Up for Sale: Success in Today’s Homeowners Market

States show signs of stability, but problem areas remain

Despite continuing availability issues and sky-high loss ratios, the U.S. homeowners market is stabilizing as a whole. Of course, most industry observers who make that statement do so with a quick knock on some wood and the caveat that major catastrophic events are few and far between over the next couple of years.

Even though the granite-hard market of the last few years is showing some signs of stabilizing, there are still numerous areas around the country where the homeowners market is anything but easy. In the traditionally high-risk markets of Florida, Texas, California and Louisiana, rates are still high, availability is still low, and lawyers are running rampant. As one Florida agent kindly put it, “the attorneys are being very entrepreneurial.”

Also of concern for insurance agents and insureds is the lack of availability of coastal coverages stretching from the U.S./Mexico border all the way up the Eastern seaboard.

Certainly, there is room for much more improvement in the market, but all said, it’s not as bad as it was two years ago. Mold claims and lawsuits have not gone away, but they do seem to be under control for now. Meanwhile, water damage claims are still a significant concern throughout the country, and legislation to stymie the use of CLUE reports remain topics of debate.

Other legislative and regulatory efforts, however, have helped to stabilize the market. Aiming to attract more insurance companies to their markets, some states have implemented flexible rating systems, and numerous states are allowing exclusions for mold and other hazards.

“I wouldn’t say the market is softening, but companies are testing the waters,” said Loretta Worters, a vice president with Insurance Information Institute (III) in New York. “It’s a better market that’s a little easier on the consumer,” she said, adding that it could improve further if 2004 losses are not as catastrophic as they were during 2001, 2002 and 2003.

Since 1990, the insurance industry has paid out more than $100 billion in losses, with 1992—the year hurricane Andrew hit Florida—being the worst, Worter said. Loss ratios have hovered around 117 percent but have dropped recently to somewhere near the 100 percent mark. The reduction in losses are due to several factors, including insurance companies rethinking their homeowners pricing structure, reevaluating their underwriting and exposure, and reining in loss controls. Companies also have been pushing for higher deductibles, with some requiring a 2 percent deductible on Clause 1 coverages.

Oceanfront Property: Less Risky in Arizona
Availability of homeowners insurance along the coastline of the Mid-Atlantic north to New England was never much of a concern until about two years ago, according to Mike McCartin, principal of Joseph W. McCartin Insurance in College Park, Md.

“I think what some of the larger companies have faced is that they have too much exposure along the coast,” McCartin said. As a result, a number of companies have restricted new business or have pulled out of the market altogether.

The result is an availability issue that is now pretty uniform from the Mexico border in Texas “right on up through the Northeast,” McCartin said. Agents are having a hard time placing insureds with regulated companies, so a lot of the business is going to surplus lines. “The worst-case scenario is when there is a catastrophic event, you’ve got no recourse,” from a regulatory perspective, he said.

In North Carolina, anecdotal information suggests that fully half of all homeowners policies along the coast are written by surplus lines carriers, according to Lee Ruef, president of the Independent Insurance Agents of South Carolina.

“The growth of residential housing along the coast has outstripped the capacity of the standard markets,” Ruef said. “But the surplus lines market is functioning well.”

Still, South Carolina’s Director of Insurance Ernst N. Csiszar is pushing modernization legislation based on the National Conference of Insurance Legislators (NCOIL) model.

The legislation would permit the insurance market to set insurance rates for homeowners and other property and casualty lines. The goal is to attract more insurance companies and create a more competitive market for consumers. Ruef said the bill has been tied up on the Senate calendar for several months.

Bringing competition back to Louisiana
In January, Louisiana implemented a flexible rating law comparable to that introduced in North Carolina. Commonly referred to as the Flex-Band Act, the new law allows property/casualty insurers to make annual rate changes of up to 10 percent without having to go before the Louisiana Insurance Rating Commission (LIRC).

