Insurance bills as big as mortgages

By Liz Pulliam Weston

The contrast couldn't be starker.

If you live in a relatively thin band of land along the coast from Texas to Maine, you're probably facing sharply higher insurance rates for your home -- when you can find a company to insure you at all.

The farther inland you are, the less you have to worry. Homeowners-insurance premiums are stable or even declining elsewhere as insurers rush to woo more business in places not prone to catastrophic storms.

A year after Hurricane Katrina hit the Gulf Coast, the homeowners-insurance market has been remade into a world of winners and extreme losers. Consider:

• Skyrocketing insurance rates in Florida are panicking homeowners, quashing real-estate developments and hobbling businesses. Some commercial and condominium rates have risen 400% or more. State Rep. Dan Gelber, D-Miami Beach, said one of his constituents abandoned a real-estate deal after windstorm-insurance costs rose from 60 cents to $6 per square foot within six months. Gelber expects his own $9,000 home insurance bill to rise to nearly $16,000 this year. The state's teetering windstorm insurance pool, which had a nearly $2 billion deficit after four hurricanes in 2004 and Wilma in 2005, issued $3 billion in revenue bonds and accepted a $715 million infusion from the state's general fund to stabilize its finances.

• In Mississippi, the state-created windstorm pool asked for a 397% rate increase for private dwellings, which would have boosted the typical premium for a $100,000 home from $792 to $3,942. The state's insurance commissioner said no, limiting the increase to 90%, but critics warned further increases will be necessary. (And don't forget to add the cost of flood, fire and liability coverage on top of that.)

• Louisiana officials fear the higher cost of insurance in southern parts of the state will slow or derail rebuilding efforts. Many of the state's remaining insurers are imposing 5% windstorm deductibles or refusing to cover wind damage at all. On top of higher rates, homeowners in the state's last-resort pool, Citizens Property Insurance, will face a surcharge of up to 20% to help pay for Katrina claims and boost the pool's reserves. And in New Orleans, homeowners are reporting quotes of $10,000 a year on a $500,000 house that didn't take any water.

• Katrina is having an effect far beyond the Gulf Coast. Insurers are cutting back coverage all along the Eastern seaboard, as industry models indicate a rising likelihood that a major hurricane could hit the Carolinas, New York or New England. Allstate, New York's largest insurer, stopped accepting new business in New York City, Long Island and Westchester County, while Nationwide is trimming coverage on Long Island as well as coastal Maryland and Virginia. An exodus of insurers from tony enclaves like Cape Cod, Nantucket and Martha's Vineyard, which started several years ago, has accelerated in the past year.

Rising odds scare off insurers

Sandy Ray, a Martha's Vineyard insurance agent with 30 years experience, was among those dropped. Ray found coverage for 20% more with another private company, but many other coastal residents have wound up in the state's windstorm pool, which is now Massachusetts' largest insurer.

Ray believes insurance companies are overreacting. He acknowledges that a hurricane swept through the area in 1938, and that the island is far more populated than it was then. Still, he finds it hard to imagine that a Category 4 hurricane such as Katrina would make landfall so far north.

"The likelihood of one of those storms coming through this area," Ray says, "is kind of remote."

Predicting the odds a hurricane will strike any specific spot in a given year is tough, says Robert Hartwig, chief economist for the Insurance Information Institute, a trade group. But "the probability is high," he says, that a hurricane will come ashore somewhere between Maryland and Cape Cod in the next three years.

Hurricane scientists are predicting another "very active" storm season, and all the Northeastern states targeted by insurers -- Connecticut, Maine, Massachusetts, New York and Rhode Island -- were hard hit by Category 3 storms during a previous hurricane cycle from 1938 to 1960. Similar storms today could cause even more deaths and damage, while larger storms could be devastating.

"A hurricane that made landfall north of Atlantic City and that rolled up through New Jersey to Canada would be a $100 billion event," says Tony Diodato, rating service A.M. Best's vice president for property/casualty insurance. So would a direct hit on Miami, such as the Category 4 hurricane that hit the city in 1926.

Companies in the notoriously cyclical business of insurance have decided en masse that it's better to be safe than sorry, at least for now.

"No CEO wants to be in front of shareholders or regulators saying 'We didn't think it was going to happen,'" Diodato says. "They don't want to say, 'We got hit by Katrina and we didn't wise up, and now we got hit in North Carolina or Virginia because we didn't think it would happen again.'"

Profitable -- and determined to stay that way

The industry was certainly caught off guard by the damage from last year's hurricanes. Insured losses reached a record $58 billion. Yet even though insurers paid out $7 billion more in claims than they received in premiums in 2005, the industry still posted record profits of $43 billion, thanks in part to investment gains.

Insurers fret that their investments won't do as well this year, but Diodato says the industry has been shedding risk so aggressively since Katrina that it's likely to remain quite profitable.

"The actions taken in the last six to 12 months are probably going to mitigate losses," Diodato says. "Right now the industry's on track for a very strong 2006."

Solid profits have led some companies to trim their rates in some states even as they request massive increases in others. For example:

• State Farm won a 52% rate increase in Florida but cut rates by 5% to 10% in many Western and Midwestern states, including Alaska, California, Iowa, Michigan, Minnesota, South Dakota, Wisconsin and Wyoming.

• Farmers reduced rates in 12 states, most significantly in Ohio (5.6%), Wisconsin (4.7%), South Dakota (3.8%) and Oregon (2.3%).

• USAA trimmed rates in 15 states, including a 22% reduction in California. Some cities, including Phoenix, Dallas, Baltimore and Richmond, Va., received premium cuts of 17% to 24%.

Less shared risk

More insurers would be lowering their rates were it not for the ever-rising costs of building materials and labor, the insurance institute's Hartwig says. As it is, most homeowners won't see much difference in their premiums at renewal time.

"It really is a tale of two countries when it comes to homeowners insurance," Hartwig says. "Insurers do try to match price with risk, so the rest of the country doesn't bear the cost of hurricanes."

But critics say insurers have gone way too far, undermining the essential premise of shared risk and leaving chaos in their wake. Some, including the National Association of Realtors and former FEMA head James Lee Witt, are calling for national disaster insurance to dampen wild swings in availability and pricing.

Gelber, the state legislator who has proposed a state catastrophe fund in Florida and who sponsors a site called StormingMad.com, says today's system wreaks too great a price on vulnerable homeowners.

"It can be devastating. … We have fixed-income seniors whose condo associations will be getting a tenfold increase in their premiums," he says. "Something needs to be done."

Liz Pulliam Weston's column appears every Monday and Thursday, exclusively on MSN Money. She also answers reader questions in the Your Money message board.