THIS STORY looks good for SCO
Cape residents face harsh reality
Insurance costs rising as firms restrict coverage
By Sasha Talcott and Bruce Mohl, Globe Correspondent and Globe Staff, 2/27/2004
A growing number of property insurance companies are restricting coverage or pulling out of Cape Cod and the Islands, leaving policyholders in the lurch.
The state's largest home insurer, the Andover Companies, plans to stop renewing policies for about 14,000 Cape homes in May. It is one of several property insurers that have scaled back coverage in the past few months, including Worcester Insurance Co., Hingham Mutual Fire Insurance Co., and One Beacon Insurance.
The retrenchments extend far beyond the Cape. With storms and other natural disasters costing the industry billions of dollars each year, insurers have increasingly looked to pinpoint the most dangerous areas of the Eastern Seaboard and limit their exposure.
"Cape Cod, as a peninsula that sticks well out into the ocean, is prone to these sorts of disasters," said Robert Hartwig, an economist at the Insurance Information Institute, an industry trade association. "They may be infrequent, but when they happen, they're devastating."
Even insurers that continue to write policies on the Cape have raised premiums and placed homeowners on the hook for more wind-related expenses. The Massachusetts Property Insurance Underwriting Association, the state's insurer of last resort for property owners, plans to boost its policy's wind deductible in March as high as 5 percent of the home's value.
That change means the owner of a $600,000 home on Martha's Vineyard would have to deduct $30,000 if winds damaged the home during a storm. Now, the same owner would deduct just $5,000.
After Hurricane Andrew tore through Southern Florida in 1992, causing $19.9 billion in insurance losses, insurers turned to storm modeling to help predict where and when disaster is likely to strike. Many of these models now show that the coasts are far more dangerous than previously assumed -- and that insurers with heavy investments in places like the Cape would face unacceptable losses if disaster strikes.
"Coastal areas from Texas to Maine have come under increasing scrutiny by insurance companies because of enormous losses," Hartwig said.
That high risk means that the price of "reinsurance," the insurance that covers insurers, has skyrocketed, said Francis A. Mancini, executive vice president of the Massachusetts Association of Insurance Agents.
"Every company that writes on the Cape is cutting back," he said.
In notifying its Cape Cod agents that it will stop writing and renewing policies, the Andover Companies blamed the high cost of reinsurance. "The extreme cost and catastrophe coverage requirements leave us no alternative but to reduce our writing in this county," the company's vice president, Donald F. Vose, wrote in a letter dated Feb. 20.
Andover's displaced homeowners will likely not be left without coverage. If all other property insurers turn them down, they can get comparable coverage from the Massachusetts Property Insurance Underwriting Association. Its FAIR plan offers homeowners moderate rates and many of the same features as private insurers, said association president Jack Golembeski. The plan is a private entity, but the state oversees it.
Some Cape insurance agents, however, inundated by waves of unhappy clients in the past few months as property insurers pull back, say homeowners rarely get a good deal from the state's default plan. Alan Long, an agent with Eldredge & Lumpkin in Chatham, said many of the clients he has referred to the plan have seen their rates increase between 10 and 15 percent. One Chatham homeowner, recently dropped by Hingham Mutual, saw his annual premium increase to $3,204 from $1,711 when he joined the state's default insurance plan, Long said.
"These are not exaggerated examples," he said. "This stuff is happening all the time."
Cape office buildings also are being hit by the escalating cost of property insurance. One Hyannis developer, Stuart Bornstein, said he has seen the insurance for his portfolio of about 70 buildings increase to more than $400,000 a year from $46,000. In response, he said, he has swallowed some losses and raised the rents for his commercial tenants. Bornstein said his insurer is the St. Paul Companies.
"It has really slammed us," he said. "The tenants are screaming bloody murder. It's a real burden."
The Massachusetts Division of Insurance regulates much of the state's industry but exerts little control over homeowner's insurance. State officials have met with Cape Cod agents and insurers to debate solutions, but the companies have free rein on whether to write policies in a given area, said Chris Goetcheus, a spokesman for the Division of Insurance.
"Nothing in the law prevents them from making a business decision not to write in a certain area," he said.
The insurance problem for coastal property is likely to get worse, industry observers said, as the number of homes built by the ocean grows. While coastal dwellers previously paid lower rates, companies are now asking residents to assume financial responsibility for their beachfront views, said Hartwig, the economist.
"There's now a recognition that if you want to live in areas that are prone to natural disaster, you're going to have to bear the burden of the higher risk."
Sasha Talcott can be reached at stalcott@globe.com. Bruce Mohl can be reached at mohl@globe
.com.
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