject to flooding, if not more subject to flooding in some areas," he added.

Mr. Erickson said Lexington includes information about flood coverage in all of its homeowners policies in an attempt to spread the word and educate consumers.

And Mr. Ruchman spoke to the challenge that agents face when selling flood coverages:

"We really push flood insurance with our clients," he said. "And we'll write the policy, and now all of a sudden there's no hurricane, no flood. And two years later they'll say, 'Hey, there was no hurricane and no flood, I'm going to cancel my policy.' You have to stay after the clients all the time [to maintain their coverage]."