Sunday, May 1, 2011

Catistrophic Insurance Musings

Back in the day, financial institutions took pride in being “sound”. In old newspapers and magazines insurance companies would advertise their “ASSETS”. They would brag that they were conservatively managed, and should they have a loss—from whatever cause—they could withstand the loss and promptly pay their insured for the loss.

Check out some of the old line companies like Lloyds of London which made a name for itself insuring the cargoes of ships, and then grew to insure ships and vessels of all types. These were conservative businesses which evaluated risk, and underwrote the possibility of a loss. And from some of their losses, new methods of safety and loss mitigation were developed. I am reminded of a story about Lloyds reviewing shipments of dry rice which I understand swells when it gets wet. This was only a problem if the rice filled the vessel to the insides of the hull, and then if it swelled, it burst the hull. Lloyds determined that this type of cargo needed to be both kept dry and shipped in cargo holds that were not attached to the ribs of the ship.

And that kind of thinking saved the shipping companies, and the rice merchants and Lloyds from having to sustain losses. So what's wrong with our insurance companies today? Why can't they assist in mitigating our losses?

First of all, like the banks, today's insurance companies are not nearly as well financed as we might think. Insurance companies buy insurance to cover their losses—what's up with that? But if you want to follow that thread, look up “excess, surplus and re-insurance”. If a hurricane hits Florida this year with substantial losses, I'm told that our own Florida insurance company, Citizen's would be unable to pay it's insureds, because they DON'T HAVE THE MONEY.

One wag told me that the only reason he has insurance is to have a place to mail his extra money. But really we buy insurance so that if your house (or car, or whatever) becomes damaged, you'll be paid enough to fix it subject to certain deductibles. But what if they can't pay? What if the losses are so great (like they must be throughout the Midwest) that everything for 300 miles and a mile wide is just pick-up sticks? Who has that kind of money?

So that means everyone's policy costs will increase. Even here in SW Florida, you and I will pay to rebuild homes that are damaged in the Midwest—like they paid for our losses from Charlie and we all paid and still pay for Katrina.

Tornadoes seem to touch down anywhere the land is relatively flat but with no particular favorite locations—although we once lived in the Chicago metro area and the outlying counties—like McHenry County—seemed to magnetically attract these twisters. (Maybe people who live in the Rocky Mountains should get a “twister discount”.)

The Federal Government offers low cost “flood insurance” to people who live in flood zones. I like that they make this product available, I had it on a house I owned in NH, and we were flooded there. But I think it should only pay once. There are people up and down the major rivers who get flooded every year and clean up and fix up and pay their policy and get flooded again the next year. As I see it flood insurance is a plan to encourage people to continue to live in areas where their house is likely to be washed away. Maybe instead of paying your claim flood insurance should buy your wet house, knock it down and make a federal parkland of all flooded areas.

Homes and buildings in areas that have a 1% or greater chance of flooding in any given year, have a 26% chance of flooding during a 30-year mortgage—that's pretty much a sure thing, just like the 100 year storms that we get every 5 years or so. Flood maps are available on line and at most libraries if you want to see what the odds are of your house being submerged.

And given those odds, you probably should pick an insurance company that has the financial wherewithal to pay off your loss, and not just the one that costs the least. When I watch the lizard selling car insurance, or the progressive lady in her apron (what's up with that?) I'm amazed that somehow they can each sell their policy for $500 less than the other, I can see that the general public is not buying insurance any longer based on the soundness of the insurer.

Dane Hahn is a real estate professional with Tarpon Coast Realty in Englewood, Boca Grande and Sarasota. He will answer your questions at: or 941-681-0312. Check him out on line at

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