THE VIRGINIAN-PILOT
Copyright (c) 1996, Landmark Communications, Inc.
DATE: Sunday, April 7, 1996 TAG: 9604060386
SECTION: BUSINESS PAGE: D1 EDITION: FINAL
SOURCE: BY TOM SHEAN, STAFF WRITER
LENGTH: Long : 163 lines
After doing business with Allstate Insurance Co. for more than 20 years, John and Janet Moffett were startled by the one-page letter that arrived in February.
Allstate said it was canceling their homeowners' policy in two weeks.
``We are unable to continue your insurance coverage for the following reason: home is located in a coastal area,'' the letter said.
Yes, their two-story house on Kendall Street in Virginia Beach is close to the Chesapeake Bay shoreline, but Allstate had been insuring it for more than 15 years, John Moffett said.
He and his wife also used Allstate to insure another house when living in Northern Virginia and bought their auto insurance from the company.
``We thought they might call us back and say, `We made a mistake,' '' Janet Moffett said.
But Allstate had not made a mistake. The Northbrook, Ill.-based company was cutting back on the amount of homeowners' insurance it provided in coastal areas of Virginia.
Four years after Hurricane Andrew devastated parts of Florida and saddled insurers - like Allstate - with a record $16 billion of losses, major property insurers continue to reduce their exposure to catastrophic losses from another severe hurricane.
``From a business standpoint, we are doing what we have to do,'' said Jim Emerson, an Allstate spokesman. ``All the way up the coast, we're one of the big writers (of homeowners' insurance) and have a lot of exposure.''
For property insurers like Allstate, a major concern in the Hampton Roads market is the wind damage that a hurricane can inflict. Property damage caused by flooding and wave action is covered by a separate flood-insurance program operated by the federal government.
Cancellation of existing policies appears to be unusual. But State Farm and Allstate, the largest and second-largest writers of homeowners insurance in Virginia, said their practice has been to renew existing homeowners' policies in coastal areas but not to write new policies.
Many other companies continue to write new policies but have boosted their rates to reflect what they consider the greater risk of hurricane-related losses.
``Companies are looking at raising rates and restricting coverage all along the East coast, but Virginia is in better shape than North Carolina and South Carolina,'' said Charles S. Nusbaum, president of S.L. Nusbaum Insurance Agency Inc. in Norfolk.
Fearing the sorts of losses they suffered in the wake of Hurricane Andrew, several insurers also have been cutting back their coverage in the Sunshine State.
Allstate has canceled thousands of homeowners' policies in Florida, and State Farm announced plans earlier this year to leave certain counties along the Atlantic coast. The pace of cancellations has been slowed by a state-imposed moratorium.
Steven T. Foster, head of Virginia's Bureau of Insurance, said there was no indication of a significant shortage of homeowners' insurance in Hampton Roads and no need for the bureau to intervene in the insurance market.
``We don't get a lot of complaints about people being unable to get homeowners' insurance,'' he said. ``Overall, we have a healthy homeowners' market.''
Still, abrupt cancellations by some companies have forced homeowners like the Moffetts to scramble for coverage, something that is required by most residential mortgage lenders.
The Moffetts said their situation had been complicated by a change in the type of policy they had with Allstate. When he was transferred from Hampton Roads to San Francisco four years ago, the couple rented their Virginia Beach house and converted their homeowners' policy to a landlord's policy, said John Moffett, an Army sergeant major now stationed at Fort Monroe in Hampton.
When they returned to Virginia Beach last November, they converted the landlord's policy back to a homeowners' policy.
Three months later, Allstate notified them of its decision to cancel the policy. The Moffetts responded by writing to Allstate's chief executive officer and calling the company's headquarters and regional office in Northern Virginia.
Allstate's response: The insurance agent should not have written the homeowners' policy because the company had stopped writing new homeowners' insurance in certain parts of Hampton Roads, said Janet Moffett, a respiratory therapist with Sentara hospitals.
She and her husband began shopping for another insurer. Within days, they found the coverage they needed at USAA, a financial-services organization that provides auto, homeowners' and other insurance to military officers, retired officers and relatives of officers. The Moffetts qualified for coverage because Janet's father had been an officer in the Marine Corps.
USAA, whose mid-Atlantic regional office is in Norfolk, said it continues to provide homeowners' coverage in coastal areas, even in damage-prone areas like the Sandbridge section of Virginia Beach.
``We've made a commitment to write insurance wherever our members live,'' said William Quinn, assistant vice president for underwriting and policy service for USAA's middle-Atlantic region. ``That's not to say that we don't look at the pricing of our insurance.''
``If you choose to live in an area close to the ocean,'' he said, ``you have to be prepared to deal with higher prices for coverage.''
To compensate for the higher risk, USAA has gradually increased its rates for coverage in coastal areas, Quinn said.
John Moffett said he and his wife got the same amount of coverage - $137,000 for their house and about $60,000 for the contents - that they had with Allstate. They also took the same $500 deductible.
Their annual premium of $420 for USAA's coverage was slightly higher than what they had paid Allstate, he said.
The pressure on Allstate and other insurers to scale back their coverage in coastal areas has come partly from a New Jersey company that rates the financial strength of insurance companies and their ability to pay claims.
The company, A.M. Best Co., has urged insurers to use computer models to determine where they might suffer especially heavy losses from hurricanes and other catastrophes. In addition, Best takes into account the results of these catastrophe models when coming up with its ratings for companies.
One reason for using the models is to better understand the enormous losses that a severe hurricane can cause, Best said last month in a report on catastrophes.
``Before 1992, many weather experts believed that a worst-case hurricane in the United States would produce less than $10 billion in insured property damage,'' the Best report said. ``They also projected that such a severe hurricane would occur only once a century.''
That thinking changed when Hurricane Andrew tore through Homestead, Fla., four years ago.
``Today, many experts believe insured property damage could have tripled to nearly $50 billion had Andrew struck a more densely populated area, such as Miami or Fort Lauderdale.''
Despite the pressure on larger insurers to scale back their coverage in regions vulnerable to heavy losses from hurricanes, some of those familiar with the industry expect the availability of homeowners' insurance to improve.
``I think it's going to get better, but it's a matter of probability,'' said said J. Robert Hunter, director of insurance for the Consumer Federation of America and former insurance commissioner for Texas. ``If during the next hurricane season we get a hurricane on the scale of Andrew, all bets are off.''
That's partly because reinsurance has become less expensive since 1993, when it nearly dried up, Hunter said. Companies buy reinsurance from other companies to reduce their risks and to write additional business.
The lower cost and greater availability of reinsurance, Hunter said, is especially important for smaller insurers that cannot spread their risks over wide areas the way larger companies the way State Farm and Allstate can.
But the increased availability of reinsurance for homeowners' policies isn't any consolation to those homeowners who suddenly have to find another insurer.
For the Moffetts, the abrupt way that Allstate halted its coverage was more disturbing than the reason for doing so, said John Moffett, a trumpet player with an Army band at Fort Monroe's Training and Doctrine Command.
``We thought we were in safe hands with Allstate,'' he said, mimicking the company's advertising slogan. ILLUSTRATION: Map
Color photo
GARY C. KNAPP
After doing business with Allstate for more than 20 years, John and
Janet Moffett of Virginia Beach found themselves shopping for
insurance in February after the insurer abruptly canceled their
policy.
Graphic
LARGEST WRITERS OF HOMEOWNERS' INSURANCE IN THE UNITED STATES
LARGEST WRITERS OF HOMEOWNERS' INSURANCE IN VIRGINIA
[For complete graphic, please see microfilm]
by CNB