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Insurance cycle paves bumpy road

January 22, 2003

Underwriting squeeze strangles homeowners, delays closings

By Susan Romero
Inman News Freatures

Homeowners are facing a hard and hardening market for homeowner's insurance now that property and casualty insurers are tightening their underwriting practices, cutting policy coverages and raising premiums nationwide.

Whether insurers' conservative actions will chill the still-hot housing markets remains to be seen. But some experts think the situation could disrupt home sales because without homeowner's insurance, home buyers can't secure the financing they need to close their transaction. Some homeowners have lost their insurance and are having trouble finding new coverage while real estate agents increasingly report stalled closings that hinge on the buyer's ability to get homeowner's insurance.

Douglas Heller, senior consumer advocate with the Foundation of Taxpayer and Consumer Rights, a California-based nonprofit organization headed by consumer advocate Harvey Rosenfield, said underwriters' use of newer risk assessment methodologies could potentially "devastate" the housing sector.

"The insurance industry is single-handedly undermining the strength of our real estate markets," he said.

Experts generally agree there isn't a crisis. But they also agree the homeowner's insurance market is hardening and likely to become even tougher.

"We're going to have a hard market for a few years," said James Walsh, editorial director of Silver Lake Publishing, an independent press that publishes books about economics, personal finance and insurance.

Walsh said the hard market will hit the coastal and other high-risk housing areas the hardest and he wouldn't be surprised if some insurers started pulling out of such areas a year or two from now when the hard market "really is having its chilling effect."

Insurers said they have to tighten their belts. They blame rising claims costs following an onslaught of natural disasters over the past decade, and more recently, rising water damage and ensuing black mold-related claims. Property and casualty insurers collectively logged a first-ever industry-wide net loss in 2001, when losses and expenses totaled $8.9 billion more the amount received in premiums, according to Insurance Information Institute, a nonprofit organization funded by insurers.

Heller argued that insurers lost billions of dollars investing in stock of corporations plagued by scandal, corruption and bankruptcy and now are price-gouging homeowners to recover those losses. Hard insurance markets are linked to bear markets, he said.

He recapped two historical situations to illustrate his point: Medical malpractice insurance premiums spiked in the early '70s in the wake of the oil embargo and other social and economic woes. Insurers blamed rising malpractice litigation costs for higher premiums, and California physicians went on strike in protest. The market eventually leveled until the early '80s, when stock market investments returns again were low. Auto insurance premiums spiked and insurers pointed to high costs of auto repair. But once again when the investment returns rebounded, insurance prices leveled, according to Heller.

California legislators responded to insurance premium increases in the '70s and '80s by slapping the industry with tighter rate control regulations and the same may happen again. Momentum already is building in several states for legislation to review insurers' underwriting methods.

The Internet boom in the '90s spared homeowners from a hardening insurance market. But once the tech bubble burst and insurers' investment revenues fell, they again turned to premium increases, Heller argued.

"All insurance markets will eventually see a softer market when investment returns move up again and insurers become more interested in getting premium dollars than in keeping loss ratios low," he said.

Hard insurance markets used to be regional situations, but today homeowners and home buyers nationwide are affected by conservative underwriting practices. Underwriters are adding the insured's credit score and the property's claims history from the Comprehensive Loss and Underwriting Exchange database, known as CLUE, to their risk formulas. The credit score typically determines how much a homeowner will pay for coverage while the CLUE data typically determines whether the property will be insured at all.

Insurers said conservative underwriting practices and premium rate increases are overdue and that the market will stabilize when premium rates more accurately reflect claims costs.

"People have been spoiled and have paid so little for their homeowners coverage....Sometimes they lose perspective of how much they're getting for the buck....the greater concern is whether insurers can continue to stay solvent and people can continue to find coverage," said Lynn Knauf, a policy manager at the Alliance of American Insurers, an organization that represents property and casualty insurers.

Experts believe the hardening insurance market will last as long as the preceding soft market did, which means homeowners are in for a long bumpy ride. A survey of lenders conducted at an I.I.I. forum found 81 percent believed the hard insurance market would continue into next year. The last soft market lasted six to 10 years.

Tomorrow: How bad credit affects a homeowners insurance policy.

Copyright: Inman News Service



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