Home of the brave: even before four hurricanes hit Florida this year, homeowners insurers had tightened their underwriting along the coastline, opening the market to excess and surplus writers and state-run pools.

Beach people will tell you: There's just something special about the ocean.

Americans are continuing to flock to the shoreline in record numbers, not just to vacation, but to live. But where these homeowners envision cool breezes, beautiful sunsets and crystal waters gently lapping against the shore, insurers see the dark clouds of potential damage and destruction from hurricanes, windstorms and coastal flooding.

After Hurricane Andrew in 1992--which caused $20.9 billion in insured losses (in 2003 dollars), the second-largest catastrophe ever behind Sept. 11--many insurers changed the way they underwrote business along the coastline. Lest any in the industry forget how much damage Mother Nature can bring, the current hurricane season may result in greater insured losses than Andrew, and insurers may once again reconsider coastal risks.

Where Insurers Fear to Tread

Coastal counties in the United States account for 17% of the country's land area, but are home to more than half of the nation's population, according to the Pew Oceans Commission, a nonprofit group. Over the next 15 years, coastal populations are expected to increase by 27 million people.

That 17% of land includes the West Coast and areas around the Great Lakes, which are not prone to damage from hurricanes. But that still leaves the Southern and Eastern seaboards for insurers to worry about potential hurricane and windstorm damage.

"The trend is everyone wants to live where they have a view of the water, or what we call 'catastrophe prone' areas," said Don Griffin, vice president of commercial lines for the Property Casualty insurers Association of America. "Even before this year, insurers have become a lot more careful about how they underwrite that business."

Robert Hartwig, chief economist with the Insurance Information Institute, said the growth along the Southern and Eastern coastline has become a problem for insurers.

"As more and more people move to these areas, they've been building on parcels of land that are marginal--they're building on sand bars, they're building on stilts," Hartwig said. "These are not land formations that were ever intended to support permanent human habitation. Insurers have shied away from insuring these structures in these areas."

Changing Course

In the wake of Hurricane Andrew, insurers became much more conscious of their overall exposures, and reduced or managed their coastal exposures more carefully.

"Hurricane Andrew was a tremendous wake-up call to the industry," said Bill McCord, director of the personal lines division for broker Burns & Wilcox. "Until that point, people hadn't done sophisticated hurricane modeling to analyze what their exposures were. Now they are closely tracking their aggregates of exposures."

Several insurers declined to be interviewed for this story, and didn't want to reveal details of their underwriting processes.

"From our perspective, it's not a matter of withdrawing or limiting of exposure, but understanding what exposure we can manage, so we don't have an overconcentration in any region," said Kevin Craiglow, a spokesman for Nationwide Mutual Insurance Co.

Spreading the Risk

After Hurricane Andrew, the insurance industry changed the way it did business so the risk was spread out further, Hartwig said.

In addition to a standard deductible, insurers implemented special hurricane or "wind" deductibles, often as a percentage of the total value of the home, instead of a flat rate. "Percentage deductibles weren't new," Griffin said. "They existed in other states as a higher deductible for wind and hail losses. But it helped mitigate and reduce the payouts on future hurricane losses."

Today 17 states plus Hawaii and Washington, D.C., have windstorm deductibles, Hartwig said. The special deductibles also exist for earthquakes on the West Coast.

While a typical homeowner's deductible is a flat rate of $500 or $1,000, percentage deductibles for hurricanes can run from 1% to 15% of the value of the home. The deductibles are applied for each individual storm, which could become an issue for Florida, which has been hit four times so far this year by major hurricanes. In fact, before Hurricane Jeanne became the fourth hurricane to strike Florida, an estimated one in five homes in the Sunshine State had been damaged or destroyed by the three previous hurricanes: Ivan, Frances and Charley, according to the Insurance Information Institute.

"People realize they have this very large deductible, and may want to wait until the hurricane season is over before reporting a claim, so they'll only have one deductible instead of two," McCord said.

Also, percentage deductibles allow the insurer to keep the deductible consistent with inflation, Hartwig said. "A flat $500 deductible today isn't worth the same as a $500 deductible 10 years from now. A percentage deductible keeps policyholders' and insurers' exposure constant over time."

Protecting the Corporation

In an attempt to protect the entire company from claims stemming from a single state, several companies, including State Farm, Allstate and Nationwide, established specific Florida subsidiaries. The goal was to accurately manage losses, Griffin said, so other states where the companies wrote business weren't penalized with higher rates for damage in hurricane-prone Florida.

Insurers also increased their use of reinsurance after Andrew. "Most major insurers did not have reinsurance after Hurricane Andrew and paid for it dearly," Hartwig said.

