Thursday, March 29, 2012

We Haven't Had a Hurricane on Long Island, How Come my Insurance Still Went Up?

Welcome back to me, as I have not posted in a while now. The market for coastal and waterfront homeowners insurance on Long Island and in the New York - New Jersey - Connecticut area in general has, if anything, gotten a little better in the last year or so, with a few more carriers coming in to the market, and some companies at least NOT canceling as many people as they were 3 and 4 years ago. In addition, prices for insurance with the 'excess lines' markets such as Lloyds of London, Scottsdale, and many others, have been driven down by competition. This is/was especially true in the past several years where we have not had major storm activity.

But in the most recent six months, there has been a 'firming' of prices and some tightening of underwriting coming from these excess insurance carriers who are the ones taking the risk on houses closest to the shore. The question becomes, why? There are several reasons at play.

For one thing, it does not take a rocket scientist to figure out that in ANY type of insurance, but especially a line like home/fire insurance where there is a potential for catastrophic losses, rates can only go down so far before they 'bounce along the bottom'. That's the price at which companies start to notice that their profit margin is being squeezed. Insurance companies, if run properly, can make money, but it comes from relatively very small percentage profits on huge dollars. So when you are working on a 5% margin, or even less, it doesn't take much to turn your results from black ink to red.

The next thing that's having an effect on all insurance company profitability is the low interest rate environment. When the insurance company is able to get a decent income on their holdings, competition can force them to lower or hold the line on rates they charge to customers. But since most insurance companies invest mostly in interest bearing bonds, and we know what rates are available on those, their investment income has dropped substantially in the past few years.

Finally, the string of catastrophes in other parts of the world has an effect on the reinsurance market, which is where insurance companies buy insurance for themselves against the major catastrophes. That spreads the risk out all over the world, but unfortunately we have seen more and more events like tornadoes, tsunami's, massive flooding, and other things that, even though they might not happen here, still affect rates for property with a high catastrophe risk.