At the end of the day almost all companies place way too much emphasis on the “proximity to the coast” portion, out of the many other risk factors, associated in managing one’s PML. Mostly underutilized, in this exercise of risk management are the tools of eligibility requirements, deductibles and coverage offerings. Specifically, carriers tend to manage their exposure by drawing “invisible lines in the sand” based upon the distance to the coast, when determining what is eligible and what is not.
This problem is only exasperated when they use a definition of convenience (i.e. the intercoastal waterway) when defining where the coast line begins. Most of us realize that this waterway was commissioned in 1919 and is maintained by the US Army Corps of Engineers. Its primary purpose is to provide safe navigation for commercial traffic and recreational boaters. Much of the intercoastal is behind barrier islands and well inland to the actual coastline. I dare say that, prior to insurance companies, no one ever thought of using the intercoastal to define the US coast line. Carriers have tried to justify using the intercoastal definition based on matters of tidal water and storm surge. Truth be known some of the intercoastal is not even subject to tidal waters and the last time I checked, storm surge coverage is considered flood and isn’t covered under the typical property policy.
In 2004 and 2005 Florida experienced some of the worst hurricanes in history. In 2004 within a 6 week period of time, Florida was crisscrossed by Charley, Frances and Jeanne. The tracks of these three storms all intersected in central Florida causing extensive damage to that region, not just to the areas where they came ashore. Upon post storm evaluation of the damage, it was determined that the age of the building’s roof was one of the biggest contributors to the extent of damage incurred by buildings. The other elements that later came into consideration as Florida legislators mandated the new wind mitigation premium credits included the type of roof, type of roof tie downs, garage door design and window coverings. Building codes were later up graded throughout the state to harden both homes and commercial properties.
In 2005 hurricane Wilma once again proved that distance from the coast was not the most important factor in managing a carrier’s PML. Wilma came in on the west coast near Naples packing 125 mph winds. Four and a half hours later she entered the Atlantic near Jupiter still wrecking havoc with sustained winds of 110 mph. After cleaning up the mess from both coasts, the east coast because of the greater density of construction had incurred more damage than where landfall was made! The shallow warm waters of the everglades had sustained her fierce winds.
So what has been learned by the insurance companies? Not much as far as I can tell. As of February 2010, many companies have opened up their property capacities here in Florida, but almost exclusively for non-coastal counties. Virtually all of them are drawing the invisible lines in the sand in increments of 5 to 20 miles from the coast and bravely declaring that the wind shall not blow in central Florida!! They have virtually abandoned the coast line to the state held carrier of last resort, Citizens Insurance.
So what is a better approach?
I believe the solution lies in three areas, two of which are within the control of the insurance companies and one is not. Starting with the carrier side, greater focus should be placed on coverage offerings. Specifically, eligibility should be based upon the condition of the building and on any of the improvements made by the property owner to harden the structure. All of these things are verifiable by inspection. Companies could also limit binding authority to 2003 or newer, until a satisfactory four points and/or wind mitigation inspection is received. The point being that there are many older homes and commercial coastal properties that are very well maintained and hardened. These properties should not be forced into Citzens just because of their age, type of construction and proximity to the coast.
Approaching the risk from this perspective coupled with higher deductibles, and tolerable reductions and exclusions in certain areas of coverage is certainly a superior approach. This also allows carriers to spread out their risk exposure while still growing premium. For example, let’s take a typical coastal community in Florida.
With only a few exceptions, most of these coastal communities had completed building out their water front areas (e.g. canal lots with intercoastal access) by the early 1980s. Thousands of higher end ranch style concrete dwellings pepper the Florida coastal communities. Well maintained and upgraded, these homes have been virtually abandoned by all admitted carriers for the reasons given above. Yet again when we take a closer look at the historical evidence, these homes, at least the ones that were well maintained, faired very well during the 2004 and 2005 storms. Homes of newer construction that were inland, but had older roofs, incurred greater damages!!
So what else can be done to improve capacity and expand market share? This is obviously a matter of rate adequacy. In this area the carriers are subjected to the political winds of the legislators. My suggestion is that carriers need to push for greater standardization and acceptance of windstorm modeling in the rate making process. If legislators are allowed to focus on how this data is collected, processed and analyzed in the rate making function, there would be less political pressure when it comes to approving rate filings. If the legislators and the insurance consumers know that everything has been done in advanced to avoid any “smoke and mirrors” in establishing insurance premiums, i.e. the certification of wind storm modeling and pricing software programs, then they would be less likely to try to make insurance premiums a political issue. They would be more willing to allow the experts and open competition keep insurance available and competitively priced.
