Risky Business
Insurance: An ingenious modern game of chance in which the player is permitted to enjoy the comfortable conviction that he is beating the man who keeps the table.
Ambrose Bierce (1842–1914), The Devil’s Dictionary (1881-1906).
They should have known better than to have lived there. Geographically, they were uniquely vulnerable to hurricane damage, yet they depended upon frail bridges and antiquated roads to evacuate people in the event of an emergency – and most knew that they wouldn’t evacuate because it was too expensive and far too difficult. There had been killer storms in the past, but for the last few decades, it had been relatively calm. In the era preceding environmental regulations, seawalls, fill and drains had changed the landscape, permitting building closer and closer to the ocean. They preferred to whistle in the dark, knowing that the major storm that would wipe them out was just a matter of time. However, it was still a major tourist destination, even internationally, and the tourists who flocked there during hurricane season had no idea that they were balancing on a razor’s edge. Hundreds of old people, some in nursing homes, were trapped in the onrushing wind and tides, and the plans to protect them were tenuous at best. Homes, businesses, roads, electricity, septic lines – all flooded, corroded by seawater and made home to mold spores. What were they thinking?
New Orleans? No, Cape Cod.
Our brave spit of sand in the Atlantic is as doomed to the onrushing tides as the city below sea level. We do not talk about evacuation plans, because we know there are no real evacuation plans.
We need to recognize one thing. Painful though it may be, we may owe an apology to the insurance industry.
When Andover Mutual began the exodus from the Cape Cod homeowners insurance market in 2004, citing new insurance industry ‘computer models’ predicting increased hurricane activity, the loss-free policyholders of decades responded with an angry and collective, ‘Yeah, right!’. That year, four seperate hurricanes slammed Florida. This year, an unprecedented Category 5 hurricane made landfall in the Gulf Coast.
It appears the computers may have been on to something.
Now, the Massachusetts Fair Plan, the state's home insurer of last resort which was forced to step into the breach, is seeking state approval for a 25% increase in the price of its standard homeowner's policy next year on Cape Cod, Nantucket and Martha's Vineyard, which would bring the average home up to around $2,000 – with wind exclusions of many thousands of dollars as part of the deductible. They now insure about 28% of the homeowners on the Cape and Islands, far beyond the intended capacity of this ‘bad risk’ agency. They are also seeking other shoreline increases, 20% in Plymouth and New Bedford, and 9.5% in Fall River. Weakly, they assert that this is a 12.9% increase statewide, but in Roxbury, Mattapan, and Dorchester, where the Fair Plan has a significant presence, a rate increase of 5.9% is being sought. In fact until the Legislature changed the formula last year (and Porcupine would give a great deal to know whose doing that was), a 5.9% increase is all that would have been permitted across the board. Why the Boston area customers are still protected by the old rate limits, while we on Cape are thrown to actuarial wolves, is not known.
We are a greater risk – but why not charge that 12.9% statewide, instead of heaping it all on us? A basic principle of insurance is to spread risk as widely as possible, inevitably overcharging some, to create a manageable pool of exposure. It’s bad enough that standard insurance companies are permitted to excise our risky area from their portfolio, but why is the ‘insurer of last resort’ also allowed to charge us more as well?
We are a terrible risk. In addition to the increase in storm activity, the increase in value of the homes insured in Barnstable County in the last 30 years has been astounding. The cost to rebuild these more expensive homes also factors into the rate calculations. Also, insurance companies must procure reinsurance to ensure that they can meet claims when they happen, and since 9/11 the reinsurance market has been drained of capacity.
What is especially disturbing is that the Fair Plan says that these rates were requested before Katrina, and even then, a 68.5% increase was warranted on the Cape based on loss exposure. They see the 25% as moderate. Imagine what it will be when Katrina is figured into the mix?
Action must be taken now to stop county-based rate increases in the Fair Plan, and force it to live up to its name. In the meantime, we need to be realistic about housing here, and recognize that we cannot continue to increase capacity without a real exit strategy. Denial is more than a river in Egypt – it’s also a breached reef in Chatham.
