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Insurers Dumping Customers Along East Coast

Hurricane fears lead to rash of cancellations

October 18, 2007

The New York Times reports some major companies have stopped writing new policies for homes and businesses if they are deemed to be in an area that could be impacted by high wind and water from a major storm.

ConsumerAffairs.com has received similar complaints from homeowners up and down the Eastern Seaboard.

"I received a letter from Allstate stating that they would not renew my policy because the 2004-2005 hurricane season was devastating and since I live on the east coast, they expect similar destruction," said John of Brooklyn, NY.

"20 years as a loyal customer who never filed a claim and all of a sudden, I get the boot. Has Brooklyn, NY ever really been hit by a hurricane?" John asked.

The Times story focused on the Gray family, who live on Long Island, 12 miles from the Atlantic Ocean. They said their longstanding policy with Liberty Mutual was “non-renewed,” because of where they live.

New York State Insurance Superintendent Eric Dinallo fired off any angry letter to Liberty Mutual and other carriers that have suddenly stopped insuring property in his state. He’s also drafted a proposal requiring insurance companies to create a catastrophe reserve fund to help pay claims caused by hurricanes and other natural disasters.

“Most people probably think that the extra money they pay on their homeowners insurance for hurricane protection goes into a ‘very rainy day fund’ to pay claims when hurricanes hit,” Dinallo said. “In fact, because of current insurance accounting and tax rules, if there is no hurricane, the extra money goes to insurance companies’ profits.

"That leaves the companies with no reserves to pay huge claims from big hurricanes and consumers angry over ballooning profits and rising premiums," he said.

“There are many proposals to have government take over or subsidize hurricane insurance, as it does with flood insurance. I believe it is better to find a private sector solution. That’s why we are proposing a new state regulation requiring insurance companies to set aside the portion of the premium they now collect for catastrophe protection. This reserve fund will help pay the claims if and when hurricanes and other disasters do hit,” Dinallo said.

“Catastrophe reserves will provide increased transparency that will be good for the industry and consumers. Consumers will see where the money they pay for hurricane protection goes. They will see if it is not enough and there is a need for higher premiums. And they will see if the reserve is large and untouched and can then question the need for higher premiums.”

Dinallo says insurance companies set aside reserves to cover claims for incidents that occur in a given year. For example, for auto insurance, a company can set aside what it will pay only for accidents that occur that year.

That works with auto accidents because there is predictable historical data on the number of claims every year and the cost of those claims. It makes sense to have the people who drive in a given year share the cost of accidents in that year.

The problem for big catastrophes such as hurricanes, he says, is that there are a very small number of very costly events that are spread out over many years. So sharing risk in one year does not work. Effectively spreading the risk of hurricane losses requires not only sharing among many people, but also across several years.

Under current accounting and tax rules, insurance companies are discouraged from setting up a reserve to fund losses from events that have not yet occurred, such as those from future hurricanes.

Companies can deduct from this year’s revenues money reserved for claims resulting from events that occur this year. That reduces this year’s taxes. Statutory accounting considers those reserves an operating expense. But if a company does not know when the event will occur, then money placed in reserve is not considered an expense in the current year by statutory accounting and is subject to federal and state taxes.

“I’m in favor of tax-deferred reserves for hurricanes, but the industry will only achieve that change if it acts first and gains credibility,” Dinallo said. “Meanwhile, we need to start building protection against the potentially huge costs of hurricanes now.”

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