Molly Quirk Kirby, legislative director for the state’s Department of Insurance and director of the Louisiana Property and Casualty Insurance Commission, said the new legislation was geared to attract more companies to the state, but that hasn’t happened just yet.

“It’s not looking too good right now,” Quirk Kirby said.

In 1990, Louisiana had 148 companies writing homeowners coverages in the state. By 2001 that number had dropped to 84, a number Quirk Kirby would be happy to see again. Currently, there are only about 20 companies actively writing insurance in Louisiana, according to figures provided by the state’s department of insurance. And only 10 companies are writing new business south of Interstate 10 .

Sinkholes make Swiss cheese in Florida
Availability of coverage has been an issue in Florida for what seems time immemorial. Hurricane losses, particularly hurricane Andrew in 1992, have devastated the market, but Florida always seems to rebound.

“Florida is a prime example of how to bring a market back,” according to Julie Pulliam, Southeast regional spokeswoman for the American Insurance Association. The state put together a state residual market catastrophe fund after hurricane Andrew hit in 1992, and it has served the state well.

Other issues, such as sinkholes in the Tampa Bay area, have not been handled as well by the state and are becoming a major concern for agents, insureds and insurers.

Shelita Walden Stuart, owner and principal of Walden Insurance Network in Port Richey, Fla., said there are no companies writing homeowners coverage in a three-county area surrounding Tampa Bay because sinkholes have become so prolific in the area.

“The problem is, they don’t know where the next one is going to pop up,” Walden Stuart said.

Citizens, Florida’s state-run insurer of last resort, is even turning homeowners down for coverage, Walden Stuart said, leaving them to find coverage through the surplus lines market or through forced placement by the mortgage company.

Part of the problem is a major push by lawyers who, according to Walden Stuart, are getting homeowners to file claims for small issues like cracks through their driveway.

When a suit is claimed it costs an insurance company upwards of $6,000 just to prove the crack is not caused by a sinkhole.
“These lawyers have billboards up saying ‘We Make Housecalls.'”

The issue is a nightmare for residents in Pasco, Pinellas and Hillsborough, which comprise an overwhelming majority of sinkhole claims in the state. A study published by Florida State University in July 2002 found that statewide sinkhole claims increased from 16 in 1996 to 317 in 2001. During the same period, the average loss increased more than 50 percent, from $40,218 to $62,628.

According to the report, Pasco, Pinellas and Hillsborough counties, with the addition of one other county, made up more than 60 percent of the total closed claims during the study period.

“It’s become a major cost driver in Florida,” Sam Miller, president of the Florida Insurance Council, said. “Not only is it a cost driver, but very often insurance companies are paying the policy limit.”

While a majority of the claims come from the Tampa Bay area, a statewide surcharge has been levied on all Florida homeowners policies, Miller said. And while many claims are valid, the attorneys that are advertising on the billboards are aggressively soliciting claims that involve nothing more than foundation settling.

“It’s just gotten out of hand,” Miller said.

Miller suggested that one way to help resolve the issue would be to narrow the definition of a sinkhole. “We believe the definition of what is a sinkhole is too broad,” he said. Another way would be to have the office of insurance regulation take over review of sinkhole claims, thereby saving insurance companies the expense and effort of having to determine whether the claim does in fact involve a sinkhole.

It’s a whole ‘nother country
Texas has been at the forefront of difficult and expensive homeowners markets for the last few years, and even with billions of dollars in mold claims settled, availability and affordability of coverage continue to hinder the state’s slowly recovering market.

The state legislature passed rate reforms in 2003, but rates have barely responded, partly due to the fact that some insurers are appealing the reductions mandated by the state.

According to Jerry Hagins, a spokesman with the Texas Department of Insurance, the homeowners market is turning the corner, with the top homeowners company reporting a loss ratio of just 58 percent for 2003.

According to the Insurance Council of Texas, even though Texas insurers are realizing an improvement in their losses, few companies are returning to the state to sell homeowners coverages. In fact, two of the state’s largest insurers either are not writing homeowners coverage or have recently re-entered the market on a limited basis.

