Barbara P. Fernandez for The New York Times
Charles R. Williams’s home was damaged during Hurricane Andrew in 1992.
By JOSEPH B. TREASTER
November 23, 2007
PALMETTO BAY, Fla. — Charles R. Williams stood near the glass sliding doors in his home south of Miami and pointed out parts of the ceiling and walls that had crumpled after Hurricane Andrew ripped open the roof 15 years ago.
The visible damage from that storm, one of the worst of the century, has largely disappeared. But Mr. Williams and homeowners nationwide are still feeling its effect in their pocketbooks.
The storm stunned insurance companies and, after paying out more than $22 billion in claims in inflation-adjusted dollars, they began rewriting policies to protect themselves as much as homeowners. They also developed computer programs intended to limit payouts on claims.
As a result, American homeowners are having to make do with much less coverage at steadily rising prices. In Miami and other places along the coast, insurance prices have skyrocketed, deepening the national slowdown in home sales.
The insurers say they have had to take defensive measures to stay in business and pay claims as operating costs have climbed. “If you’re being overly generous in covering risks and you’re not taking in sufficient premium, it doesn’t make business sense,” said Richard Ward, the chief executive of Lloyd’s of London, a large insurer of homes and businesses in the United States.
Yet some industry experts and consumer advocates say that efforts by the insurers to increase profits, after years of taking losses on home insurance, are shifting more of the burden of repairs and reconstruction to homeowners. The cutbacks in coverage, consumer advocates say, have contributed to the slow recovery of the Gulf Coast from Hurricane Katrina and will most likely hamper recovery from the recent wildfires in California.
“You have a different mentality at the insurance companies,” said Andrew Barile, a consultant who has spent his life in the industry. “They no longer worry about the public service aspect. They’re concentrating on the bottom line.”
The bottom line has been good recently. The property insurance industry, including home, auto and commercial coverages, reported a record profit of $44 billion in 2005, even after paying $41 billion in damages from Katrina. The industry set another record for profit in 2006 at $64 billion. And as a second hurricane season is coming to an end without a hurricane hitting the coasts, 2007 is shaping up to be another lucrative year.
The changes in insurance coverage have been gradual. They are spelled out in the revised policies. But few homeowners read their policies, and they are often unaware that coverage has been reduced until they are faced with making repairs or rebuilding their homes. In most of the country, reduced coverage is much more of a burden than rising premiums.
Ten years ago, for example, the average cost of home insurance in America was $455 a year.
Today, it is an estimated $886 for much less insurance. Along the coastlines, annual premiums on houses routinely run into the thousands of dollars. Contending that even those premiums are not high enough for the risk they face, the insurers have canceled or declined to renew several million policies.
Two years ago, the annual cost of coverage for Mr. Williams, a retired airline pilot, and his wife, a former flight attendant, rose more than 50 percent to $2,599, for about $250,000 in coverage.
The insurers say they have tried to strike a balance that works for them and their customers. “What insurers have tried to do,” said Robert P. Hartwig, the president and chief economist of the Insurance Information Institute, a trade group in New York, “is to sell policies that provide people with coverage for the vast majority of losses they are likely to suffer at an affordable price.”
“A policy that covered every peril would be unaffordable for many if not most people,” Mr. Hartwig said.
Before Andrew, the insurers sold home insurance as a loss leader and loaded the policies with lavish benefits to attract customers for their car insurance and to build up capital in their investment portfolios.
“It was a kind of avuncular, sleepy line of business,” said William R. Berkley, the chief executive of W. R. Berkley, a commercial insurer in Greenwich, Conn. “Then losses started to outstrip even what investment income might have been able to make up.”
In those days, the standard home policy promised to pay for the replacement of a destroyed home, regardless of the cost. Now most policies pay the insured value of a house and up to about an additional 25 percent — which is often not enough to rebuild, as many victims of the recent wildfires in California are discovering.
As an example, a typical policy for a home valued at $300,000 usually pays up to $375,000.
One home destroyed by the California fires, for example, was insured for $4 million. The insurer, Chubb Insurance, estimated that rebuilding would cost $6 million, or 50 percent more than it was insured for. But Chubb is one of the few insurers still offering full replacement coverage.
