Homeowners insurance rate increases have slowed to a trickle in ...

Homeowners insurance premiums have continued rising in Louisiana and remain among the highest in the nation, but the rate of those increases has slowed since immediately after Hurricane Katrina, according to new data released by the National Association of Insurance Commissioners.

Louisiana remains the third-most expensive market in the nation for homeowners insurance, behind Texas and Florida, with a statewide average premium of $1,430 in 2009, the most recent year for which data is available.

But while statewide average premiums increased 9.9 percent in 2006, the third biggest jump in the country, and 11.4 percent in 2007, the largest jump in the nation, the rate of increase in homeowners insurance has slowed dramatically since then. In 2008, statewide average premiums increased just 0.35 percent in 2008 and 1.78 percent in 2009.

Louisiana Insurance Commissioner Jim Donelon said the moderate premium increases reflected in the NAIC data are consistent with the stabilization that he has seen in the homeowners market. "I am encouraged, and not surprised," he said.

Donelon credits new competition with taming the runaway rate increases immediately after the storm. About a dozen companies have become active players since the storm, some of them new companies that came here with the $29 million in incentives awarded by the state, some start-ups or new players that came here on their own, and some longtime players such as Liberty Mutual or the Republic Group that greatly increased their policy-writing over the past six years.

While those new players have not succeeded in bringing down rates, Donelon said his market strategies have been successful. "The best regulator of cost is competition," he said.

Based on information at the Louisiana Department of Insurance that ultimately will be analyzed by the insurance commissioners group, Donelon said figures for 2010 and 2011 will also show moderate rate increases. Most of the increase came from State Farm, which took statewide average rate hikes of 8 percent to 9 percent in each of the past three years. State Farm controls about 30 percent of the state's insurance market.

But after 2011, Donelon said, homeowners insurance rates could resume rising because of the influence of a new batch of computer catastrophe models such as RMS 11.

Insurance companies use computer models to analyze their portfolios of homes to assess risk, and newer models often predict greater hurricane activity, more intense storms and tropical storm-force winds traveling further inland than in the past. When models show more risk, companies drop policies, reduce coverage, increase deductibles, raise rates or do some combination of all of them to make sure they have enough money to cover the risk.

Indeed, Donelon said that the insurer of his home in Metairie, one of the new companies that started doing business in Louisiana, recently informed him that it would drop his policy based on reviews from the new catastrophe models.

Catastrophe models are controversial. Proponents say they bring science to underwriting and synthesize the latest understanding of storms and climate change to insurers. Opponents say they're gee-whiz black boxes that manufacture instant justification for high rates for insurers.

"The looming threat of the new cat model, RMS 11, has not shown up in any rate filings as of yet and is going to have an influence," Donelon said.

Louisiana has plenty of coastal company in the most expensive insurance list. Most of the top states on the list are those with lots of property concentrated at the coast in hurricane zones, plus a few with high hail and tornado risk, like Oklahoma.

Not so bad?

Without minimizing the financial pain that the high cost of insurance causes many people, Jeff Albright, chief executive of the Independent Insurance Agents and Brokers of Louisiana, said it's significant that the increases have been small in the past two years, especially considering that Louisiana was hit with Hurricanes Gustav and Ike in 2008.

"Yes, it went up, but a lot of things went up a whole lot more than 2 percent," Albright said. "What we've tried to do in Louisiana with bringing in markets (new companies), it hasn't reduced the prices, but it has moderated the increases. We thought the prices would go up more than they did after Gustav and Ike."

However, Bob Hunter, director of insurance at the Consumer Federation of America, said that while competition can do wonders for rates in a stable market, after a storm, when insurers are eager to raise rates and drop coverage, strong regulation makes a bigger difference in keeping rates moderate.

Hunter has become deeply suspicious that companies are simply taking advantage of the situation after storms to gouge people. Hurricane Katrina may have been the largest insurance event in history, but if one looks at the financial impact that it had on the insurance industry nationally, it's much less significant than the impact of Hurricane Andrew in 1992, a much smaller event by insured losses.

With each disaster since Andrew, insurers have increased deductibles, trimmed coverage and dropped policies, all of which foist risk back on policyholders -- and, through disaster aid, taxpayers -- yet they have continued raising rates. The result is that insurers are better financed and shoulder less risk, so even a big event like Katrina didn't rock the industry.

"They have basically eliminated their risk," Hunter said. "Why haven't these things worked to bring rates down? Are they just gouging?

"It really requires regulation," he said.

Hunter, an actuary, is working on the final edits of a new report on what he calls the "disappearing hurricane risk." The industry is collecting so much premium and has so much money available in surplus that its leverage is at a historic low. And even if one took the top ten insurance loss events, including the World Trade Center attacks, the Northridge earthquake in Los Angeles and Hurricanes Katrina and Rita, converted them all to 2010 dollars and assumed they all hit the industry in the same year, the insurance industry's leverage ratios would remain in a healthy range.

"Why do they need all these dollars? It's incredibly safe," he said.

Used to high prices

While rising homeowners insurance rates wreaked havoc on home sales in the first few years after the storm, real estate professionals say that the New Orleans area market has largely adjusted to the new high-price environment.

In 2006 and 2007, as many people were buying new homes and trying to resettle, many found that they suddenly couldn't afford the homes they were trying to buy because the insurance prices were coming in so much higher than expected.

Joe Ory, a New Orleans realtor who is regional vice president for the Louisiana Realtors Association and who serves on the Louisiana Real Estate Commission, said that back then realtors went from attaching notes that sales agreements were subject to the purchaser being able to find satisfactory insurance to saying that the purchaser agreed to get quotes within five days because so many sales were falling apart.

But now, Ory said, people know what they're in for on the insurance front and have adjusted accordingly. They may buy a little less house, but they know that if they want to buy a house in the New Orleans area, they might have to shell out $500 a month for insurance.

"After Katrina, early on, we had a lot of sticker shock. But people digested it," Ory said.

Ory thinks that people care less about what their counterparts in Arizona are paying for insurance than what people in nearby parishes are paying. "People who choose to live in the New Orleans area know that they have to pay for insurance," Ory said.

But, he added, the high cost of insurance disproportionately affects people of modest means and first-time homebuyers. The cost of insurance tends to be higher on smaller homes than bigger ones, and people's budgets are often tighter on the lower end of the housing scale. Meanwhile, people looking at homes worth more than $350,000 probably are more affluent, or have previously been homeowners, so they already know what they're dealing with on insurance and are accustomed to paying it.

Glenn Gardner, president of operations at Gardner Realtors, one of the largest firms in the area, said continued high insurance rates in Louisiana do affect the affordability of housing, particularly in the New Orleans area, though many have begrudgingly accepted the new reality.

But the biggest factor in making insurance less a topic of complaint among homeowners has nothing to do with rates or competition from the new companies that have come into the state, Gardner said. Rather, it's all about interest rates, since so many people have been able to buy homes at lower rates or refinance, making their overall housing picture more affordable.

"It still remains higher than we'd like to see it," Gardner said of insurance rates. "Fortunately, we are blessed at least with record-low interest rates right now. The good news is, at least the interest rates have gone down."

Rebecca Mowbray can be reached at rmowbray@timespicayune.com or 504.826.3417.

Source: http://www.nola.com/business/index.ssf/2012/01/homeowners_insurance_rate_hike.html

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