Hurricane Insurance is Grossly Overpriced

So, here’s the question: How many on the Gulf and the Atlantic Coasts feel that their hurricane insurance premiums are at the levels they should be? Let’s put it another way, how many people feel that they are paying too much for their hurricane insurance?

There is little doubt the folks along the Gulf Coast are paying too much and getting too little in return, especially after we get hit by a hurricane. We now have to include the recently very dangerous Atlantic Coast. The northeast coast was hit so badly by Hurricane Sandy they can barely hold their head above water. Let’s take a look at what happened after this monster passed over New York and New Jersey.

Hurricane Sandy, as a hurricane and a post-tropical cyclone, killed at least 117 people in the United States and 69 more in Canada and the Caribbean. The death toll in the U.S includes 53 in New York state, 34 in New Jersey, 12 in Pennsylvania, six in West Virginia, four in Connecticut, one in Maryland, and seven elsewhere in the U.S.  An estimated 7.9 million businesses and households are without electric power in 15 states and the District of Columbia.

Where’s the monetary help coming from? Here is some of it in an emergency effort:

• According to the U.S. Chamber of Commerce Business Civil Leadership center, businesses have contributed more than $33 million in donations.

• The White House, which has already approved more than $137 million in direct assistance for those in need, says that about 164,000 Connecticut, New York and New Jersey residents have applied for federal assistance from FEMA.

• The Red Cross had raised nearly $103 million in donations for Sandy victims.

• More than 352,000 people have registered for assistance and more than $403 million have been approved for FEMA assistance.

• New Jersey Governor Chris Christie estimated damages from Sandy-related storms to be about $36.8 billion dollars.

• New York City Mayor Michael Bloomberg estimates the total public and private losses to New York City to be $19 billion.

• Governor Cuomo says Sandy has cost New York state 41.9 billion.

By this time it is the 12th of February, five months after the disaster, and still no word from anything that resembles an insurance company. Where are they? The old story, after a hurricane, is for the insurance companies to cry foul, that they are going broke, and they have no money to pay the claims. What happened to the premiums that the faithful had relentlessly been paying over all these years? Let us not forget the “claims adjusters.” If you live on one of these two coasts, I am sure you can empathize with this “insurance criminality.“

This is one of many insurance fiascos that have come to pass over the last 10 years alone. Hurricane Katrina slammed into New Orleans on Aug. 29, 2005, bringing death, destruction and despair. Entire neighborhoods were wiped out, about 80 percent of the city was underwater and 1,800 people were killed. In the seven years since, the city has rebuilt many areas and billions of dollars were pumped into a revamped levee system, yet the landscape has been forever altered.” After Katrina was Hurricane Rita. Between the two of them the Gulf Coast from Texas to Alabama was battered beyond recognition. There was untold billions of dollars in damages and over 1,800 people were killed in one of the worst disasters ever in the U.S.

The Gulf Coast East Coast Homeowners Insurance Coalition, has already begun the good fight to lower hurricane insurance, forming a multi-state initiative. Eight different coastal states in the coalition include: LA, MS, AL, FL, SC, NC, NJ, NY. They have been conferencing with grass roots representatives from these states approximately every two weeks for the last sixteen months.

GCECHIC needed some political clout to move the issue. Alabama State representative Joe Faust (R) is credited by GCEC leaders with kick-starting the initiative. Michelle Kurtz is one of the founding leaders of the multi-state initiative. “Variations of the coastal band concept have been floating around for years,” Kurtz said. “Representative Joe, as we call him, approached our organization and suggested we work together to build the multi-state initiative and capture all that money that’s going to overseas reinsurers.”

One of the first moves Faust and the Alabama GCEC chapter made was to ask Alabama Democratic Representative Napoleon Bracey to co-chair the elected officials thread of the multi-state initiative. “The quickest way to fix problems is to work across party lines,” Kurtz said, “and Democrats and Republicans are responding together.” Bracey immediately agreed.