By issuing full replacement policies, the risks of higher reconstruction costs and underestimates on home values fell on the insurance company. Now most companies put the risk on the homeowner.
In much of Miami and along the coast, the insurance companies no longer provide coverage for the most costly threat to homes: damage from hurricanes and other high winds. Now, Florida and several other states have created state-run insurance companies to provide the coverage.
Insurers that still sell policies against wind damage impose deductibles of at least 2 percent and as much as 5 percent, which is another way of reducing coverage. On a $300,000 home with a 5 percent deductible, the homeowner pays for the first $15,000 in damage, compared with the once standard deductible of $500.
After Katrina, the reductions in coverage and the insurers’ reluctance to pay claims contributed to thousands of lawsuits and out-of-court disputes and made it difficult for many to rebuild.
Flooding was extensive along the Gulf Coast. The insurers do not cover flood damage, and their policies say so. But most policies also contain clauses that rule out payment for wind damage that occurs in combination with flooding.
Many homeowners could not accept that flooding caused by hurricane winds could cancel out the battering by high winds that their homes suffered for hours before the water arrived. And they took their insurers to court. But a federal appeals court recently ruled that the insurers were within their rights to deny payments in those circumstances.
Besides many angry customers, the insurers are facing federal and state investigations and a lawsuit by the attorney general in Louisiana into their coverage and claims-paying practices.
In a lawsuit filed this month, Charles C. Foti Jr., the attorney general in Louisiana, accused State Farm, Allstate and other insurers of using computer programs to gain “an unjust advantage over policyholders” in calculating premiums and paying claims. Private lawyers in Louisiana have filed similar lawsuits based on the testimony of former claims adjusters.
“The idea that insurers conspired to limit claims is completely without merit and unsubstantiated,” Mr. Hartwig said.
The insurers say they have resolved 99 percent of the 1.2 million claims from Katrina for damage to homes and that most people are satisfied. Most of the complaints, they say, have not been related to reductions in coverage but have resulted from expectations of homeowners that insurance policies would cover flood damage.
Many people, Mr. Hartwig said, are “searching for ways to fill the economic gap” created by Hurricane Katrina. “But,” he said, “the gap principally boils down to two words: flood insurance. If there had been 100 percent penetration of flood insurance, we wouldn’t be having this conversation.”
Tightening coverage and claims payments have produced spectacular results for the insurers, as shown in an economic snapshot of their performance in home insurance in 1992, the year of Andrew, and in 2005, the year of Katrina.
In 1992, the companies collected $20.5 billion in premiums and reported a pretax loss of $11.8 billion on home insurance, not counting earnings from investments, according to A. M. Best, an insurance rating agency. In 2005, the home insurers took in $52.2 billion in premiums and reported a pretax loss of $643.6 million; losses had been cut to a sliver of sales. In 2005, with investment earnings of $1.9 billion, the home insurers had a net gain, before taxes, of $1.3 billion.
One measure of the new efficiency of the home insurance business is its ratio of claims expenses to premiums. In the year of Hurricane Andrew, the industry paid out $1.27 for every dollar of premium it collected. In 2005, the year of the more destructive Hurricane Katrina, the insurers paid out 71.50 cents for every dollar of premium.
“I could understand it if the insurance companies were cutting back on coverage, lowering their costs and passing on some of the savings to homeowners,” said J. Robert Hunter, the director of Insurance at the Consumer Federation of America. “But they’ve hollowed out their policies and they’re keeping the benefits for themselves.”
The insurers say that in a time of more powerful and more frequent hurricanes, they have to tailor their coverage and prices for overwhelming jolts. The huge increase in condo towers and homes along the coasts, they say, have multiplied their potential losses.
“I guarantee you,” Mr. Berkley said, “as we move down the line, the profits you’re seeing in the business today are going to take a significant hit.
“One meteorological wobble,” he said of Hurricane Dean, which tore through the Caribbean and Mexico in August, and the storm “would have hit Miami. And that’s a $100 billion hit.”
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