Going coastal: State must address windstorm insurance issue
By Bill Settlemyer
President and CEO, Setcom Media
State Sen. Glenn McConnell has the good habit of tackling tough issues head on. He demonstrated that trait recently when he held a forum to address the rising cost and shrinking availability of windstorm and homeowners insurance coverage along the South Carolina coast.
A recent article in The Washington Post reported that insurance carriers are actively reducing their windstorm (i.e., hurricane) loss exposure along the entire Eastern Seaboard and Gulf Coast. Stung by the losses from hurricanes Katrina and Rita, as well as other storms that pounded Southern coastlines over the years preceding Katrina and Rita, the insurance industry has decided to head inland.
Participants in Sen. McConnell’s forum told stories of insurance premiums rising by 300% to 400% in one year or getting notices that their insurer would not renew their coverage. Similar reports have appeared in the media in other coastal states, especially Florida, which is feeling the brunt of dramatic rate increases and policy cancellations.
Here in South Carolina, it is important for policymakers and business people to realize that this is an issue with a statewide impact. The state’s coastline has been the focal point of much of the population and economic growth in the state in recent years, and it would be in no one’s interest to see lack of insurance cause a dramatic slowdown.
As The Washington Post article pointed out, if you don’t have access to homeowners insurance (including windstorm coverage), banks won’t issue a mortgage. No mortgages, no sales. No sales, no value. That $2 million beach home suddenly becomes a liability rather than an asset.
Insurers—they’re human too!
In one of my past careers I was government affairs counsel for a property and casualty insurance company.
For an industry built on insuring other people’s risks, the industry’s decision makers are a pretty conservative crowd, as they should be. They are methodical and cautious, but they’re human, too. Sometimes they overreact to bad claims experience, and other times they get carried away chasing market share, writing too much coverage at rates that are too low to produce a healthy profit.
If I were an insurer that took a big hit from Katrina, I’d feel pretty banged up, like a guy who’d been in a bad car wreck and needed a year of rehab to get back on his feet. So I do think there’s some degree of overkill in the current retreat from writing coverage on the coast.
But even if you adjust for the emotional impact of 2005’s hurricane losses, it’s hard to fault insurers for being more cautious in managing their exposure to coastal windstorm losses. A part of the problem is man-made, literally: The sheer volume of building along our coastlines is raising the total dollar volume of insurance exposure, regardless of any increase in the frequency or severity of storms.
The other part comes from Mother Nature, and she’s not showing her hand so clearly any more. We know we’re in a multi-decade weather cycle that produces more storms, and this too will pass. What we don’t know is how climate change, such as global warming, will change conditions long-term beyond the current weather cycle.
The best educated guesses call for rising seas, more storms and stronger storms due to warming oceans and increased rainfall. How fast that will happen is another story entirely, but that kind of long-term uncertainty makes insurers even more nervous and cautious, because predictive models based on history become less useful in predicting future risk.
The short-term fix
It is important for the state’s political and business leaders to join Sen. McConnell in putting this issue high up on their agendas for 2007. We should look at best practices and solutions based on what other states are doing to address the cost and availability of windstorm insurance. We should also seek the best advice we can get from insurance experts and insurers and take specific steps that make sense.
Those steps might include changes to the South Carolina Wind and Hail Underwriting Association, an insurer of last resort created by the state to help those unable to obtain coverage through normal channels. It’s also important to look at building codes and zoning to insure that current and future construction, both residential and commercial, meets high standards of protection against both flood and wind hazards associated with hurricanes. In addition, exposure along the coast can be significantly reduced by retrofitting existing structures to provide better protection against wind damage.
The long-term fix
It’s possible that there is no long-term fix. It’s possible that climate change has enough momentum from all the greenhouse gasses we’ve pumped into the atmosphere that an eventual and complete retreat from the coastlines is inevitable. It’s possible that the entire state of Florida will have to be evacuated along with the rest of the low-lying coastlines around the Eastern Seaboard and Gulf Coast.
No one wants to think about that. The financial losses and dislocations would be an economic disaster of unimaginable scale, as the British government pointed out in the recently released Stern Review:
“Using the results from formal economic models, the Review estimates that if we don’t act, the overall costs and risks of climate change will be equivalent to losing at least 5% of global GDP each year, now and forever. If a wider range of risks and impacts is taken into account, the estimates of damage could rise to 20% of GDP or more. In contrast, the costs of action—reducing greenhouse gas emissions to avoid the worst impacts of climate change—can be limited to around 1% of global GDP each year.
“The investment that takes place in the next 10-20 years will have a profound effect on the climate in the second half of this century and in the next. Our actions now and over the coming decades could create risks of major disruption to economic and social activity, on a scale similar to those associated with the great wars and the economic depression of the first half of the 20th century. And it will be difficult or impossible to reverse these changes.”
I’ll put it to you in simpler and more personal terms: Which is more important, the loss of your home and your way of life on our beautiful coast or your 15-mpg SUV? Choose one, because, you (and your children and grandchildren) can’t have both.
View as PDF
|
E-Mail This Article
Printer-Friendly Version