In 2012, the Alabama chapter got the Homeowners Insurance Clarity Law passed by the Alabama State Legislature, which requires the Alabama Department of Insurance to collect and publish aggregate claims and loss data by zip code statewide. “That data comes online November first,” Kurtz said. “We think it will show that our coastal counties have been grossly over-charged. It would be great if all states had something similar. That would leave no doubt as to the premiums being paid or the amount paid out in claims.”

According to the GCECHIC, insurance companies collect “An estimated $5 billion to $15 billion in homeowners hurricane insurance premiums each year. If this band had been functioning since 2005, the totals would be between $48 billion and $120 billion. During that same time, insurance companies only paid about $15 billion in hurricane claims within the band.” Almost all of the $48 billion to $120 billion in premiums went overseas to mostly Swiss and German banks.

The coalition started to talk about getting together to discuss the issue of hurricane insurance prices. “We held a two-day planning conference in Biloxi, Mississippi in April,” David Gauthe said. Gauthe is on staff with Bayou Interfaith Shared Community Organizing. “Four states had grassroots representatives physically present and two more participated by phone. Two national insurance reform figures also participated by phone. We developed our understanding and laid out a good strategy, and I’m really impressed we’ve gotten this far so quickly.”

After that meeting they agreed to go multi-state. “We’re reaching national officials,” Tonia Pence said. Her Appleseed Consulting organization near New Orleans aggressively participates. “We’re reaching local officials and multiple grass-tops groups that have interstate linkage. Everyone – bankers, homebuilders, realtors, civic clubs – everyone has a stake in fixing this crisis and they’re responding with remarkable energy.”

“Churches, too,” Kurtz added. “In fact the churches play the most significant role. Organizationally, their denominational links across state lines are helpful.”

Where did all those billions go? Before we can answer that question, we need to understand what this thing called reinsurance is. You may have heard this term before as defined per Article 779, paragraph 1 German Commercial Code: “Reinsurance is the insurance of the risk assumed by the insurer, in other words the insurance of insurers according to the principle of risk assumption and risk spreading.”

“These two definitions already illustrate the key points of reinsurance. Reinsurers insure the so-called “primary” insurers by participating in the risks which they have assumed. A primary insurer is an insurance company which has a direct contractual relationship with the customer (private individual, company, organization) and which accepts its risks in exchange for an insurance premium. The chain of risk assumption and spreading thus begins when a primary insurer concludes an insurance contract with his customers in respect of a particular risk. The primary insurer can then seek so-called reinsurance cover for this risk or a combined group of similar risks from one or more reinsurers. A reinsurer’s clients are thus exclusively insurance companies – private individuals cannot obtain insurance from a reinsurer.”

Doesn’t it sound like that derivative scheme the banks were using to make more money during the mortgage bubble that burst in 2008?

So, let this sink in for a second. We pay our premiums so they, the premiums, can be sent overseas to a Swiss or German Bank only to have the risk spread among more insurers and then a new policy is written on you so that you have to pay more insurance premiums. The banks call it Reinsurance.

We, the insured, call it more money. Meanwhile our original dollar was sent to the Caymans, minus a commission to the reinsurer, and is reinvested in who knows what. This is all done without benefiting you or the U.S. markets. And, might I add, the insurers do it without having to pay more than 15-20 percent of the total on actual claims. Whatever happened to the idea that insurance premiums are paid to protect our assets and if a catastrophe occurs the company will reimburse us for our loss, as agreed upon?

Before GCECHIC could move forward, they needed a strategy they could use to get these outrageous insurance rates down. How could we make this work? First, we must accept the risk. Second, there must be an area specified to be insured. A 70 mile coastal band from Mexico to Maine. We would be insuring ourselves for only hurricane insurance and it would include flood and wind coverage.

Michelle Kurtz said that, “if we all work together within the band proposal, we can make our own insurance work for us. We can insure ourselves, keep all the money here in the U.S. and it won’t even cost half of what we are spending now. We would accept the risk and take it away from an insurance industry that doesn’t want to give it back.”

So, how would this look? Can we see that the possibility is there? Imagine, hurricane insurance for less than half price and no claims adjuster trying to stop you from getting what you need to get back in your home after a hurricane.

Richard Andrew is a guest blogger for Ring of Fire.