Katrina hits New York
The letter begins: “We’re writing to you with what we know is unfortunate news about your Allstate Insurance.”
Startled, Marie Collins reached for her glasses, then a magnifying glass and pored over the letter, realizing with a sinking feeling this isn’t a standard mailing from the company that insures her home.
It was a cancellation. Her home was being dropped, the letter said, because it’s in the path of future hurricanes.
But Collins doesn’t live in New Orleans or even Florida. She lives in New York City.
Hurricane Katrina may have made landfall on the Gulf Coast last year, but its impact is being felt hundreds of miles away, as insurers scramble to reduce their exposure to future catastrophes.
“It’s outrageous,” said Collins, who’s lived 81 of her 83 years in the same house in the New York borough of Brooklyn, where a devastating hurricane hasn’t hit since 1938.
Yet hers is one of 30,000 homes the nation’s No. 2 insurer, Allstate Corp., is canceling in coastal counties of New York, citing the need to protect itself from future storms. Other major players are following suit: Nationwide Mutual Insurance Co. is no longer writing new policies on the eastern half of Long Island, N.Y., while MetLife Inc. is requiring extra inspections and expensive storm shutters for new customers living within 5 miles of salt water.
It’s a strategy of retreat that’s unfolded before: After Hurricane Andrew in 1992, insurers drastically scaled back their presence in Florida, forcing residents into the expensive, state-run insurance pool. The difference is that now insurers are not just shedding policies in traditional hurricane targets such as Florida, but all along the eastern seaboard.
“My home is in the middle of Cape Cod. It’s nowhere near the beach. But we’re all being painted with the same brush,” said Paul Covell, 67, who recently received his cancellation letter from the Hingham Mutual Group, a Massachusetts-based insurer that dropped 5,000 of its customers on the Cape.
Even though the Northeast has not had a direct hit in decades, the high replacement value of homes there makes it an especially vulnerable spot in an insurer’s portfolio.
“Homes in Long Island (N.Y.) have gone up in the last five years between 60 and 70 percent. Believe me, our rates have not gone up by 60 or 70 percent,” said Edward M. Liddy, chairman and chief executive of Northbrook-Ill.-based Allstate. “You look at our exposure and you say ‘We want to have enough capital to protect and care for all our 17 million households across the country.’ To do that, you may have to reduce your exposure in a small way in other areas.”
Those in the industry stress that a single massive event like Katrina can wipe out years of savings, putting an entire company with policyholders all over the nation at risk.
One of the ironies of last year’s storm is that insurance companies reported a record $43 billion profit in 2005 — an 11.7 percent increase over the previous year and the highest net income since 1991, according to the Insurance Information Institute, a trade group.
Insurers say profits tell only half the story: The property-and-casualty insurance industry was able to weather the huge losses resulting from Katrina because they were themselves insured. Half the $58 billion in insured losses resulting from last year’s hurricanes were absorbed by reinsurers, companies that insure insurance companies, according to the institute.
Those same reinsurers are now sharply increasing their rates in all coastal areas, making it far more expensive to do business there.
Marie Collins says she understands the risk. Her issue is loyalty: The house has been insured for 81 years — a period of time in which she’s never put in a claim. “I’ve been their customer for years,” she said of Allstate. “That should count for something.”