Tuesday, November 28, 2006

Trying to Sort Out the Homeowners Insurance Mess

I hope everybody had a happy Thanksgiving.

Today I was reading one of a number of insurance industry email newsletters that come daily. It's the modern way to keep up with what's going on. One particular article caught my attention and relates back in an interesting way to our ongoing discussion of the Long Island homeowners insurance situation.

The article says that a new company is rolling out a big car insurance program across the country in something like 35 states including New York. But the auto insurance market in NY is, if anything, super competitive and super saturated. The big direct writers and one-company-agent companies have long held most of that market and so they are battling it out for the most part amongst themselves. '35% Savings' and 'New Low Rates' are all over the place.

But there is so much money to be made on car insurance overall that new companies continue to want to enter the fray. It's very good for consumers because the competition keeps prices low and service levels high.

So what does this have to do with homeowners insurance on Long Island, you may well ask. Well, I did too. So I went to the new company's web site and looked around. There was the car insurance product, branded under their name. Then when I looked at the homeowners insurance page, a different link showed up in the sidebar. It said 'view a list of the 40+ insurance companies we represent'. A very impressive statement, but it doesn't show up on the auto insurance page at all.

Why? Because like GEICO and Progressive and AIG and any number of 'auto only' programs, this new company doesn't want to get involved with property insurance except as a selling agent or broker! Yes, auto insurance is profitable right now. But more importantly, car insurance is homogeneous across the country. There are variations in state law, but for the most part, it's something the insurance carriers can work with.

But since 9-11 and Katrina, insurers have begun to realize that HUGE amounts of property in the form of homes and businesses can be wiped out in one event, and that those events can actually occur. The industry was able to pay for Katrina but what about here, with our row upon row of million dollar homes?

So part of the key to solving the Long Island homeowners insurance issue in the short run is diversification, spreading it out to more companies. In the longer run, there are other possibilities including government backstops, all-peril insurance policies, catastrophe bonding, and some exotic financial instruments that are beyond the scope of this blog (meaning I don't understand some of them either)

More to certainly come. Next: What's happening in Flood Insurance.