Homeowners hear about limits on coastal insurance

Bethany Beach homeowners have begun discussing a rising problem: insurance companies not renewing policies in coastal areas. Delaware Deputy Insurance Commissioner Gene Reed explained to members of the Canal Association and other Bethany home owners on Dec. 3 how insurance companies make rate decisions and the State’s own role in regulation.

A handful of residents from the Canal development have already experienced insurance limitations, as companies raise their rates or cease coverage. Restrictions may be place on policies for houses closer than 1,000 feet or 2,500 feet to the ocean, depending on insurer.

“I think we’re all concerned. It’s a financial investment, never mind the sentimental,” said home owner Joe Smith. “You want to protect your investment.”

The Insurance Commissioner’s Office enforces Delaware insurance law, which is Title 18 of the Delaware Code (found online at www.delcode.delaware.gov/title18). Delaware law, however, cannot force new insurance companies to offer flood insurance to coastal areas, although new health insurance companies must serve diverse clienteles.

If a company doesn’t renew an insurance policy, Reed said people should first contact their insurance agent, then notify the state commission.

Non-renewal of policies is not a new phenomenon. Reed said it is a business decision based on finances and risk. So many companies pulled out of Florida that the state now offers its own flood insurance, Reed said. However, it would be too expensive for Delaware to offer the same program, he said.

More and more companies are placing restrictions on where they insure, he noted.

“As far as I’m aware, every insurance company has restrictions” in coastal Delaware, said Reed.

Companies do occasionally ask to withdraw from the Delaware market. Some are denied, and some have been approved under other commissioners, Reed said.

He said the commissioner tries to ensure a market is still available for people to use. When standard companies pull out of an area, homeowners must turn to expensive surplus lines, which cover higher-risk categories, like wind and flood insurance.

Delaware Insurance Commissioner Karen Weldin Stewart is aiming to attract more surplus-line insurers to Delaware, creating competition and driving down prices.

Homeowners’ rates can be determined by a variety of factors, from location and building materials to credit score and education level. Insurers must justify that with data proving certain people or situations are more likely to apply for a claim.

Deductibles are required and help reduce the cost of policy to consumers. But customers must know what they are paying. Reed particularly warned about wind and hurricane deductibles: a 2 percent deductible means 2 percent of the home’s entire insured value, not just 2 percent of the claim.

Pricey hurricane deductibles help companies afford the cost of reinsurance. They must purchase reinsurance as a backup for catastrophes that might cause extreme damage and many claims. The increased cost is passed on to consumers, which means higher premiums, especially in susceptible coastal zones.

There have been no catastrophic disasters in the First State for many years, but coastal premiums are raised because insurance companies use more than local historic data. Companies rely on business and storm models to determine the cost of weather patterns.

However, the commissioner, Reed said, is frustrated that companies often use models of extreme Florida weather to raise rates for the milder Delaware landscape. They do collect massive amounts of data, but models need to be scrutinized because Delaware is not in the same ballpark as Florida, weather-wise, Reed said.

Also, many people may not realize that future weather predictions are also considered, because a county that does not see major flooding could be at risk in the future, according to insurance weather models.

Insurance commissioners in the Northeast are working to cap hurricane deductibles and use more localized storm models for reasonable rates, according to Reed.

The rates charged to the policyholders change yearly, with most of the change being in the upward direction.

All state insurance commissioners must approve the rate increases. When a company submits rate filings, the commissioner determines if the increase is appropriate and necessary. If not, the rate filing is rejected and the company must continue with current rates until submitting an acceptable price.

“The commissioner’s done a really good job at knocking down a lot of these potential giant rate increases simply because she scrutinizes everything,” said Reed.

Delaware insurance companies are permitted to make a profit of between 5 and 8 percent. Other states, like Pennsylvania, might allow a 15-percent profit margin.

The only thing worse than a high premium is when the premium is too low, said Reed, because a company would be unable to pay claims.

“Delaware has been successful in keeping companies solvent,” Reed said.

To increase knowledge and transparency in the system, Delaware is now posting rate filings online. That means the public can view and comment on all aspects of the process: what the company requests, what Delaware thinks the company really needs and what rate the company is finally allowed.

Health and medical insurance data is already online at www.delawareinsurance.gov/departments/rates, and other types of insurance will be posted soon.

Delawareans can always contact the commissioner with inquiries and complaints, Reed said. Between January and September of this year, the state recovered $1.8 million for Delaware consumers. That shows the commissioner’s dedication, Reed noted, but also reveals the need for oversight.

“I am going to be very zealously advocating the most stringent legislation,” said Michael Gould, the newest manager of Consumer Services.

After Hurricane Irene, Gould said most complaints were about one company that only enforced certain parts of multiple policies while nullifying other sections of the same policies, resulting in high deductibles and low coverage.

When the insurance commissioner completes the investigation, all details will be publicized, Gould said, and insurance companies could face remedial action, including repayment to customers.

Reed offered other tips for homeowners: People should insure homes for the cost of replacement, not the original building cost. Most importantly, people should ask what is not covered before accepting new insurance policies.

Much general and consumer protection information is available at the Delaware Insurance Commissioner’s Web site, at www.DelawareInsurance.com, or by calling (302) 674-7300.

“It is nice to know that somebody is watching your back,” said Smith.