But reinsurance became difficult to find and expensive to buy for homeowners writers, especially in Florida, after Hurricane Andrew. To remedy this, Florida also created the Florida Hurricane Catastrophe Fund in 1993 to offer reinsurance to the state's homeowners insurers. Industry losses must reach a trigger point of $4.5 billion before the fund can be tapped, and it's been activated just once in 1995 when it paid out $9.5 million for Hurricanes Opal, Eric and Allison.

Although claims from all four major hurricanes of 2004 were still being accounted for, as of October it appeared that the Florida cat fund would be minimally impacted, if at all, Hartwig said.

Bad Risks Need Not Apply

Large, national homeowners insurers are still doing business in storm-prone areas such as Florida, McCord said, but they can afford to be picky about what types of risks they are willing to accept.

"A lot of them decided they had enough business, and didn't want any more," McCord said. "After 1992, they may have written replacement business, but weren't writing any new business, or very little new business. They might accept just one to two policies a month as opposed to having an open season."

And the writers strengthened their underwriting criteria to take only the best risks, McCord said. A bad credit report or a history of claims losses could be enough for a standard insurer to shut the door on an applicant.

Filling the Void

With more people building homes and moving into coastal areas, the demand for homeowners insurance has been increasing, even as insurers' appetites have waned. With most banks requiring homeowners insurance as a condition of obtaining a mortgage, excess and surplus lines writers and state-run insurance pools, known as the residual market, have had to step in to offer coverage.

About 34 states have some form of a state-run entity to provide insurance to those otherwise unable to obtain coverage because they're considered a high risk. Only a dozen or so of these plans, called Fair Access to Insurance Requirements Plans, offer homeowners coverage. Some of the plans are specifically for coastal areas while others are for any property in the state that's considered a high risk.

With 80% of Florida's population living 20 miles from the coast, it should be no surprise that Florida's residual market is the largest in the country.

Two entities, the Florida Residential Property and Casualty Joint Underwriting Association and the Florida Windstorm Underwriting Association, were merged into the Citizens Property Insurance Corp. in August 2002. The pool has grown from 60,000 policies before Hurricane Andrew to 433,000 policyholders in 2004, according to the III.

About 65% of its policies are from South Florida.

With $1.17 billion in premiums written for 2003, Citizens is bigger than all the other FAIR plans combined, according to the Property Insurance Plans Service Office, which represents all the FAIR plans except for the North Carolina plan.

FAIR plans operate by charging premium, but have the ability to tap the voluntary market for additional money if needed. Typically, the reserves are allowed to grow tax free, which gives them an advantage over traditional insurers.

Last year, the Florida Citizens plan turned an underwriting gain of $536 million, but this year, "it's going to lose billions," said Ron Cassesso, president of PIPSO. "If the wind doesn't blow, they make money."

In Louisiana, the Louisiana Citizens Property Insurance Corp., which operates the state's FAIR and coastal plans, had the greatest share of losses from Hurricane Ivan in the state. Of the $7.2 million in estimated damages in Louisiana--which includes homeowners, private passenger, auto, commercial auto and property and federal flood insurance--$3.1 million represents Citizens' losses. That's 52% of all homeowners claims from Ivan in the state, or $5.92 million.

Other states, including Virginia, are currently studying the need for a wind pool to cover their coastal areas.

Pay for View

If you want a room with an ocean view, expect to pay more to insure it. But even homes without ocean views may be close enough to be considered high-risk coastal properties.

In addition to the state-run FAIR plans, a number of excess and surplus lines writers are active in offering homeowners insurance coverage in coastal areas. Coastal coverage isn't cheap in general, but E&S tends to charge much higher premiums than the standard market.

While a Midwestern home valued at $200,000 may be charged an annual premium of $350, a home of the same value in South Florida may be charged $1,400 to $1,800 a year, McCord said, even in the standard market. E&S premiums can run 50% to 100% greater than that, he said.

"If it's a price issue, we aren't going to write the account. If the homeowner has an admitted option. they will take advantage of that. But sometimes they can't find another alternative," McCord said. "There's a big demand for E&S on the coast. We see people who may not have had any claims losses, but they are in a location where the standard markets have ceased writing. It's standard business in a nonstandard location."

E&S plans also often include a windstorm deductible, but it usually is a higher percentage than those charged in the standard market, McCord said.

Excess and surplus lines coverage also can till in gaps left in the residual market. For instance, it can provide higher limits or include additional coverages not offered in the residual market, Griffin said. Most FAIR plans, including Florida's Citizens, are intended to write last-resort coverage, and often do not write high-end homes, he said.

