For example, Angel said while hurricanes are modeled as typical losses every 10-15 years, the tornado outbreak of 2011 was a once-in-250-year event. Further, the data does not include surplus-line insurers, who write policies within five miles of the coast, areas considered to be the highest risk with the greatest losses. The DOI does not regulate surplus-line insurers.
Angel also said some policies in Mobile and Baldwin counties are counted twice, because the wind portion is bought separately and the data also does not account for homeowners who have voluntarily dropped their wind coverage. Finally, Angel stressed that the data only looks at losses incurred by insurance companies, not their expenses. A large percentage of a policyholder’s premium is comprised of the cost of reinsurance, which insurers purchase from third parties to cover their own losses.
“I’ve demonstrated that if you take the expenses that the insurance companies incur for their overhead, for commissions, for reinsurance and for a reasonable profit, if you take those expenses and add them to the coastal loss ratios then that demonstrates over the 10-year period that homeowners have paid almost exactly what they should have paid,” Angel said, adding if anything, the data shows that homeowners upstate are actually underpaying for their policies.
“The fly in the ointment is when I do the same calculation for upstate, for everybody except in Mobile and Baldwin counties, it shows the people upstate have underpaid or have been undercharged,” he said. “Under our state law, I cannot force an insurance company to charge less than what their statistics justify them charging. I cannot force an insurance company to charge less than what they are charging. On the other hand, if a company upstate chooses to be more competitive and they choose to undercharge, I can allow that as long as we consider that company to be financially strong and undercharging would not cause them to go insolvent.”
HHII spokesperson Dan Hanson said it also proved the catastrophe modeling used to set the rates was flawed.
“Catastrophe models are at the core and they are not accurate,” he said. “The industry uses the same models on coastal Alabama that they use in Florida and who do you think is more prone to hurricane damage? They say it is based in science, so that is what they use to drive our prices four times higher.”
Angel said science had made “great strides” in computer modeling and the domestic industry relies on the models because the reinsurance companies, who are largely foreign, use the same models.
“It has been determined models are a better predictor than the actual losses over the past 10 years so in essence, we cannot use Clarity Act data instead of or against the data the insurance companies file when they make a rate filing with the department,” he said.
Long term solutions
If the Clarity Act data, no matter how it’s interpreted, can’t be used to lower premiums, can Alabamians rely on the recommendations of the governor’s commission? Independent insurance provider Carl Schneider thinks so and he thinks you should believe him, because he’s frank.
“Everything is about loss control and about what price to charge for risks,” he said. “Insurance 101 is, know your risk, reduce your risk, transfer your risk or completely avoid the risk. Unfortunately my industry has done a piss-poor job of identifying and reducing its risk. Instead they just throw knee-jerk reactions.”
Schneider served alongside Kurtz on the governor’s commission and although he is an insurance provider, he has tried to balance his image as a consumer advocate by creating a non-profit organization called Smart Home America that encourages increased building standards and home fortification.
Schneider also disagrees with HHII’s interpretation of the Clarity Act data and although he credits the organization with keeping the issue in the limelight, he said by focusing on the costs, they are hurting innovation in the market.
“They are using the numbers they have access to and doing a lot of elementary analysis,” he said. “If a true statistician were to try to analyze it, the first thing he would say would be there is not enough information.”
Schneider said HHII’s interpretation does not take into account basic factors like the average home value in Mobile and Baldwin counties compared to the rest of the state, or the price of deductibles. As an insurer, he admits that clients around Atmore and Brewton cost him more money after Hurricane Ivan, but he said the comparison is apples to oranges.
“The Alabama coast is so small it’s a gnat on an elephant’s butt as far as the whole scheme of insurance and we’re really not that big of a factor when you look at it from a worldwide market standpoint,” he said. “So it would be very easy for companies to walk away. The problem is, if you push too hard, the private sector will walk away and if you don’t push enough, the consumers get hosed. An insurance company has to be profitable nine out of the 10 years on the coast because on the 10th year, they are going to get popped and all that money is going back to consumer in the form of claims.”
Schneider said just since 2011, he has actually seen premiums begin to come down again, while new insurers and those that previously fled are returning to write policies on the coast. At the same time, new homes being built to fortified standards in Orange Beach are fetching $1,200 annual premiums while similar policies in Saraland go for as as little as $900 per year.
“You don’t want to kick the industry that helps you,” he said. “This is an emotional issue. Are there people being harmed? Absolutely, but if the question is what is a fair premium, I don’t have an answer for that. I can say things are improving and State Farm and ALFA are now writing new policies south of I-10 for the first time in years but here’s the thing: Neither want older homes. They want homes built under better standards.”
Back at the DOI, Angel said the new institute would help consumers find the best policy for their budget, while also making changes for a more competitive statewide insurance market. He said there were also new laws going into effect over the summer that mandated discounts for homeowners who retrofit existing homes to fortified standards.
“Commissioner (Jim) Ridling has been very active the last five years in trying to encourage more companies to come to Alabama to write new policies on the coast in the hopes that when we have more companies, that will help push the rates down,” he said. “We’re doing all we can to encourage the free market work to the advantage of the homeowner… If we could retrofit 20,000-30,000 homes in Mobile and Baldwin counties it would make the counties very attractive for new companies to write policies. And the more competition, the lower the rates.”
Yet Kurtz wonders how many more hurricanes will hit before the market improves.
“While they are saying ‘well just wait and see,’ people are suffering,” she said.
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