[StBernard] Hurricane deductables could cost homeowners more in future storms

[Westley Annis]

Hurricane deductables could cost homeowners more in future storms

By Rebecca Mowbray
Business writer 

Louisiana homeowners can expect to shell out a lot more of their own money
to cover wind damage this storm season because of the increasing use of
hurricane deductibles. 

Before Hurricane Katrina, 57 companies had permission to use hurricane
deductibles in Louisiana. Since the storm, another 31 companies have filed
plans to use them. 

Unlike traditional deductibles on property insurance, which might ask people
to pay the first $500 or $1,000 when they make a claim, hurricane
deductibles have generally required homeowners to pay about 2 percent of the
value of their home as a deductible when a hurricane, tropical storm,
windstorm of hailstorm damages their property. 

Now those deductibles are climbing to between 3 and 5 percent. They can even
go as high as 15 percent. Hurricane deductibles are also increasingly
required of policyholders, whereas in the past they were often offered in
exchange for lower premiums. 

These higher deductibles could eventually help make insurance more
available, because with homeowners footing more of the bill, insurers can
usually issue more policies. 
But if South Louisiana gets smacked with another hurricane, policyholders
could be on the hook for thousands more than they were with Hurricane
Katrina. 

And climbing deductibles raise the possibility that some homeowners could
dutifully pay their premiums throughout the year and not get any help from
their insurance company in covering moderate damage. 

The owner of a $300,000 home with a 2 percent hurricane deductible, for
example, would have paid for the first $6,000 in Katrina wind damage repairs
to his home. A 5 percent deductible on the same home, however, means the
owner is on the hook for the first $15,000. 

The average Katrina homeowners claim in Louisiana was only $13,405, so if a
5 percent deductible had been in place on that home when the hurricane hit,
that home owner might not have received any insurance payout. 

The upshot is that homeowners with high hurricane deductibles may only get
help from insurance if their home is severely damaged. 

The insurance industry argues that rising hurricane deductibles are a way of
forcing residents who live in risky areas to shoulder a greater portion of
the burden. 

"Companies felt that homeowners needed to take on a greater responsibility
for the risk," said Loretta Worters, vice president of communications at the
Insurance Information Institute, an industry trade group. 

But consumer advocates say rising hurricane deductibles - also called
named-storm deductibles or wind deductibles - are nothing short of a
wholesale transfer of risk to homeowners who, over time, are paying more
money for less coverage while the property and casualty industry earns
record profits. 

"Insurance companies don't like to take risk. They're risk avoiders," said
Bob Hunter, a New Orleans native and former Texas insurance commissioner who
is director of insurance at the Consumer Federation of America. "It's like a
big rate increase because the risk is shifted to you." 

All major homeowners insurers in Louisiana have provisions for hurricane
deductibles on their books, though they may not have used them. Now, more
companies are not only using them, but they're raising them and requiring
them of policyholders. 

The state's largest insurer, State Farm, has not made any changes to its
hurricane deductibles post-Katrina. In some coastal parishes, it requires a
minimum 2 percent deductible, but it has voluntary deductibles of between 2
percent and 5 percent. 

Allstate uses wind and hail deductibles, but those deductibles have not
changed since the storms. For customers that have a wind and hail deductible
provision on their policies, customers can choose a deductible that's as low
as their all-perils deductible, possibly as low as $500, or a 2 percent or 5
percent deductible. 

But many other companies have come before the Louisiana Insurance Rating
Commission in recent months with plans to start using or increase
deductibles. Farm Bureau Insurance Cos., the state's fourth largest insurer,
for example, did not use hurricane deductibles before the storm. It will now
have a required 1 percent to 3 percent wind and hail deductible on policies,
and deductibles could go as high as 5 percent. 

Fireman's Fund Insurance Co. raised its mandatory windstorm deductible from
1 percent to 5 percent, though it allows customers to reduce that deductible
by paying higher premiums. AAA instituted a 3 percent windstorm deductible
for renewing business, and windstorm deductibles of between 2 percent and 5
percent on new policies, depending on where the properties are located. 

Republic Fire and Casualty Co., one of the few companies that is actively
writing in the New Orleans area, now has a mandatory 5 percent deductible on
new business in Orleans, Jefferson, Calcasieu and Iberia parishes and a
mandatory 3 percent deductible on new business in St. Tammany, St. Charles,
St. John, St. James, St. Martin, Lafayette, Acadia and Jeff Davis parishes. 

Hurricane deductibles were created after Hurricane Andrew in 1992 as part of
a package of insurance policy reforms aimed at keeping property insurers
from bolting from coastal areas. They've been more widely used in the past
five years, but are now taking a giant leap forward as insurers confront
increasing population, appreciating coastal property values, and what's
expected to be an active period of hurricanes for the next decade or two. 

The insurance industry says that shifting more risk to homeowners is the
only answer to the riddle of how to keep insurance premiums affordable. 

It's true that raising deductibles shift a larger financial burden onto
policyholders, but it's better than having no insurance at all, Worters
added. 

"If you look at the bigger picture, it's $40,000 as opposed to $400,000. If
your home were totally destroyed, would you have $400,000 to replace your
home?" she asked. 

Rich Piazza, Louisiana's chief actuary, said the insurance industry could do
more to help control rates and damage by formalizing programs that offer
homeowners discounts for either building homes to stronger specifications or
retrofitting them with storm shutters, hurricane clips and other materials
that help them better withstand hurricanes. 