Ambrose Bierce (1842–1914), The Devil’s Dictionary (1881-1906).
They should have known better than to have lived there. Geographically, they were uniquely vulnerable to hurricane damage, yet they depended upon frail bridges and antiquated roads to evacuate people in the event of an emergency – and most knew that they wouldn’t evacuate because it was too expensive and far too difficult. There had been killer storms in the past, but for the last few decades, it had been relatively calm. In the era preceding environmental regulations, seawalls, fill and drains had changed the landscape, permitting building closer and closer to the ocean. They preferred to whistle in the dark, knowing that the major storm that would wipe them out was just a matter of time. However, it was still a major tourist destination, even internationally, and the tourists who flocked there during hurricane season had no idea that they were balancing on a razor’s edge. Hundreds of old people, some in nursing homes, were trapped in the onrushing wind and tides, and the plans to protect them were tenuous at best. Homes, businesses, roads, electricity, septic lines – all flooded, corroded by seawater and made home to mold spores. What were they thinking?
New Orleans? No, Cape Cod.
Our brave spit of sand in the Atlantic is as doomed to the onrushing tides as the city below sea level. We do not talk about evacuation plans, because we know there are no real evacuation plans.
We need to recognize one thing. Painful though it may be, we may owe an apology to the insurance industry.
When Andover Mutual began the exodus from the Cape Cod homeowners insurance market in 2004, citing new insurance industry ‘computer models’ predicting increased hurricane activity, the loss-free policyholders of decades responded with an angry and collective, ‘Yeah, right!’. That year, four seperate hurricanes slammed Florida. This year, an unprecedented Category 5 hurricane made landfall in the Gulf Coast.
It appears the computers may have been on to something.
Now, the Massachusetts Fair Plan, the state's home insurer of last resort which was forced to step into the breach, is seeking state approval for a 25% increase in the price of its standard homeowner's policy next year on Cape Cod, Nantucket and Martha's Vineyard, which would bring the average home up to around $2,000 – with wind exclusions of many thousands of dollars as part of the deductible. They now insure about 28% of the homeowners on the Cape and Islands, far beyond the intended capacity of this ‘bad risk’ agency. They are also seeking other shoreline increases, 20% in Plymouth and New Bedford, and 9.5% in Fall River. Weakly, they assert that this is a 12.9% increase statewide, but in Roxbury, Mattapan, and Dorchester, where the Fair Plan has a significant presence, a rate increase of 5.9% is being sought. In fact until the Legislature changed the formula last year (and Porcupine would give a great deal to know whose doing that was), a 5.9% increase is all that would have been permitted across the board. Why the Boston area customers are still protected by the old rate limits, while we on Cape are thrown to actuarial wolves, is not known.
We are a greater risk – but why not charge that 12.9% statewide, instead of heaping it all on us? A basic principle of insurance is to spread risk as widely as possible, inevitably overcharging some, to create a manageable pool of exposure. It’s bad enough that standard insurance companies are permitted to excise our risky area from their portfolio, but why is the ‘insurer of last resort’ also allowed to charge us more as well?
We are a terrible risk. In addition to the increase in storm activity, the increase in value of the homes insured in Barnstable County in the last 30 years has been astounding. The cost to rebuild these more expensive homes also factors into the rate calculations. Also, insurance companies must procure reinsurance to ensure that they can meet claims when they happen, and since 9/11 the reinsurance market has been drained of capacity.
What is especially disturbing is that the Fair Plan says that these rates were requested before Katrina, and even then, a 68.5% increase was warranted on the Cape based on loss exposure. They see the 25% as moderate. Imagine what it will be when Katrina is figured into the mix?
Action must be taken now to stop county-based rate increases in the Fair Plan, and force it to live up to its name. In the meantime, we need to be realistic about housing here, and recognize that we cannot continue to increase capacity without a real exit strategy. Denial is more than a river in Egypt – it’s also a breached reef in Chatham.
posted by Peter Porcupine at 2:23 PM
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