On insurance costs, coastal residents are feeling the heat

By MIKE FITTS

Associate Editor

COASTAL HOME and condo owners are hot about insurance rates — and when you look at the rate increases, it’s not hard to see why.

Property owners are getting rate increases of 100 percent to 700 percent. Owners of a Myrtle Beach condo told The Sun News their insurance went from $126,000 to $879,000 — on a condo they bought seven years ago for $77,000.

Not only are rates going way up, but insurance companies have been cutting down on insuring coastal properties, or cutting them out entirely.

“It appears that the market for coastal property insurance is deteriorating drastically,” Eleanor Kitzman, state director of insurance, said.

Why are coastal residents getting clobbered?

Insurers protect themselves from huge losses by buying coverage from reinsurance companies — which are buffeting them with big increases. What do reinsurance companies provide insurance for? Well, everything, just about. Anything that seems to be at risk. And that’s a lot, in this world today.

Insurance, in its essence, is the monetizing of risk. How much more dangerous a driver is a 17-year-old boy than a married 34-year-old woman? How much more likely to be destroyed by wind is a house in Myrtle Beach versus Newberry? Insurance puts a dollar value on different probabilities. In so doing, it protects investments of every kind.

And the insurance industry believes the world is a more risky place now, so companies are going to charge more for their services.

The reinsurance companies took an enormous financial loss on 9/11; the threat of mega-terrorism has to be taken into account across their entire business. That’s a huge risk that the reinsurers largely cannot avoid.

The whole insurance industry took another pounding last year with Hurricane Katrina, and that is resonating in the market. “Katrina has changed the insurance industry’s view of catastrophe,” Ms. Kitzman said.

Coastal exposure, however, can be reduced. So they charge more to insurance companies that have a lot of coastal property insurance.

Coastal real estate has been gaining value faster than property in the rest of the country. The coast has been gaining residents quickly, too. Those would normally be good for the insurance business, right? More customers with more value to protect with insurance.

So why do they see the coast as such a risk, instead of a growth opportunity?

Simply put, the weather.

The insurance industry believes it is likely that the coasts will take a pounding in the future. The Atlantic is in the middle of a cycle of increased hurricane activity, the high part of a long-term fluctuation.

There’s also substantial evidence that hurricanes are getting stronger. A Georgia Tech study found that one in three hurricanes during the 1990s and early 2000s got up to the strongest categories, 4 or 5. During the late 1970s and 1980s, that ratio was one in five. It’s those more powerful hurricanes — with devastating storm surges and high winds — that really create huge claims for insurance companies.

The costs are magnified for condo owners, Ms. Kitzman says, because the policy covers the entire complex — exposing the company to a bigger risk of a major loss if the whole building is damaged by a storm.

The state can try to encourage more companies to write policies in South Carolina, and there are some law changes that might help, she says. The best answer for the problem, she says, is for the market to correct itself.

But the weather might not allow that. The leading suspect in creating warmer waters that breed these huge hurricanes is the warming of the climate, and that seems to be accelerating.

The political world debates man’s role in climate change; Washington does nothing, while cities and states are pledging to take action. But the insurance industry is already redirecting its resources because of the increased risk it sees in coastal property.

While people may be looking for definitive signs of global warming — and man’s role in it — in the climate, the signs are as close as their insurance bills.

It may be through the economic lever of insurance that coastal communities really begin grappling with a response to global warming’s dangers, with further changes to building codes and tighter building regulations.

But for coastal home and condo owners, I fear that the market will be difficult for years to come, even if this year is not a repeat of the disasters of 2005.

Getting companies to write coastal policies is going to be a hard sell, and the premiums will be stiff. The costs won’t be limited entirely to the coastal counties, either. Anyone who was in Sumter or Charlotte when Hurricane Hugo crashed across the Carolinas in 1989 knows that the big storms can wreak havoc well inland, too.

The United States, especially in Washington, has not really grappled with climate change and man’s contribution to the trend. But through devices such as the insurance market, the costs already are beginning to mount.

Write to Mr. Fitts at mfitts@thestate.com.