Superstorm Sandy in October 2012 caused more than $18 billion in
insured damages (plus billions more in
damage) but also caused a shift in how insurance underwriters view
According to insurance broker NAPCO's Spring 2013 State of the
Market Report, underwriters and catastrophe modelers now regard the
Northeast more like the Southeast when it comes to property
insurance pricing, storm language and the availability of flood
Insurance underwriters have long taken a dim view of the
Southeast, with its pounding hurricanes and expensive claims. Now
the Northeast isn't looking much better.
What to expect
Experts speculate the Northeast residents will run into more
windstorm deductibles and
when buying home insurance. Residents of "first-tier" counties --
those counties adjacent to the Atlantic - will see 1 percent or 2
percent deductibles in their policies, if they haven't already.
Also common will be rate increases on older structures that are
not as well made or as strong as newer construction.
Expect language like "super storm" and "storm surge" to be added
to policies, which will trigger special storm deductibles - and
expect those deductibles to be higher -- says David Pagoumian, CEO
Steven Weisbart, chief economist at the Insurance Information
Institute, notes that there are multiple factors pushing up home
insurance rates. He explains that "it's not so much the chances for
loss - no one can predict that - but will rebuilding costs be
higher?" The question is not so much
there be damage, he says, but what's the cost to
In addition, home insurance companies often turn to reinsurance
for help after natural disasters, but reinsurance rates have been
going up, says Weisbart. Also working against insurers are low
interest rates. Insurers haven't been able to make much investment
income from premiums before they have to pay out the money in
"Every year senior [executives] sit around a table and conjure
up the things that keep underwriters up at night," says Pagoumian,
Things like a New York terror event, a Japanese earthquake, the
"Big One" in California, or a storm hitting Pinellas County, Fla.,
that leaves the whole city of Tampa underwater.
"But the first event that keeps us up at night is a
two-hurricane event [within a short time frame]; the first one
hitting the Northeast and the next one hitting the Carolinas."
That's predicted to be a $78 billion loss.
"Most carriers are migrating toward a 'bi-peril model,' so
they'll rate the risks separately -- fire, wind, hail, earth
movement -- so in those instances, you'll see the portion of the
premium associated with wind go up even as they're adjusting the
deductible amounts or the definition of a super storm or a wind
event," says Alex Tsetsenekos, vice president and general manager
of Property Vertical at LexisNexis Risk Solutions.
No matter how you slice it, Northeasterners will pay more. Some
home insurers will raise deductibles but make minimal rate
increases; others will leave deductibles alone and simply increase
Previously carriers thought wind damage only affected areas five
miles from the coast. Now, anything east of Trenton or Philadelphia
will be re-evaluated and considered accordingly, explains
Price increases the
National Flood Insurance Program
(NFIP) makes are likely to be a more painful part of the Northeast
When the flood program was set up many decades ago, there was a
long period with little flood impact, and certainly nothing like
Sandy. So if someone in the Northeast was paying $400 per year for
flood insurance, and the NFIP now determines that $5,000 per year
is required, the NFIP may raise rates 25 percent a year until it
gets to an actuarially sound number.
"For a lot of folks, the total cost of ownership for their home
may be cost prohibitive," says Tsetsenekos.
Other calculations he sees find flood insurance available for
$5,000 annually but with the requirement that you raise your home 6
feet off the ground. Even for affluent neighborhoods, that could
cost skyward of $100,000 and be cost prohibitive.
Tsetsenekos says that some price models show a flood policy
costing $30,000 annually for some homes. "There are some dramatic
impacts for folks living in these low-lying or coastal areas," he
The future of Northeast insurance
The final FEMA flood maps for New Jersey, New York and
Connecticut should be released this fall.
Tsetsenekos says there are hard questions that Northeastern
homeowners should ask themselves:
- Am I in a flood zone?
- What flood zone am I in?
- Is it feasible to raise my home or take other drainage or
loss mitigation steps?
- Will I have to consider moving as these rates go up?
- If I have a
subsidized flood insurance premium
, how long before it expires and it becomes cost prohibitive to
live in this location?
"Those are the kinds of challenges I would ask consumers to
think about as they're addressing where they live and how they
live," Tsetsenekos says.