By Jared Council
Coastal insurance rates continue to climb for a variety of reasons, according to a new study, and authors said the trend is poised to alter the economics of buying and inhabiting properties near the shore.
Norfolk-based Wetlands Watch conducted the study and found that increasing rates are a result of four main factors: heightened storm activity, recent lawsuits related to major hurricanes, the recession and sophisticated data on policy holders.
Wetlands Watch Executive Director Skip Stiles said if the public sector responds by capping rates, private-sector insurers may leave the market. But if rates continue to mount, coastal communities could be gentrified or hollowed out.
"That's a conversation that we need to have between the private sector, the public sector and the public at large," he said. "There are big changes coming and people are feeling it. It's not going to go away. What do we do with it?"
Wetlands Watch is in favor of coastline property retreat. If property development steps back, Stiles said, it may give the area's wetlands room as sea levels advance. Wetlands, Stiles said, help filter water pollution and serve as nurseries for aquatic life.
When and where retreatment may occur is unknown, but the study indicates insurance companies are increasing prices largely because of higher risk. Stiles said his organization advocates gradual, proactive retreat from coasts as opposed to rapid retreat in response to a catastrophe.
"We see the environmental benefits and fiscal prudence in dealing with this now," Stiles said.
Local insurance premiums have been growing in recent years, according to data from the State Corporation Commission. In Norfolk, for example, the average annual premium on a brick house was about $965 in 2010. That grew nearly 20 percent to $1,156 per year in 2012. Tidewater communities experience higher premiums than their upstate counterparts, state data show.
Incorporated in 2001, Wetlands Watch is a 501(c)3 nonprofit. The year-long study, released earlier this month, was funded by a $17,000 grant from the Virginia Environmental Endowment. Stiles said he interviewed state insurance officials and nearly a dozen local insurance company representatives.
Stiles said the group became interested in homeowners insurance because rates can impact the demand for buying and developing coastal property. He said his group noticed rate increases and was curious to see if rates were being driven by climate change. Turns out, he said, the answer wasn't so clear-cut.
One of the reasons is actuarial data that shows the country has entered a 20- to 40-year cycle of increased storm intensity.
"In 2011," Stiles said, "one of these big weather modeling groups that advises insurance companies said, 'Whoa! Now we see this pattern of storminess that started about 1995. So, we're now advising everybody that insures along the Atlantic Coast that you're going to see more storms and, therefore, more storm damage.'"
Lawsuits stemming from hurricanes Katrina and Rita are also a factor, Stiles said. When homeowners returned to their damaged Gulf Coast homes and filed claims, it wasn't clear how much of a factor floods played. Most private insurers don't cover floods, so many claims were denied. Lawsuits followed.
"In the end, the insurance companies paid more in legal fees than they would have settling the claims," said Stiles, adding some companies just withdrew from coastal areas or scaled back coverage.
Like it did with many companies, Stiles said, the recession pinched the profits of insurers, who invest funds not being used for claims. The economic downturn and better data on consumer risk have prompted insurers to restructure rates and coverage.
"I think it's a valuable study," said Old Dominion University professor Michael McShane, who specializes in risk management and insurance. "No one else I know of has gone that in depth on how homeowners insurance is being carried out in Virginia along the coastline."
McShane said insurers who can't charge high enough interest rates to reflect risk may abandon the area. In such scenarios, which have played out in states including Florida, property owners have to resort to unregulated higher-priced insurance or insurance subsidized by the government, often referred to as "wind pool" insurance.
"If a big hurricane comes along," McShane said, "the taxpayers are going to have to bail out these state insurance pools."
High insurance rates, Stiles said, may depress the home values and attractiveness of some coastal properties.
For other properties, investors or well-off buyers may be the only parties willing to buy them. Properties near water in non-resort areas may not fare as well as those in resort areas, he added.
"We've got to start stepping back from the coast," Stiles said.
McShane said retreating is a "sensible solution," and the federal government likes it. He cited the Federal Emergency Management Agency, which runs the National Flood Insurance Program, and its programs designed to buy out properties that have been repeatedly damaged.
But local governments don't like it much, as these lots typically become open space.
"For cities," McShane said, "that reduces their tax base."