More Questions About Insurance

Three years ago, a year before Katrina, Florida got the wake-up call that began a transformation in the way homes there are insured against catastrophe.

On the Insurance Journal site, Cecil Pearce, vice president of the Southeast region for the American Insurance Association, put it this way:

Hurricane Andrew, with $15 billion in insured losses -- threw Florida's property insurance market into chaos, many carriers discovered they had miscalculated their exposure to large weather-related losses.

Many homeowners faced higher rates and fewer options for coverage. Insurers tried to spread their risk over larger areas with less hurricane exposure. Pearce describes “A severe imbalance between the need for insurance and the industry's capacity to provide it.”

But Andrew did not slow the settling of Hurricane Alley and no laws were passed to limit such exposure. After all, Florida’s coastline is its main attraction for new residents and the travel industry. So now insurance is provided as a shared risk between insurance companies, the state and the homeowner. This is not, however, a comprehensive answer to the risk of storm damage and destruction. Another Andrew – given the continued build-up along the coast – could still bankrupt all of the provisional insurance sources.

For everyone whose home is at risk now or may be in the future due to the impacts of climate change, following the thinking of insurance providers is key for several reasons:

• They are experts in risk assessment. On the ground, that’s what we all wonder – “What are the odds that I’m going to be affected by the forecasted impacts?”
• People pay insurers so that they can recover or rebuild lost property due to catastrophe. Policy holders trust that they’re covered in case Nature clobbers their homes with wind, fire, flood or earthquake. Insurers, though, are constantly re-evaluating the risks associated with that coverage.
• Policy holders may not be covered as well as they think. Those re-evaluations are leading to cancellation of policies in many locations where the risk is seen as too great for continued coverage.
• We all need to know how to respond to the new reality where our locations disqualify us from insurance coverage or when high deductibles and premiums force us to make the choice of whether or not to pay for policies.

Government at both the state and federal levels understands that any region where insurance coverage for expected catastrophe is denied or is unaffordable to the residents is a ticking time bomb. We have the aftermath of Katrina to look at as an example.

Assuming that you can afford the insurance for your most likely disaster, you’d follow the advice of someone like Liz Pullium Weston in this column on MSN’s MoneyCentral page. Read it and you’ll see that unless you can afford to put plenty of money away in your own insurance reserve, there are no guarantees that your coverage will replace your losses.

This is where FEMA would be expected to step in. I know; hold your laughter. But more effective federal support for disaster insurance is being discussed in Congress, which brings up a moral question.

As the New York Times opened its lead editorial yesterday:

There is impeccable logic to the argument that taxpayers should not be made to pay for the risks incurred by people who choose to live along a hurricane-prone coast or atop a major geological fault.

It then noted that 50 percent of Americans live within 50 miles of a coast, and thus are vulnerable directly or indirectly to the damage of hurricanes and sea level rise. At some point, as climate change advances and shows itself, many of those residents may no longer be able to buy or afford insurance.

Since Hurricane Katrina — which caused a record $50 billion in insured losses — private insurers have jacked up premiums as much as they can and, when barred from raising prices, dropped coverage of riskier homes.

Many of these companies, which have turned denying valid claims into an art form, deserve little sympathy and certainly no government subsidies. Still, taxpayers would end up picking up the tab through federal disaster relief if millions of homeowners lost their insurance or decided to drop it due to high premiums.

If, as the editorial continues, the reality remains that we all stand to pay for uninsured losses one way or another, it seems that insurance companies may be let off the hook and relieved of their own risk. That would seem to also relieve them of the responsibility to deliver objective risk assessment - the single most valuable product of their expertise.