"I'm not sure there's less coverage available today. The change has been how it's distributed," Griffin said. "Sometimes the E&S writers can be more competitive than the FAIR plans. They aren't as highly regulated as the voluntary market, and can respond quickly to market changes."

Castles in the Sand

Hurricanes tend to dominate the news, but may not be insurers' biggest risks, III's Hartwig said. "Last year, a wind/hail/tornado storm swept through the upper Midwest, and cost insurers $3 billion plus. Virtually, no one has heard of that" he said.

Still, Hartwig said, he expected Hurricane Jeanne to continue to validate the changes the insurance industry made after Hurricane Andrew.

Also, he said he expects building codes will continue to be strengthened along all areas, not just hurricane-prone coasts. Homeowners can get premium discounts for having more storm-proof homes, he said.

The Institute for Business and Home Safety estimates that a fortified home--one that meets the institute's stricter building code recommendations to become more resistant to natural catastrophes--can be built for about 10% more than a regular house.

One way to protect homes from wind damage from hurricanes and tornadoes is to protect all of the openings, whether they are windows or doors. For instance, windows should be protected by impact resistant shutters. Another key to preventing wind damage is to tie down or strengthen structural elements of the house.

"A lot of companies encourage mitigation" Hartwig said. "There's already a lot of evidence the newer buildings faired much better than the older buildings [in the hurricanes] this year. The question is: Could we do any better than that? I predict there'll be a pitched battle among insurers, the building community, regulators and legislators about what the appropriate degree of building code upgrades is going to be. The more investment that's made In this type of technology, the better off homeowners are going to be."

Learn More

Andover Cos.

A.M. Best Company # 00166

Distribution: Independent agents

Nationwide Group

A.M. Best Company # 05987

Distribution: Independent contractors

For ratings and other financial strength information about these companies, visit www.ambest.com

Key Points

* While the demand for coastal insurance Js growing, many standard insurers are shying away from the market.

* Other insurers have selected fewer risks, raised deductibles or established subsidiaries to stay in the market.

* Before Hurricane Jeanne hit Florida this September, one in five homes in the Sunshine State had already suffered hurricane damage this year.

Moving to the Coast

For the past 40 years, the population on the United States' coastline has grown five times faster than in the country's interior. More than half of all Americans live in a county that has a coast.

[GRAPHIC OMITTED]

Note: This graph does not include Alaska and Hawaii

Source: National Oceanic and Atmospheric Administration, State of the Coast report, 1998

Many Resort to Market
Of Last Resort

Fair Access to Insurance Requirements
plans have grown in recent
years as more homeowners, especially
along the coast, find they can't secure
coverage in the standard market.

($ Thousands)

                        Binders or      Premiums        Profit
                   Policies Issued       Written     or (Loss)

Florida (Citizens)
1999                       611,807      $362,980      $41,599
2000                       525,789      $375,257     ($29,731)
2001                       373,756      $525,913     ($26,679)
2002                       658,085      $803,832     $466,374
2003                       485,278    $1,171,996     $536,885

Five-Year Total          2,654,715    $3,239,978     $968,448

Massachusetts
1999                        88,456       $54,432        ($343)
2000                        85,368       $55,851         $434
2001                        88,036       $58,732      ($7,700)
2002                        98,770       $71,737      ($4,078)
2003                       116,385       $93,329     ($15,385)

Five-Year Total            477,025      $334,081     ($27,072)

Source: Property Insurance Plans Service Office, Five-Year
Experience Report, 2003

Who's at Risk?

While the residual market in Florida continues
to grow, here are the top 10 writers in
the homeowners standard market for the
state in 2003:

($ thousands)

                                                   Market
                                                    Share      Direct
                                                    (DPW)    Premiums
Rank     AMB#    Companies                            (%)     Written

 1      00088    State Farm Group                   23.61    $901,470
 2      00008    Allstate Insurance Group           11.45     437,218
 3      04080    USAA Group                          5.29     201,975
 4      05987    Nationwide Group                    5.06     193,124
 5      18492    HDI U.S. Group                      4.32     164,878
 6      18554    Poe Insurance Group                 3.98     151,989
 7      00060    Liberty Mutual Insurance Cos        3.20     122,343
 8      00012    Chubb Group of Insurance Cos        2.65     101,326
 9      00048    Hartford Insurance Group            2.46      93,952
10      18540    American International Grp Inc      2.07      78,867

Source: A.M. Best Co. State/Line Report 2003

Homeowners Multiple Peril, Top Writers, United States--2003

Rank is based on 2003 direct premiums written.

