The Weather Has Home Insurers Running Scared

The guy standing with his feet in the Florida surf is not happy. The property policy on Jim Bax's three-story beachfront home in Longboat Key was canceled, effective in May, by his insurance company, a small regional outfit. Don't ask about the other insurers in town: None wants Bax's business. "They're getting more and more cautious," Bax complains. That means, if another storm hits, he's on his own.

Bax is one of 500,000 Floridians left high and dry by insurers, which are dramatically curtailing property coverage in coastal areas. Many companies have even stopped writing policies altogether in Florida and Hawaii (table). Big insurers, finding themselves suddenly overexposed, want to hedge risks by reducing their coverage of waterside homeowners. Some are hiking prices, too, but that's a quick fix: Higher premiums now won't cover outsized losses from storms in the next few years, the insurers say. Simply put, "our exposure is unacceptable," says Dale S. Hammond, a Travelers Corp. senior vice-president.

While Florida homeowners have suffered most from the cutbacks, the problem is rapidly spreading to other regions. Rating agency A.M. Best Co. estimates that 40% of Hawaiians, or 80,000 homeowners, will lose insurance this year. And residents of the New York metropolitan area bordering Long Island Sound could be next.

BIG HOLES. The industry has no lack of reasons for cutting back. December's northeaster and the March blizzard caused billions of dollars in damage to wind-lashed homes--adding to the costs of Hurricane Andrew. The $16.5 billion in damages from that storm grossly exceeded insurers' expectations, which had been based on woefully inadequate models. In some cases, losses were underestimated by as much as 40%.

The storms ripped holes in what traditionally has been a very lucrative business. For 1992, the insurance industry paid $1.56 in claims for every $1 paid into homeowners' policies, according to Best. That has created far too big a gap to close with investment income, when interest rates are yielding an average of just 7%. Stung by its big Florida tab, State Farm Fire & Casualty Co., the nation's largest home insurer, posted a $1.2 billion loss last year.

That has sent insurers frantically revising their loss estimates for future storms to account for greater populations and higher property values. One scary finding: The damage possible in a single South Florida storm could reach $75 billion. That's almost half the $161 billion the industry has in reserve to pay all claims, including those from auto accidents and third-party liability awards.

So insurers such as Travelers are backing down. After aggressively building its share of the South Florida market to 5%, Travelers decided in the late 1980s to reduce risks by cutting back to the 2% share it holds nationwide. It didn't move fast enough: With a 3.5% share of the region's homes, the company paid out $240 million in claims from Andrew. Now, it has put into effect a limited ban on policies in the area as well as along the Long Island coast.

One solution for dispossessed homeowners: state-run associations established to handle the troubled risks. Bax, the beachfront homeowner and a small businessman, heads a state-run association formed to provide policies for abandoned Florida residents. The downside, though, is that premiums typically run 25% to 35% above comparable coverage from commercial companies. In Massachusetts, premiums in a state pool can run 60% higher than private rates.

MORE HEAT. Are insurers making the right decision? While the restrictions should lift industry profits, they have bred animosity among the very agents on whom the companies depend for business. And they have not gone unnoticed in state capitals and in Washington. In February, New Hampshire agent Eric Gustafson called the practice "redlining" before a House subcommittee.

With insurers already taking heat for high health costs in Washington, it's a bad time for that sort of publicity. The big companies say they may return to abandoned areas when regulators allow them to charge enough to justify risks--probably 40% to 50% more than current rates. But that could take as long as three years. Until then, the industry's bad-guy reputation will only worsen. And homeowners will have to hustle to find any insurance they can get.

      Major property insurers are pulling out of storm-prone areas. Here's what 
      they've done to reduce their exposure:
      STATE FARM The country's largest home insurer says Florida agents can write 
      policies only to replace those that lapse. It's reviewing coverage in other 
      Gulf states.
      ALLSTATE The No. 2 home insurer is allowing some Florida policies to expire and 
      has stopped writing new policies except for its auto customers. It may do the 
      same in New York. 
      PRUDENTIAL On Jan. 29, it announced an 18-month moratorium on new policies in 
      Florida and said it would review other areas. It's also not renewing some 
      Florida policies.
      TRAVELERS It has stopped writing new policies in South Florida, on Long Island, 
      and along the Connecticut coast