New Jersey is the new Florida
Superstorm Sandy in October 2012 caused more than $18 billion in insured damages (plus billions more in uninsured damage) but also caused a shift in how insurance underwriters view the Northeast.
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.
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 percentage-based deductibles 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 of NAPCO.
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 will there be damage, he says, but what's the cost to fix the damage?
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 claims.
"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 rates.
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 Tsetsenekos.
Price increases the National Flood Insurance Program (NFIP) makes are likely to be a more painful part of the Northeast storm equation.
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 says.
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.