($ Thousands)

                                                    Direct            %
                                                  Premiums    Change in
Rank    Company/Group                 AMB #        Written     Premiums

   1    State Farm Group              00088    $10,853,344         14.2
   2    Allstate Ins Group            00008      5,424,791         10.0
   3    Zurich/Farmers Group          18549      3,623,229          5.5
   4    Nationwide Group              05987      2,285,231         16.1
   5    USAA Group                    04080      1,803,504         18.0
   6    Travelers P&C Group           18358      1,749,845         18.3
   7    Liberty Mutual Ins Cos        00060      1,430,514         16.9
   8    Chubb Group of Ins Cos        00012      1,367,429         15.7
   9    Amer Family Ins Group         00124      1,245,278         24.3
  10    Safeco Ins Cos                00078        796,727          1.4
  11    Hartford Ins Group            00048        777,571         13.3
  12    MetLife Auto & Home Group     18552        724,718          7.9
  13    Auto-Owners Ins Group         04354        708,727         25.4
  14    Erie Ins Group                04283        617,487         24.5
  15    CNA Ins Cos                   18313        523,304          3.7
  16    Alllanz of America, Inc       18429        481,039          4.6
  17    Southern Farm Bureau Group    02962        466,311         13.1
  18    Allmerica Finl P&C Cos        04861        419,950          9.6
  19    Amer Intl Group, Inc          18540        419,294         45.2
  20    Vesta Ins Group               05681        377,615         11.5
  21    Arnica Mutual Group           18522        314,254         18.6
  22    CA State Auto Group           18460        306,153         26.6
  23    Country Ins & Finl Svcs       00302        291,150         25.4
  24    Cincinnati Ins Cos            04294        262,628         11.6
  25    Auto Club Group               00312        258,839         24.3

        Top 25 Writers                         $37,528,933         13.6
        Total U.S. P/C Industry                $48,376,292         13.3

           Market Share (%)        Adjusted Loss Ratios (1)        % of
                                                                Company
Rank     2003     2002     2001      2003    2002     2001     Premiums

   1     22.4     22.3     21.9      60.6    73.1     87.9         23.7
   2     11.2     11.5     11.4      52.4    61.2     70.2         23.4
   3      7.5      8.0      8.6      52.4    67.8     88.3         13.7
   4      4.7      4.6      4.6      64.9    62.3     72.5         16.6
   5      3.7      3.6      3.6      61.4    59.7     60.7         23.1
   6      3.6      3.5      3.6      52.7    59.8     71.3         11.8
   7      3.0      2.9      2.9      59.6    64.2     72.8          9.8
   8      2.8      2.8      2.6      61.6    60.8     69.3         14.8
   9      2.6      2.3      2.2      57.5    67.4    124.3         22.3
  10      1.6      1.8      2.0      50.8    65.7     86.5         15.5
  11      1.6      1.6      1.6      53.7    57.3     58.5          7.5
  12      1.5      1.6      1.5      52.0    54.0     71.7         24.1
  13      1.5      1.3      1.2      71.8    81.2    102.2         17.6
  14      1.3      1.2      1.1      72.5    85.7     64.6         16.8
  15      1.1      1.2      1.3      74.9    60.8     74.6          4.5
  16      1.0      1.1      1.2      56.1    62.0     76.3          9.9
  17      1.0      1.0      0.9      60.5    86.1     76.4         23.3
  18      0.9      0.9      0.9      57.5    58.6     71.9         17.3
  19      0.9      0.7      0.6      53.6    60.4     52.8          1.6
  20      0.8      0.8      0.4      57.0    48.9     58.4         50.1
  21      0.6      0.6      0.6      67.5    69.6     77.3         23.9
  22      0.6      0.6      0.6      34.4    63.4     62.4         14.9
  23      0.6      0.5      0.5      54.6    60.7     67.9         19.3
  24      0.5      0.6      0.6      79.8    86.2     99.7          8.9
  25      0.5      0.5      0.4      58.2    66.7    110.9         16.3

         77.6     77.3     76.8      58.2    66.6     79.8         15.3
        100.0    100.0    100.0      59.5    66.1     77.6         10.8

(1) ALR: Adjusted loss ratio is direct losses incurred divided by the
difference between direct premiums earned and dividends paid to
policyholders.

Source: A.M. Best Statement Products: State/Line. For more information
about custom data, please call [phone], ext. 5383.

RELATED ATICLE: Room for growth.

