Cameron Bagherpour ~ North Carolina Insurance

FL] Home Insurance Industry Is Fraught With Risks

February 27, 2010, Paige St. John, Sarasota Herald-Tribune [Excerpt]

Millions of Floridians now bet their homes on property insurers that teeter on the edge of financial failure, a Herald-Tribune investigation has found.

These companies look nothing like the Allstates and State Farms that insure the rest of America - legacy carriers that command bankrolls the size of small nations.

Instead, because State Farm and Allstate are fleeing Florida, a growing number of homeowners get their insurance from tiny, untested companies that have a few million dollars in the bank but insure billions worth of property they could never hope to rebuild on their own.

More Failures to Come

No one knows what will happen when the next big storm strikes Florida shores. But the indications are not promising.

Over the past year, without having to weather a single hurricane, Florida led the nation with a half-dozen property insurance failures. For the first time, state regulators openly warn that more failures will come, even if a storm does not.

The Herald-Tribune spent more than a year examining Florida's property insurers, tracing the ownership of more than 70 companies through shell corporations and reviewing the financial filings of each. It found:

One in three privately insured Florida homeowners relies on insurers that exhibit one or more signs of financial risk.

More than 100,000 homeowners relied on companies barely capable of paying for house fires, let alone hurricanes. These insurers' reserves come so close to the state's $4 million minimum requirement that they operate with only a few hundred thousand dollars of their own to pay claims.

During the 2009 hurricane season, at least 38,000 Florida homes were insured by companies state regulators knew would fail. Homeowners were not told until after hurricane season, when one company was shut down and the other had to sell.

Lawmakers and regulators have ignored warnings and encouraged private companies to stretch their limited cash further. They have pushed companies to insure more and more homes without increasing the money set aside to pay claims, a practice that put state residents farther out on a limb.

Larger dangers loom. Despite rising property values, one in three Florida carriers has decreased the cash set aside for storms.

The Florida-only carriers that provide the majority of hurricane coverage in this state now stretch their limited cash nearly twice as far as they did before 2004.

They do it by buying a form of backstop insurance, called reinsurance, that is supposed to kick in and prevent insurers from failing when major catastrophes strike.

But insurers still must have their own money to pay what amounts to a deductible. And after every storm they need cash to operate and pay claims until they can collect on backstop policies.

Experts point out that even companies with the best reinsurance policies can fail if they experience cash-flow problems.

'florida ponzi scheme'

In simplest terms, the average Floridian with a $350,000 house is insured by a company with less than $750 in hand to pay for that home. By contrast, the average carrier had $1,300 in 2003. Allstate and other well-funded insurers had nearly $4,000 banked for the same risk.

"It is the Florida Ponzi Scheme," said Miami agent Phil Lyons, secretary of the Independent Insurance Agents of South Florida.

Regulators, insurance executives and industry lobbyists argue that the system, perhaps flawed, is all that Florida has to fill the yawning hole left by the mass exodus of national insurers.

"What were the options?" asked Sam Miller, vice president of the Florida Insurance Council, the industry's largest trade group in the state. "I don't think any other plan would have worked."

Yet among insurance insiders there is unease and growing alarm. "There should be bells and whistles going off everywhere," said Jeff Grady, president of the Florida Association of Insurance Agents.

"On the surface it may appear things are OK, but below the surface, things are really troubling."

why Florida?

Beginning with Hurricane Andrew in 1992 and accelerating after Katrina in 2005, Florida's property insurance market changed dramatically.

State Farm and Allstate, combined protectors of one-third of Florida homeowners before 2004, led a wave of withdrawals, followed by Nationwide, USAA, Hartford and Travelers.

In their place arose what insurance expert Robert Klein, director of the Center for Risk Management and Insurance Research at Georgia State University, calls the "Florida-zation of cat risk."

These are the insurance companies that only do business in Florida, taking an all-or-nothing gamble on the state's weather.

In 1992, these concentrated risk-takers insured just 6 percent of Florida. Today, including the Florida-only subsidiaries of national insurers, they cover 71 percent.

For the full story visit: http://www.theledger.com/article/20100227/NEWS/2275050/1002/SPORTS?Title=Home-Insurance-Industry-Is-Fraught-With-Risks

Who would have thunk it?

