The wave of hurricanes that slammed Gulf Coast states over the past couple of years has left lasting scars in the homeowners insurance market. While the housing market in Florida has performed well despite this barrage of storms, the real estate industry is now sounding alarms about the declining health of the insurance market.

If insurance is too expensive and adequate coverage becomes scarce, some homeowners may not be able to purchase or sell homes.

The wave of hurricanes that slammed Gulf Coast states over the past couple of years has left lasting scars in the homeowners insurance market. While the housing market in Florida has performed well despite this barrage of storms, the real estate industry is now sounding alarms about the declining health of the insurance market.

If insurance is too expensive and adequate coverage becomes scarce, some homeowners may not be able to purchase or sell homes. And for real estate professionals, that could mean fewer sales and lower profits.

John Sebree, vice president of public policy for the Florida Association of Realtors trade group, said, “Our members are concerned that people will find the house that they want, the mortgage they want – but the mortgage company’s not going to allow you to close if you don’t have insurance. In the short-term we want to make sure it’s available. Affordability is a huge issue.”

In 2002, Florida created an insurance entity, Citizens Property Insurance Corp., to serve as the so-called “insurer of last resort” for homeowners who could not find insurance from standard insurance carriers.

Some insurance companies have evacuated Florida, which has been particularly storm-prone over the past two years and is facing what weather experts say is likely to be another season of major storms, and rate hikes are the norm for those that are still writing coverage.

“Hopefully the private market will be enticed to come back into this area. We do need Citizens and unfortunately it (is becoming) the largest insurer in the state of Florida. The intent was to be the insurer of last resort – right now it’s sort of the insurer of only resort for people,” Sebree said.

The state Legislature “spent a huge amount of time dealing with insurance” in its latest session, Sebree said. State officials have been working to maintain Citizens as a viable option for homeowners. Also, Sebree said, there is the possibility that some overseas insurance companies may consider writing insurance policies for Florida homeowners in the short-term.

Sebree, a former lobbyist for the National Association of Realtors, said he has been working closely with the national trade group to study a possible federal fix to the homeowners’ insurance problem, as Florida is not the only state where homeowners are suffering from ballooning insurance costs and shrinking availability.

“We don’t anticipate another session of the Florida Legislature until next March. At this point we need to focus on Washington,” Sebree said.

During a meeting of the National Association of Realtors’ board of directors in Washington, D.C., last month, regional directors rallied together to support a natural disaster insurance program as a major priority for the 1.3 million-member trade group. Such a program might function like the Terrorism Risk Insurance Act, a congressional act that created a three-year federal program to ensure sufficient money would be available to help pay some terrorism-related claims during that time. That act was extended last year and is scheduled to expire Jan. 1, 2008.

According to briefing papers prepared by National Association of Realtors staff, “NAR believes the time is right for Congress to seriously consider a federal natural disaster program. The intensity of large natural disasters in recent years has made the acquisition of adequate homeowners’ insurance very difficult in some areas. Insurers are declining to write policies, (and they are) canceling existing policies and increasing premiums on existing policies. Recently, hurricanes Katrina and Rita have refocused attention on the issue.”

There is already federal legislation circulating relating to insurance. One proposal, H.R. 4366, would require participating states to create their own reinsurance fund for catastrophic disasters. Reinsurance, which is essentially insurance for insurers, allows other parties to share the risk in insurance policies, according to the Realtor group’s policy briefing. Another bill, H.R. 2668, would allow insurance companies to create reserve funds from pre-tax dollars to help insurers pay claims for future major disasters.

Sebree said that some opponents to a federally backed natural disaster insurance program might oppose the plan as “a taxpayer bailout” for those states that are more prone to natural disasters. But, he said, “Without a program the taxpayer is paying right now. When the federal government responds to people who aren’t insured we’re all paying for that. People want to have insurance – they all want to have insurance options.”

The Realtors association hosted a March 2 meeting to discuss natural disaster insurance issues. Among the participants were two members of Congress and 50 others, including Realtor association representatives, home builders, insurance professionals and financial services representatives.

