Battening down the hatches: coastal-state homeowners are facing a crisis in finding homeowners insurance. And in cases where they can find it, they may not be able to afford it

Mortgage Banking, August, 2007 by Jack Milligan

When the Atlantic hurricane season officially kicked off on June 1 of this year, it made a lot of people nervous--and for good reason. After a much-needed lull in 2006, communities along the Atlantic and Gulf of Mexico coastlines braced themselves for the kind of beating they endured in 2004 and 2005--two of the worst hurricane seasons on record. [??] Ominously, weather scientists at the National Oceanic and Atmospheric Administration (NOAA), Washington, D.C., predict this year there is a 75 percent chance that hurricane activity in the Atlantic Ocean will be above normal, with 13 to 17 named storms, including milder tropical storms. Of these, NOAA said that three to five could become Category 3 hurricanes or higher. [??] While this would not top the worst-ever hurricane season of 2005--when there were 27 named storms and a whopping 14 hurricanes, according to the Asheville, North Carolina-based National Climatic Data Center--it certainly does not portend well for coastal states like Florida and Mississippi. In these states, homeowners insurance rates have already soared nearly as high as a rocket at Cape Canaveral. [??] Because it is essentially a long peninsula with two extensive coastlines, Florida has always been subject to very high hurricane risk. Indeed, prior to Hurricane Katrina in 2005, Hurricane Andrew--a Category 5 storm that devastated South Florida in 1992--ranked as the most expensive natural disaster in U.S. history. But the unprecedented hurricane activity in 2005 also inflicted billions of dollars in damage along the Gulf Coast in Alabama, Mississippi, Louisiana and Texas, leading many private insurers to pull back from states where hurricanes are most likely to occur.

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The result was a homeowners insurance crisis that forced coastal states to adopt a variety of emergency remedies--including Florida, which took the controversial step of expanding its own insurance underwriting facility to fill the vacuum when private insurers pulled back from the homeowners market. That state-owned facility, Jacksonville, Florida-based Citizens Property Insurance Corporation, is now Florida's largest homeowners insurer and provides sharp competition for the private market.

In Florida, where the average annual premium for a homeowners insurance policy went up 40 percent after the 2004 and 2005 hurricane seasons, there were reports of some homeowners in coastal areas getting hit with rate increases upward of 800 percent, according to Florida Insurance Commissioner Kevin McCarty. "There were some people who had to take a second job just to afford their homeowners insurance," says McCarty.

The situation is pretty much the same in Mississippi. "The market is very tight, particularly along the coast, and [homeowners coverage] is very expensive," says George Dale, Mississippi's state insurance commissioner.

And while tightening in the homeowners insurance market has yet to produce a significant problem for mortgage servicers, it bears watching closely, says Freddie Mac. "There are a lot of situations that give us concern, although we have yet to see a direct impact," says Al LeQuang, director of insurance relations at Freddie Mac. "What we want to see is a stable source of [homeowners] insurance, and a source that is affordable."

Record losses

By almost any measure, the 2004 and 2005 hurricane seasons were unprecedented both in terms of storm activity and related damage. There were 15 named storms in 2004, including eight hurricanes--six of which were rated as Category 3 or higher. Florida was especially hard-hit in 2004, with four hurricanes making landfall, including two--Frances and Jeanne--just three weeks apart. According to the New York-based Insurance Information Institute (III), an insurance industry-funded research and educational organization, insured hurricane-related losses in 2004 (including but not limited to homeowners insurance) totaled $23.7 billion.

Unfortunately, the 2005 hurricane season turned out to be even worse thanks to Hurricane Katrina, which devastated the Mississippi and Louisiana coastlines and became the costliest natural disaster in U.S. history--and the single-most costly event in the history of global insurance. The III estimates that total hurricane-related insured losses that year hit nearly $58 billion.

Clearly, the 2004 and 2005 hurricane seasons were extraordinarily expensive for the global insurance market, including property/casualty insurers in the United States as well as reinsurance companies throughout the world. In his written testimony submitted to the U.S. Senate Committee on Banking, Housing and Urban Affairs for an April 11, 2007, hearing on the issue of insurance availability and affordability, III President Robert Hartwig said that Katrina-related homeowners insurance claims in Mississippi totaled $13.6 billion--wiping out "approximately 17 years' worth of premiums and every dime insurers had ever made in the history of the state."