We're finally getting lower auto insurance rates in North Carolina! Yipee! So is this cause for celebration? Not really. The final negotiated rate reduction is 0.5%. Yep, one half of one percent. Kind of a downer, huh?

So starting with policies renewing November 1st, you may see your North Carolina Auto Insurance rate come down, at least a little bit. Did you catch that? You rate MAY go down. That's because the 0.5% reduction is an AVERAGE reduction. Some might go up, some might go down. Ugh, we can't catch a break here.

But that's not the good news anyway. The really good news is that this rate reduction is RETROACTIVE back to January 1, 2009 meaning that if your insurance carrier decided to take a rate increase back then, you'll be getting a refund.

And that really is some good news.

So, you might want to compare the discovery of seedless watermelons with the 'fix' that our wise leaders in Raleigh came up with for the beach plan. As in, we have seedless watermelons now - it's done, case closed, for now and forever, with no need to look back.

Not quite.

So what did they do to 'fix' the Beach Plan? Let's take a closer look:

1) Only $750,000 of coverage will be available to Beach Plan homes as compared to $1,500,000 before.

2) The home insurance companies will have to pay the first $1,000,000,000 (Billion) of excess hurricane damages.

3) After the first $1 billion in excess storm damages, ALL NC HOMEOWNERS ACROSS THE STATE WILL BE SURCHARGED 10% ON THEIR HOMEOWNERS INSURANCE. So, yet again, the consumer is on the hook for the beach plan.

4) After that, the home insurance companies will pay the remaining excess damages.

So they essentially put a band-aid on the problem

Ok, so how bad could it be? The beach plan has reserves of approximately $1.5 billion available to pay for hurricane losses. However, a large storm could potentially wreak over $7 billion in damages, leaving over $5 billion in excess losses.

But that's the good news. If we get hit by a SECOND or THIRD storm, ALL OF THE LOSSES ARE CONSIDERED EXCESS and we will end up with bankrupt home insurance carriers across the state. Our home insurance market will closely resemble Florida's of a few years ago where there was one carrier - the state sponsored one. And that isn't an environment that anyone looks forward to.

Cameron Bagherpour
Agent
Allstate Insurance
Cary, NC
919.460.0606

Since housing prices have dropped, I've been getting more and more inquiries from homeowners about whether they should lower the amount they insure their home for. Great question.

The price that most homeowners see going down is the market value of their home. The 'market' value of the home is really the value the house and land together can fetch if it were sold to a buyer on the open market.

On your insurance policy, your home is normally insured to its replacement cost. This price is considered to be the amount it would cost to rebuild the home if it were to burn down to the ground. Remember, home insurance does NOT insure the land, only the structure.

So as you can see, market value can be dramatically different from replacement cost, or the amount it would cost to rebuild the house.

A good example of the difference between market value and replacement cost is this:

Take an average 2500 square foot home in Any-City, USA. The market value of this home in Any-City is $350,000. The replacement cost for this home is calculated to be $200,000.
Now, imagine that same home being located in Any-Rural, USA. The market value of that same home may now only be $250,000, but the replacement cost will remain the same at $200,000 because it would cost essentially the same to rebuild the home in a rural area.

So regardless of market value, if your insurance agent set your policy up correctly when you bought the insurance policy, you shouldn't need to reduce the insured amount of the home. There are exceptions to this, so seek the advice of your insurance professional to address your unique situation.

It's about time!

Effective 1/1/09, all NC auto insurance policies are required to carry Uninsured +/or Underinsured Motorist (UM/UIM) coverage. It was part of NC HB 738.

What does this mean to you and me?

Whatever your current Bodily Injury and Property Damage limits are on your auto insurance, your UM/UIM coverage must now meet or exceed those limits. You're being required to protect yourself (um/uim) to the same degree that you're protecting others (liability).

If you weren't carrying um/uim before, you must carry it now. You insurance carrier will automatically add it or increase it to match your liability limits. And no, they don't need your approval or your signature. Additionally, the cost of the UM/UIM coverage will go up as well.

I think this change is long overdue since as many as 1 in 5 North Carolinians drive without insurance.