Insurance Companies Retrench in Wake of Disasters

After a lifetime of hard work, Anita and Henry Solowiejczyk were happily planning their move to a five-bedroom, oceanfront home, with lots of room for their four sons to bring grandchildren. Their mortgage was approved. They’d bought new furniture and ordered tiles.

But just before their closing, they got a rude surprise. Their insurance company of the last five years refused to insure the house--even though it was across the street from the Long Island home where they had lived for 38 years.

“They’re just not taking on anyone new,” said Ms. Solowiejczyk, 61, an interior decorator. “It seems crazy. You pay, you pay, you pay, and then you need them” but they’re not there.

“What’s insurance for?” she demanded.

After desperate calls to eight brokers, the Solowiejczyks did finally get insurance--for about 40% more than their previous premium.

The Solowiejczyks are not alone. Hundreds of thousands of Americans face price hikes or renewal difficulties as the property-casualty insurance industry engages in a profound self-examination after its worst year of catastrophe losses ever.

The problem is most acute in Florida, where last year’s Hurricane Andrew caused a record $15 billion in insured loss. But Andrew has had a ripple effect across the country, dramatically altering the industry’s assumptions about disasters.

“Before, we thought we’d get a Gloria, or a Bob,” said Sean Mooney of the industry-sponsored Insurance Information Institute, referring to storms that caused under $2 billion each in damage.

Now, he said, “Studies show that a Category 4 (hurricane) hitting Long Island could cost $40 billion.”

To reduce their risks, companies have been re-examining where and how they have written policies. The results of their reviews:

* Companies have announced plans to drop up to 844,000 homeowners’ policies in Florida, and request higher premiums on others. A state moratorium is blocking the cancellations through Nov. 15.

* Up to 50,000 policies in Hawaii have been canceled or are not being renewed following Hurricane Iniki.

* Dozens of companies have tightened homeowner policy writing in states prone to windstorms and hailstorms, such as Texas and Kansas, as well as in coastal areas ranging from Cape Cod, Mass., to Louisiana.

* New Jersey is trying to block plans by Ohio Casualty Corp. and Cigna Corp. to limit new business along the shore. Cigna also wants to cancel 3,500 shore policies, state officials say.

* Insurers in North Carolina have filed for the first hikes in homeowners’ base rates in 14 years, including 50% increases in some coastal areas, state officials say.

Many consumers whose policies aren’t renewed are forced to buy special wind-damage insurance. Others have to join state-sponsored pools known as FAIR plans--Fair Access to Insurance Requirements. Such plans can cost up to three times the market rate, and often provide less coverage.

Some analysts and state officials say the retrenchment reflects years of careless policy writing by insurance companies, spurred by intense competition that drove down prices.

But others say the insurance companies themselves are under pressure, particularly due to rising costs of reinsurance, which covers part of their losses.

“It’s been an industry that mismanaged price increases and growth,” said John H. Snyder, a senior vice president at A.M. Best Co., a major insurance rating service based in Oldwick, N.J.

Tom Gallagher, Florida’s insurance commissioner, said that in the past, companies that could legitimately have requested permission for a 20% or 25% increase in premiums would only ask for 10%.

“Their marketing people said, ‘If we ask for more, we’ll lose market share,’ ” he added.

In addition, analysts say, companies were lulled into a sense of security by a 30-year stretch of relatively mild Atlantic storms.

That respite has ended. Last year, the industry was rocked by a record $23 billion in claims for catastrophes, including hurricanes Andrew and Iniki and the Los Angeles riots.

In the first half of this year, disaster claims were $4.3 billion, and could well surpass the industry’s “normal” annual catastrophe losses of up to $6 billion.

Insurance companies say the new limits on coverage are not all their fault.

For example, reinsurance has jumped as much as 300% due to a string of disasters worldwide. Companies that can’t find reinsurance often have to limit policy writing.

In addition, independent rating agencies are urging insurance companies to limit exposure in coastal areas, where a building boom has sent the potential cost of storm damage spiraling.

Officials at Cigna Corp., which is re-examining its policies in coastal and quake-prone areas, say raising prices won’t solve the problem.

“Regarding prices, after a certain point, you can’t get enough rate to offset potential catastrophes if you are overexposed,” the company said in a statement.

Some regulators and rating agencies say companies are doing the prudent thing.

“It’s much fairer than ignoring that (risk) and having companies go insolvent,” said Linda Ruthardt, the Massachusetts insurance commissioner.

Despite the disasters, the insurance industry is hardly strapped. The property-casualty industry’s surplus--its cushion of capital that enables companies to absorb losses--rose from $159 billion to $164 billion in 1992.

“They were collecting money all those years,” said J. Robert Hunter, president of the National Insurance Consumer Organization in Alexandria, Va. “Even in the worst year ever, 1992, they made money as an industry.”

But insurance executives say last year’s profits came from those companies that did not insure coastal property.