Saturday, June 10, 2006

So What Do You Do, If...

What if your homeowners insurer calls it quits?

After collecting your premiums year after year, a homeowners insurance company can decide it doesn't want to do business with you -- or, for that matter, anyone in your community--anymore. This is a situation facing thousands of New York metro-area homeowners who learned in early February that they may be getting the heave-ho from the "good hands" of Allstate Insurance.

Allstate stopped writing new homeowners insurance policies in the eight-county region covering New York City, Long Island, and Westchester on Jan. 1. Now the company says it will also step up the pace of policy nonrenewals in the region.

Allstate, the largest home insurer in New York, cited its "catastrophic exposure" to losses if a severe hurricane were to hit New York's coastal areas. Sen. Charles Schumer (D-N.Y.) says the claim is "bogus," citing National Oceanic & Atmospheric Administration (NOAA) statistics predicting that a category 4 hurricane or higher will hit New York City only once every 500 years and Montauk, Long Island once every 130 years. He thinks Allstate's move is nothing more than a political ploy to create a "false crisis" that will trigger public outcry for a taxpayer-financed fund indemnifying insurers from catastrophic losses produced by hurricanes and other major disasters.
What is insurance if not financial protection from a loss, even a disastrous one?

Keep in mind that Allstate (this article was written in February) is only one insurance company, and that only MetLife soon followed suit, but this tactic can spread quickly. It won't be easy to go to another insurer, mostly because insurer's don't like "exposure," or large areas of risk where they can lose money quickly. Think of it as spreading your chips around a reverse roulette table. If your number comes up, you lose 8-to-1, but all your other bets are returned to you with interest.

You'd want to put as little on the losing number as possible, so you place as little money on each bet as possible, keeping in mind that you earn interest on those bets that you win. Meaning you aren't going to sit on your stake, but go all-in on each spin. Similarly, insurance companies make their money in two ways: taking in premiums with the bet they'll never have to pay them out and then investing those premiums.

Now, you've owned a home on Long Island for ten, fifteen, twenty years, say. The last major hurricane to hit Long Island directly was Category 1 Gloria, back in 1985. Damage to most of Long Island? Minimal. Flooding along the shorelines, and into towns on the barrier islands, towns like Long Beach. Other than that, it was pretty much business as usual.

The last devastating hurricane to hit Long Island was in 1938, the legendary Long Island Express, an estimated Category 3.
Nearly 70 years ago, violent hurricane ripped across the south shore of Long Island, then largely farmland. The storm, locally dubbed the Long Island Express, sent 30- to 50-foot waves surging ashore, killing 50 people and 750,000 chickens in the Long Island counties of Nassau and Suffolk.
Too, in 1938, Long Island was mostly chicken and potato farms, whereas now some of the richest real estate sits on those sites. real comprehensive Federal protection, even in the areas of highest risk, like Long Beach, where people have taken to paying off their mortgages faster, rather than move ( need insurance in order to carry a mortgage. No insurance, and the bank forecloses), or:
"There are very few insurance companies that are willing to write homeowners' policies right now," says Denis Miller, a Long Beach insurance agent. He says he recently placed one customer with another major insurer, but for an extra $350 annually, almost a third of the prior premium.[....]

[Michael] Charles, now 55 years old, already feels the impact of living in a storm-prone area. For a single-story house with three bedrooms and an attic but no basement, he pays $2,350 for homeowners' insurance, including hurricane coverage. He also has flood insurance through the federal government. But federal flood-insurance figures suggest many Long Islanders aren't prepared for the worst. In Long Beach, only about 40% of households are covered by the federally backed flood-insurance program. That's a much lower percentage than in much of New Orleans at the time of Hurricane Katrina; in many parishes in the metropolitan area, more than 60% of households had federal flood insurance when the storm hit.
What do YOU think is going on? Could it be that, oh, I don't know, the government is waiting for homes to drop in value so that their cronies, big real estate developers, can snap them up and then force zoning law changes, thus making enormous profits on major developments? Right now, there is only one high rise property on Long Island, and even that is right outside the city lines.

This could change as insurance becomes a lottery that only people who can absorb these high rates can afford. And the only way an individual can afford them is to pool his or her risk with a few other people, per square foot of residence. And the only way to spread that enough is through communal residences: apartments, and condos of sufficient density so that the individual exposure is minimal.

In other words, a city. Which is precisely why many people moved to Long Island to escape.

Clearly, this is not news to everyone who reads this blog, in particular Floridians and others in Hurricane Alley and perhaps Southern Californians in the earthquake belt, but make no mistake: as insurers whittle their risks ahead of the perceived dangers of global warming, they will look to as many places as possible to pull this stunt.

They ought to be called on it, now.