Thursday, October 20, 2016

Is My Insurance Company 'A-Rated'?

I just got a question from a prospective client about what the financial rating is for the companies we have used to quote coverage for the home they are buying. The answer is not so simple, so I thought this would be another good subject for a post.
A lot goes into a carrier’s financial rating, but mostly it’s about analyzing their ability to pay claims, and the biggest issue there for us on Long Island, and particularly on the South Shore, is catastrophic windstorm. This can be a hurricane or just high winds. But the problem is that it affects MANY homes rather than just one or two. Virtually all insurance companies can easily pay for one or two homes that, for instance, burn completely to the ground. But the idea that a windstorm could damage THOUSANDS of homes in the same area at the same time could bankrupt an insurance carrier who is not that stable.
Since the financial meltdown of 2008, AM Best (www.ambest.com ), the oldest and most respected rating company, has gotten much more conservative in their ratings. This is due to a number of factors. For one, the accounting mumbo jumbo that led to a lot of losses in the meltdown, was hidden even from the rating companies. For another, global climate change is drastically changing the exposures near the coast. So companies who write homes near the water have a much tougher time getting that coveted A rating.
In the meantime, most of the biggest traditional insurance companies (Travelers, Allstate, Hartford, State Farm, etc) have pulled back 2-3 miles from water in what they write. So the negative impact of waterfront and coastal property on their financial rating gets greatly reduced, as opposed to other, mostly smaller, companies who are finding ways to take on this risk.
Another ratings agency has sprouted up called DEMOTECH. (www.demotech.com) also gives financial ratings. One thing you will hear from insurance reps is that there are a couple of companies out there who are rated A by Demotech. But in many cases THESE COMPANIES ARE NOT EVEN RATED BY AM BEST! Others have an A rating from Demotech but B or B+ from AM Best.
The reason is fairly straightforward. A lot of the investment capital, and reserve funding that the Demotech A rated companies use to back up claims payments comes from promissory notes from private investors such as billionaire George Soros and others. These investors have been chasing returns that are higher than the 1 or 2 % you can get on bank accounts and bonds these days, and have turned to complex insurance investments. Demotech counts these ‘promissory notes’ as if the insurance company already has the money. AM Best does NOT count these and so may assign a lower rating to a particular company. But again, many of the companies rated A by Demotech are not rated AT ALL by AM Best, and are not even eligible to be looked at by them.
The final point to make is that if the insurance carrier is admitted in the state of New York, coverage is also backed by the New York State Insurance Guarantee Fund. This is comforting, but after seeing what happened with NY Rising, relying on the state government could be frustrating. You might get paid by them eventually but it would probably take several years, which could be a big problem.
Bottom line? Deal with someone you trust, and ask questions and research a little yourself so you know what questions to ask.
Visit us at www.nortonandsiegel.com for more info.

Tuesday, October 18, 2016

Was This House Ever Flooded??

One of the questions we get the most from real estate agents and prospective home buyers is ‘How do we find out if a house has had flood damage?’ This is a great question, especially here on Long Island and other coastal towns in the Tri-State area after Sandy, when a lot of homes were flooded that never had water in them before.
The answer is both simple and hard at the same time. Most insurance companies report losses to a company called C.L.U.E. which stands for Comprehensive Loss Underwriting Exchange. It’s a service most insurance companies subscribe to which lets them share information on losses based on address, name, and more.
After Sandy, one of the things FEMA did was have some meetings with agents and brokers about how things were being handled. One of the questions brought up there was how the next generation of buyers would know if a home had flooded in Sandy. We specifically asked if this information was going to be made available via the C.L.U.E. or other system.
Their answer was that they consider this private information and will make it available ONLY to the property owner. Why they think this is an issue for them and not for every other insurance company doing business out there, is beyond me. As usual, they are the government and they are here to help…
So what’s the simple answer? It’s that on all flood insurance renewal policies sent to the property owner, there is a page that includes any flood insurance losses that the home has had! So you just need to ask the current property owner to show that page. It will either have the claims listed, or indicate that there have been no claims. If the property owner has already given you the correct information, this will confirm it. If they have said there have been no losses but are reluctant to provide the proof, it’s probably time to worry. And if they say they don’t have it, that can easily be solved by asking the agent/broker on the policy.
Conclusion – don’t buy a house or other property without getting the right information. Flooding is going to get worse, not better.