LitaWrites (real_lawyer) wrote,
LitaWrites
real_lawyer

They call the wind... expensive

Some excerpts from a NY Times article published September 26, 2006 entitled,"High Winds, Then Premiums" by Joseph Treaster:

ORANGE BEACH, Ala. — Add this to the list of reasons real estate is cooling off in some of the hottest markets: soaring insurance costs.

Along the coast from Texas to Maine, owners of apartments and houses are being charged huge increases in premiums — in some cases more than 10 times what they paid last year.

The price rises are part of continuing fallout from Hurricane Katrina. Insurance companies paid more than $57 billion to cover damage from the hurricane and three others last year. And faced with predictions of severe storms for years to come, they are charging higher premiums to try to insulate themselves from future financial damage.
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The ripple effects are also being felt farther north, beyond the once-hot coastal markets in the South. Coverage costs have tripled in some cases on Cape Cod and have risen as much as 50 percent on Long Island.

Real estate experts say the rising premiums have contributed to the fall in housing prices, which are also under pressure from rising mortgage rates and the inevitable cooling of a too-hot market.
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“The market is full of fear because of the storms,’’ said Larry Powell, a broker at Meyer Real Estate in Gulf Shores, Ala. “When you start seeing the cost of insurance in the range we’re seeing it, you start thinking: Is it worth it? Can I afford to be here?’’

Farther north, insurance coverage costs have not risen so sharply, but coastal homeowners are paying for heightened hurricane fears another way. On Cape Cod and Long Island, for example, owners have been forced to take on a much larger share of the risk of hurricane damage through higher deductibles.

Mike Chapman, sales chief in Boston for Hub International, a national insurance broker, said that premiums on many condos on Cape Cod had doubled or tripled. Deductibles, in some cases, jumped to $125,000 from $5,000.

On Long Island, Alex M. Seaman, another Hub International broker, said prices were up 20 percent to 50 percent. For one condo building, he said, the annual premium had risen to $175,000, from $120,000, and the deductible increased to $50,000, from $2,500.

The higher insurance rates are also scaring off real estate investors, who generally do not plan to live in the apartments they buy. Typically, their strategy has been to rent the apartment for most of the year to cover mortgage payments and other fees, perhaps use it for a few weeks of vacation, and then sell it for much more than they paid.

But the higher insurance costs have forced investors to redo their back-of-the-envelope math. And for many, the numbers are not adding up.

“People were buying condos with the idea of ‘cash flowing’ them — having them pay for themselves with rental income,” said Kay Stephenson, a broker at Crump Insurance Services in Atlanta. “But now you have the cost of insurance and you have to increase the cost of the rental, and people are just not able to do it.”
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In Florida, sales of individual homes have declined an average of 33 percent, and condominium sales are down 37 percent statewide. But in the cities of Daytona Beach and Naples, condo sales are down more than 50 percent from last year.

“Insurance is killing us,’’ said Michael Dooley, president of the Florida Association of Realtors. The effect of higher premiums “has stepped up big time in the last few months.”
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“I don’t think the price is going to go come down quickly, no matter what happens,” said Ed Kiessling, a senior executive at Frank Crystal & Company, a national insurance brokerage firm based in New York.

There are no real alternatives for homeowners. Policy makers in Washington have begun debating whether the federal government should share some of the burden of coverage for many kinds of disasters — not just hurricanes, but also tornadoes, wildfires and earthquakes — as it does now in terrorist attacks. But the industry is divided on whether to cede some of its risks and potential profits to the government, and Congress is far from voting on the issue, industry specialists say.
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The last time homeowners experienced so steep a jump in insurance prices was in 1992, when premiums tripled or quadrupled in Florida after Hurricane Andrew tore across the state south of Miami. To win the approval of regulators for such increases in Florida and a few other states, the insurers told regulators that they had taken steps to avoid similar price shocks in the future, according to J. Robert Hunter, who served as commissioner of insurance in Texas in 1993 and 1994 and is now director of insurance for the Consumer Federation of America.

“They’re either gouging now or they used erroneous assumptions then,’’ Mr. Hunter said.

At Fitch Ratings, which tracks the financial strength of companies, Jim Auden, a senior manager, said, “They’re trying to price to make an adequate profit.’’

In 2005, the property and casualty industry reported an overall profit of $43.2 billion. Home insurers, despite their heavy losses along the coasts, reported slightly better than break-even returns for the year because of investment gains and profits elsewhere in the country.

So far, there have been no major hurricanes this year, and Mr. Hunter said that if the season ended quietly, “You’re going to see such obscene profits, it’s going to be shocking.’’
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