While many insurers are limiting their coastal exposure, broker Willis has just rolled out a new product that seeks to write expensive beach homes. Underwritten by the Lloyd's syndicate Hiscox Insurance Co., the coverage is aimed for coastal homes valued at $500,000 or more.

"This was in the works well before anyone could even spell Jeanne or Charley," said Tim Sullivan, team leader for Willis' VIPHomeguard. The week after Willis started offering the coverage in September, Sullivan's phone was flooded with calls, he said.

"There's a baseball cliche. You want to 'hit 'em where they ain't.' We look for gaps [in existing coverage]," Sullivan said. "We don't want to be writing a three bedroom center-entry cape 40 miles from the coast. There are hundreds of carriers that will be competitive there. We want to be in coastal Florida, Long Island or Fire Island. We don't want to be on Main Street, we want to be on 'the wrong side of the tracks.' We want something with hair and teeth, something we can dig into."

Still, Sullivan said Willis will try to avoid concentrating values. "We use layers of reinsurance and selective underwriting. We are experienced enough as an organization to say never say never, or always say always. Is there something that we wouldn't write? Probably. But we haven't run across it yet," Sullivan said. "One person's headache is another person's opportunity."

RELATED ARTICLE: Out of the frying pan, into the lobster pot.

While Florida was the first state since Texas in 1886 to be hit by four hurricanes in a single season, all states along the Southern and Eastern shoreline have had to grapple with a difficult coastal market for homeowners.

In Massachusetts, the state's Fair Access to Insurance Requirements plan has become one of the largest writers of homeowners insurance along the coast of Cape Cod.

"There are some eerie parallels to Florida. Massachusetts has a peninsula that sticks out into the ocean and is susceptible to hurricane and tropical storm risk, plus hurricane-force winds during spring and winter storms," said Robert Hartwig, chief economist with the Insurance Information Institute. "The most important thing to remember is Cape Cod has seen explosive growth in recent years. Once it was a place with cheap summer cabins; now there are expensive year-round homes."

Earlier this year, the Andover Group, Massachusetts' second-largest homeowners insurer, said it would stop insuring homes on Cape Cod and began sending non-renewal notices to some 14,000 homes on the cape.

Homeowners insurance has been harder to fred since December 2003, mostly because reinsurance costs had risen after new storm models predicted greater potential losses ff a 100-year storm were to strike the coast, said Chris Goetcheus, a spokesman for the Massachusetts Division of insurance.

"Insurers that operate on the cape have had to take a good look at whether they could weather a storm, because reinsurance is unpredictable at best. Many have chosen to limit underwriting or pull out," Goetcheus said.

Also, Massachusetts is in a different position from many other states in that its auto market is widely recognized as one of the most difficult in the country. Because so many personal lines writers try to cross-sell auto and homeowners insurance to policyholders, many of the nation's largest homeowners writers aren't active in Massachusetts because they've chosen not to write auto insurance in the state, Goetcheus said.

Homes that were nonrenewed and were valued under $1 million were eligible for coverage from the state's FAIR plan, Goetcheus said. But those valued at more than $1 million were forced to seek coverage in the excess and surplus lines market, he said.

The 2004 hurricane season isn't likely to inspire standard writers to return to the Cape Cod market, said Ron Cassesso, president of the Boston-based Property Insurance Plans Service Office, which represents all the FAIR plans except for the North Carolina plan.

"Although we've had no experience up here from the last four hurricanes, I think it's spooked insurers even more," Cassesso said. "If one ever comes up the coast of Massachusetts, we'd get crushed. I don't think anyone is looking to take back business and start writing on the cape anytime soon."

Chossing Risks

Andover Cos. dropped from being the top
standard homeowners writer in Massachusetts
in 2002 to the No. 2 spot in 2003. The
top 10 writers in the state in 2003 are shown
below.
                                                  Market
($ Thousands)                                      Share      Direct
                                                   (DPW)    Premiums
Rank     AMB#    Companies                           (%)     Written

 1      02966    Commerce Group Inc                 9.08    $102,951
 2      00166    Andover Cos.                       8.61      97,566
 3      00012    Chubb Group of Insurance Cos       7.01      79,506
 4      18358    Travelers Prop Cas Group           6.66      75,528
 5      18437    Quincy Mutual Group                6.16      69,771
 6      00060    Liberty Mutual Insurance Cos.      5.86      66,396
 7      18220    Arbella Insurance Group            4.53      51,338
 8      04861    Allmerica Financial P & C Cos      4.02      45,613
 9      18552    MetLife Auto & Home Group          3.62      41,032
10      18490    White Mountains Insurance Grp      3.60      40,857

Source: A.M. Best Co. State/Line Report 2003