One of those companies, State Farm Insurance, has not sold new policies in Texas since 2001, though it has re-entered several markets across the country, but mostly on a limited basis.

One of the significant cost drivers over the last few years in Texas has been water damage. According to TDI, water damage claims for homeowners policies totaled more than $2.36 billion in 2002, accounting for a full two-thirds of the state’s $3.85 billion in homeowners losses for the year.

Through the third quarter of 2003, however, the amount of homeowners water damage losses had dropped to just under $714 million.

During 2003, the Texas legislature made several changes to laws dictating what insurance companies are allowed to do regarding underwriting and rating of homeowners policies for insureds who have prior water damage or mold losses.

Essentially, the rule restricts an insurer’s ability to use for underwriting purposes any prior water damage claims resulting from appliance failures.

Insurers also may not use for underwriting purposes any previous mold damage claims but only when: the property was remediated according to Texas Board of Health guidelines; and the property was inspected by an independent mold assessor or adjustor who provided a certificate of remediation.

While the new rules have been beneficial to insureds, they’ve been a headache for insurance agents over the last few months, according to Judi Webb, senior vice president of Waldman Bros. in Dallas.

Companies are still haggling over the semantics of the rules with TDI, Webb said. “It’s been a crazy few months trying to figure out what’s considered an appliance or not,” she said.

Still, writing insurance in Texas today is better than it was two years ago, Webb said. “The market was so hard that if I didn’t have hair dye I’d be completely gray by now,” she said.

In 2002 and 2003, companies that said they were still writing business were taking only the most “squeaky clean” risks, Webb said. Now, however, many companies have backed off some of the stringent underwriting restrictions they were imposing on agents, making life for some agents a little easier and a lot more competitive.

With decreased revenues to show as a result of market conditions, and with very competitive coverages available, Webb is ready to begin marketing in areas she hasn’t typically gone after in the past, including the policies that State Farm is still refusing to write.

“I’m ready to go after that direct writer business,” she said.

Fire and water in California
Though last year’s wildfires in southern California were devastating, water damage losses continue to top the state’s list of troublesome insurance issues.

While losses are always a concern, catastrophes like the fires are factored into loss models, according to Peter Morago, a spokesman with the Insurance Information Network of California. That means that homeowners insurance rates aren’t directly impacted by the fires, but they could be affected by the costs to rebuild the destroyed homes.

The cost driver ultimately could end up being that the cost of repairing homes is rising faster than the consumer price index. On the positive side, the manner in which the rebuild occurs could lessen future fire danger, Morago said. Municipalities in some of the hardest hit areas have, or are implementing more stringent building codes, including requiring the use of double-pane windows, non-flammable roofs and doing away with eaves on new construction. And some municipalities are even talking about requiring sprinkler systems in houses, Morago said.

Candysse Miller, IINC executive director, said some homeowners affected by the fires whose policies had either lapsed or were in some other way inadequate, are pushing to have insurers pay the full replacement value of their homes. While the issue is still in its infancy and “so far doesn’t seem to have legs,” Miller said it is something that will continue to be watched closely.

Also being watched closely are the rising costs of household water damage in California. In 2002, remediation and construction costs associated with water damage accounted for a $66 million increase in water damage insurance losses.

Water damage, lingering mold issues and the politically charged nature of the California market all lend themselves to continued reluctance of insurers to add market volume in California, according to Miller.

Constance Parten is an award-winning journalist who has written about insurance at the state and federal level for several years, including working in Washington, D.C., covering tax and insurance legislation on Capitol Hill. Parten also is a former Insurance Journal staff writer, and currently lives in Dallas where she works as a freelance writer.

Topics California Florida Catastrophe Trends Carriers Texas Profit Loss Agencies Legislation Claims Louisiana Hurricane Homeowners Property Market Property Casualty