Wednesday, February 19, 2014

Hope for Those Hit by High Flood Insurance Premiums

The precarious financial state of the National Flood Insurance Program (NFIP) prompted the passing of the Biggert-Waters Flood Insurance Reform act in 2012. The act was an attempt to find a solution for the $24 billion deficit that the NFIP faced and to take the program to a stronger financial position. As per the provision of the Act, premium subsidies are to be phased out and new flood maps are to be drawn. There are about 5.5 million policy holders in the program and FEMA estimates that about 1.1 million (20%) receive subsidies. Under the Act, those who have second homes and people whose properties are flooded frequently will find their premiums increasing. In addition, over 575,000 policy holders will have to face higher premiums if they sell their homes or if they are subject to severe and frequent flood damage. There is no argument about the need to control the huge financial deficit that the NFIP is operating under so as to prevent the almost certain bankruptcy looming over it. But the hardship that will be faced by so many homeowners and the effect of people selling their homes because of unaffordable flood insurance will have a big negative impact on the real estate market in particular and the economy in general. The Senate has now come up with a measure of relief.

The Compromise

The Senate has joined the House of Representative in passing a compromise $1.1 trillion spending bill that will give some relief to a portion of those who face sharp premium increase. About 25% of policy holders will benefit from this. A bill that would have postponed premium increases by 4 years was expected to be introduced, but has apparently been side tracked. The current provision will only result in a delay of 6 months in the rate increases.

The issue of removing the subsidies is one that has caused passions to rise on both sides of the argument. The short delay in the premium increases has resulted in an increase in the tensions. The Chair of the House Financial Services Committee is a proponent of ‘free market alternatives’ to the existing program and along with other top republicans is not inclined to back away from taking measures to reduce the massive $24 billion deficit. Besides the huge existing deficit the question being asked is if it is fair for taxpayers to subsidize the insurance of the minority who are covered under the program.

On the other side of the argument are those who say that the large rate increases are nothing less than an eviction notice to those who have been paying their premiums regularly for years. And the rise in the number of homes that are for sale for this reason will drive down property value in a market that is still in the recovery stage. Many small coastal communities are afraid that a large number of residents will be forced to give up their homes and the communities would turn into ghost towns. In many cases, these people are required to have flood insurance as a condition to their mortgage.

At present it would seem that the short delay that affects only certain types of homeowners, is all that home owners in flood prone areas can hope for. The speaker of the House of Representative has said that it will not consider any 4 year postponement of the rate increases.

With an unacceptable $24 billion deficit on one hand and the prospect of premium increases that could lead to thousands losing their homes, the stage is set for a tough fight, with no clear winner in sight.

Even though FEMA subsidizes only 20 % of policies, our area is all subsidized. Palo Alto and Menlo Park, for example, are subsidized. The new rules will increase rates up to $6000 and require an elevation certificate $1000 cost for new home purchases or anyone who lets their current policy cancel.

Insurance by Allied brokers has a new private insurance market that offers half priced coverage with no elevation certificate required. Call us for this cutting edge option at: (650) 328-1000 or visit us at

Tuesday, February 18, 2014

20 Years after the Northridge earthquake – Did We Learn?

It has been 20 years since the Northridge earthquake hit the Los Angeles area resulting in several deaths, thousands of injuries, huge business losses and massively disrupted transportation systems. The total cost of insured damages was over $15 billion – that’s about $24 billion in today’s money. It was, and remains today, the 4th costliest disaster in U.S. history. It’s easy to think that 2 decades after such a calamity and many smaller quakes later, things will have changed, at least as far as earthquake insurance goes. The truth is that it hasn’t.

Quake Insurance – Who Wants It?

There has been about a 33% increase in the number of earthquake policies in force in California as compared to 1994. That may sound impressive, but the fact is that only 10.6% of homeowners in the state have earthquake insurance. There are 3 reasons for this. This first is the fact that 20 years on, the memories of the destruction have faded. Secondly, quake insurance is thought to be too expensive. And thirdly, most people think that if such a disaster should happen again, the government will step in to bail them out.
There is nothing that can be done about the shortness of people’s memory. But the other 2 factors need to be considered carefully. As for the government stepping in, disaster relief is limited to providing help in coping with the effects of the quake, not in rebuilding and recovery.

As regard to the high cost of quake insurance, the root of the problem is in the low cost of coverage before 1994. Till that time quake insurance was not a separate policy as it is today. It was simply an endorsement on a homeowner’s policy that was easy to get and cost very little. The fact that the insurance was under-priced is proven by the fact that the losses incurred by the insurance companies because of Northridge to use up all the premium collected by the insurers for the last 30 years.

Some companies almost went under and since California law requires that those who offer homeowners’ insurance also offer quake coverage, many insurers quit the market. After Northridge, almost 1 million policies were dropped.

The Earthquake Insurance Affordability Act

That situation led to the creation of the California Earthquake Authority (CEA) which today has $10 billion in claims paying capacity. 45% of this is in capital while the balance is in the form of reinsurance and catastrophe bonds. While this has helped make the quake insurance more widely available, the cost is still a limiting factor.

Among the many steps being taken to make earthquake insurance more affordable is the Earthquake Insurance Affordability Act which is before the Congress. This bill will enable the CEA to save $100 million in reinsurance costs per year by providing a federal guarantee of private market debt. This in turn would result in a reduction of premiums by about 20%.

Another step being taken is the reduction in deductibles which today typically stands at 15%. CEA now has a range of polices that allow policy holders a mix and match option where they can increase of decrease contents coverage etc. so as to bring the deductibles down to around 10%.

The aim of these and other measures is to bring the 89% of uncovered homeowners in the ambit of earthquake insurance. The sooner this happens, the better. According to the president of the Insurance Information Institute, “the potential cost of U.S. earthquakes has been growing because of increasing urban development in seismically active areas and the vulnerability of older buildings, which may or may not have been built or upgraded to current building codes.”

However, while CEA coverage is offered by 70% of the companies, Allied Brokers has companies that offer better coverage at a lower cost. We cover personal property, loss of use and separate structures just like a homeowners policy.

Plus our companies are much more financially sound. CEA is an assigned risk pool just like Obamacare; they take everyone with no accounting for risk. This means their losses in a big quake will be bigger. Our companies will not accept high risk homes.

Also when the CEA goes broke, and it will, there is no recourse to collect. Our companies are backed by a state bailout fund and all of the assets of the company and its reinsurers.

Contact Insurance by Allied Brokers at (650) 328-1000 to know more about earthquake insurance or about any questions related to your insurance policies.