Another legislative issue of interest to the Realtor association is the sustenance of the National Flood Insurance Program, which Congress created in 1968 to provide federally backed flood insurance to communities that agree to participate in floodplain management to reduce future damages from flooding. In response to the disastrous Gulf Coast flood events last year, Congress passed three bills from September 2005 to March 2006 that increased the borrowing power for the National Flood Insurance Program from $1.5 billion to about $20.8 billion, the association reported.

There were about 4.8 million insurance policies in this federal insurance program as of March 2006. Insurance claims through this program skyrocketed to about 209,000 in August 2005, with an additional 17,500 claims in September and 24,941 claims in October, in the wake of last year’s major storms.

Hurricane Katrina, which devastated New Orleans and several other Gulf communities, caused an estimated $38.1 billion in insured losses, while Hurricane Wilma caused about $8.4 billion, Hurricane Rita caused $5 billion and Hurricane Dennis was responsible for about $1.1 billion in insured losses, the Insurance Information Institute reported. The institute is a nonprofit organization supported by property and casualty insurers.

Some of the latest hurricanes to strike in the United States are also some of the most costly, the institute reported. Seven of the 10 costliest hurricanes in U.S. history struck from August 2004 to October 2005.

“We’ve had some pretty strong storms in the past couple of years that have made the marketplace much more unstable,” said Loretta Worters, vice president for the Insurance Information Institute. Coastal areas are particularly subject to higher costs and fewer options for coverage, she said, and proximity to the coast has a lot to do with cost and affordability of coverage.

Weather experts at Colorado State University have predicted that there will be five intense hurricanes during the 2006 hurricane season and 17 named storms, compared with 26 named storms and seven intense hurricanes in 2005. Additionally, there is an 81 percent probability that a major hurricane will make landfall along the U.S. East Coast this season, and a 47 percent chance of landfall in the Gulf Coast area stretching from the Florida Panhandle to Brownsville, Texas.

Worters said that another major hurricane this season “would certainly add some additional instability to the region and most likely make the availability even more difficult and the cost even higher,” she said.

While insurance costs have risen, home buyers should think twice about a purchase if the cost of insurance is truly impacting the purchase decision. “If you can’t afford the insurance then you can’t afford the house. The problem is, if you’re that tight that $1,000 (for insurance) is going to sway you to the fact you can’t afford that home, then you shouldn’t have that home,” she said.

Also, continuing development along coastal areas that are visited by hurricanes is contributing to the problem, she said. “You look at those losses and you look at the severity and frequency of those storms along with the fact that more and more people are moving to coastal areas. To a large measure, people still tend to be building in that area (affected by storms). Everybody wants a little piece of paradise and unfortunately they’re going to pay for it.”

In Louisiana, about seven insurers have asked for homeowners’ insurance rate increases at a level that requires state regulatory approval. And there are reports of insurance rates doubling and even tripling for some homeowners in Florida.

Durenda Fachtmann, a real estate agent for RE/MAX First Class in Clearwater, Fla., said, “Things are becoming more difficult daily” with homeowners’ insurance in Florida. Fachtmann specializes in properties that have had past sinkhole damage but have since been repaired and stabilized through engineering work. Sinkholes are not uncommon in Florida based on the climate and bedrock and soil conditions in the state, she said. The insurance market for these remediated sinkhole properties has become very difficult, she said, and the availability of windstorm coverage is also a problem.

She said she learned about a property in the Tampa, Fla., area in which the transaction fell through because the prospective buyer could not get windstorm coverage for the property, and some properties have depreciated in the Pasco County area, she said. Annual insurance costs can range from $5,000 or $6,000 for typical homes in the Tampa Bay area, she said, compared to about $800 just a couple of years ago.

“Up in Pasco County I’ve had agents tell me and I have seen it myself – buyers are just opting to under-insure,” Fachtmann said.

Worters, of the Insurance Information Institute, said that about 64 percent of people across the country are under-insured, and homeowners typically purchase homeowners’ insurance because mortgage lenders require it.

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