"I think the insurance industry probably can do more to offer discounts on
mitigation efforts," Piazza said.

Banks, because they require a homeowners insurance policy when issuing a
mortgage, have played a big role in the development of hurricane
deductibles, but they're also wary of their rise. 

As hurricane deductibles climb, some lenders worry that with Americans'
traditionally low rates of savings, people might not have the cash on hand
to pay a storm deductible. As a result, repairs could stall and the bank's
collateral could be damaged. 

"For us it's pretty troubling," said Vicki Vidal, senior director of
government affairs for the Mortgage Bankers Association. 

Al LeQuang, director of insurer relationships at Freddie Mac, said it's a
delicate balancing act. Deductibles can play an important role in restoring
the availability of insurance when insurers are spooked, but they have to be
managed carefully so that they don't become so high that home owners can't
pay them. 

Freddie Mac said it opened the door for hurricane deductibles to be used in
1993, after it observed that while there was a crisis in the insurance
market in the United States after hurricanes Hugo, Andrew and Ineke,
property insurance was still available in Puerto Rico because it separated
the deductible for hurricane damage from the standard deductible for fire,
theft and liability coverage. 

"Such a deductible helped restore insurance capacity on the island," LeQuang
said. "While on the mainland we were seeing all these retrenchments, all
these capacity problems, Puerto Rico, which had been hard hit, was able to
maintain full capacity." 

After hurricanes Katrina, Rita and Wilma caused a combined $56 billion in
insured property losses last year, LeQuang said the pattern from the early
1990s of insurers raising rates, not writing new coverage and pulling out of
markets altogether was repeating itself, so the quasi-government agencies
stepped in. 

In late May, both Fannie Mae and Freddie Mac issued bulletins raising the
limits on hurricane deductibles from the 2 percent level set the 1990s to 5
percent. 

The reason, LeQuang said, is that homeowners were having trouble finding
insurance companies willing to write policies with only a 2 percent
deductible. 

By raising deductibles, Freddie felt it had a chance to help home owners by
creating new incentives for insurers to write policies in coastal areas, but
it put capped the deductibles at 5 percent to keep the insurers from
shedding all storm risk. 

"We could have stuck to our guns and said, 2 percent, and what would the
result be? The homeowner would find it very difficult to get insurance. They
cannot close the loan," LeQuang said. "These were hard choices for us. Hey,
are we going to contribute to the hard market, or are we going to help solve
it?" 

Ultimately, Freddie Mac decided that it was better loosen the deductible
limits and let consumers turn to the U.S. Small Business Administration or
another source of capital if they have trouble paying a deductible should a
hurricane ever hit them. 

"When you go apply for a mortgage, you're on your own," LeQuang said. "When
disaster strikes, everyone will be pitching into help you." 

Hurricane deductibles have created financial hardships for some homeowners
in hurricane-prone Florida. 

Although hurricane deductibles had been buried in the insurance policies of
Florida homeowners since shortly after Hurricane Andrew, their impact on
consumers wasn't felt until a quartet of hurricanes struck the state in
2004. 

Many homeowners could not afford to pay the deductibles, according to the
Florida Office of Insurance Regulation, and they had to borrow money from
friends and family or take out loans. 

Policies in Florida are now required to print the dollar translation of the
deductible's percentage on the front of the policy so that policyholders
won't be surprised by how much they have to pay up front. 

Another problem that surfaced in Florida in 2004 was that people were being
asked to pay hurricane deductibles each time they got hit with hurricanes.
For some homeowners, that meant paying their deductible two or three times
over the course of the storm season. 

"Since we had four catastrophic storms, there was no limit to these," said
Bob Lotane, spokesman for the Florida insurance office. "They could be
tapped for each storm." 

Eventually, the state had to create a fund to cover people after they paid
the first deductible. That program paid out $43 million on 26,000 claims.
The Florida Legislature later passed a law protecting consumers from paying
more than one hurricane deductible per season. 

Louisiana has no such protection against paying more than one deductible per
hurricane season, according to the Louisiana Department of Insurance. 

The Federal Emergency Management Agency says it will not help people pay
their hurricane deductibles, but the U.S. Small Business Administration says
its disaster assistance loans can be used to cover hurricane deductibles as
uninsured losses.

The bottom line is, home owners can expect to pay for a much greater share
of the routine storm damage themselves going forward. 

And the trend is drawing criticism from some and acceptance from others. 

Hunter, the consumer advocate, says the promise that hurricane deductibles
and the other reforms instituted after Andrew would create a more stable
insurance market have proven hollow to homeowners. 

Instead, consumers are getting less coverage with higher deductibles, and
rates continue to rise. "It's total reneg on the promises that were made,"
Hunter said. "Insurance is supposed to bring stability, not these periodic
upheavals." 

But Martin Grace, a risk management professor at the Robinson College of
Business at Georgia State University, said that over time, insurance rates
have continued to rise despite the existence of deductibles, but that's
because the risk has increased. If one were compare two policies on the same
house, one with a deductible and one without, the one with the deductible
would have a lower premium. 

Without hurricane deductibles, states such as Florida wonder how high rates
would have gone, or whether property insurance would be available at all. 

"Take all of those away, and we'd be in trouble. As bad as things are,
they'd be worse," Lotane said.

(Rebecca Mowbray can be reached at rmowbray at timespicayune.com or at (504)
826-3417.)