Unwillingness of Insurers to Go Near Water Causes Cape Cod HO Crisis

The homes are among the most desirable on the East Coast. Their wealthy owners have maintenance staffs and landscapers to keep the properties in shape. They install the latest fire prevention and security features and, as one agent says, they will “replace a roof if it gets dirty.”

Are they a homeowners insurance company’s dream customer?

Not if the mansion is on Cape Cod.

The lack of availability of homeowners insurance on Cape Cod has become a “crisis” in the opinion of agents and their organization, the Massachusetts Association of Insurance Agents (MAIA).

The crisis, which affects all homes on the Cape, not just the mansions, has been building for several years as insurers, facing price increases from their reinsurers and red flags from computer catastrophe models, have retreated from writing in coastal areas like Cape Cod out of fear a hurricane may strike any moment.

Even the state’s homeowners market of last resort, the FAIR Plan, has signaled warnings, as it has been swamped with applications, not from urban areas where it expects to get business, but from coastal communities like Falmouth, Harwich Port, Dennis and Brewster. Last year, this market of last resort filed for a rate increase, citing its growth in coastal areas; its approved hike was limited to about 5 percent.

The Massachusetts Division of Insurance detailed in a 2003 report how the private market for coastal properties has eroded. Boston territories represented 28.8 percent of FAIR Plan homeowners dwelling form policies as of Dec. 31, 1996. The same Boston territories decreased to 20.1 percent of the FAIR Plan’s policies as of Dec. 31, 2002. Coastal rating territories over the same period increased their share of these policies from 22.1 percent to 23.6 percent, which represents an increase in the number of coastal territory policies from approximately 10,355 in 1996 to 16,184 in 2002, an increase of almost 60 percent. Cape Cod and the Islands went from 3,889 to 6,725 during that same time period, while Plymouth County (excluding Brockton) went from 4,909 to 7,499.

The FAIR Plan’s share of Cape business is about to get a lot bigger.

Last month, one of the state’s biggest homeowners insurers, The Andover Companies, sent its Cape agents lists of all their accounts and informed them it would no longer write homeowners business in Barnstable County on the Cape, and as of May 1, 2004, it will begin non-renewing 14,000 homeowners policies in the county. The only available market for these policyholders will be the FAIR Plan. The Andover exit jolted Cape agents who had been already dealing with slowdowns and withdrawals from the likes of OneBeacon, Travelers, Commerce, Hingham Mutual and other carriers.

Alexander Thomson, president of Snow & Thomson Insurance Agency in Harwich Port, and his staff, are reeling. Thomson, who calls his firm “an average-size” independent agency, said he “will be severely affected by the untimely and sudden withdrawal of The Andover from the Cape market.”

He said just a few days before he learned about The Andover withdrawal, his field representative from the company was handing him his profit sharing check and proclaiming how his 9 percent loss ratio made him one of the company’s prized agencies.

The 350 policies he has with The Andover are what he calls “the absolute cream” of his agency and include his own home. These properties generally have high dwelling coverage limits, broad jewelry and fine arts floater coverages, business-in-the-home protection and high-limit liability umbrellas.

Thomson says he will be able to move most of the routine HO-3 coverages to the Massachusetts FAIR Plan, but “will have to greatly reduce or eliminate these other coverages as too difficult or impossible to place through other markets.”

Further, replacing 350 Andover homeowner policies, plus hundreds of others he has with OneBeacon and other carriers that won’t go near the coast, “will place an extraordinary burden on our staff and resources.” Given the “sheer magnitude of paperwork, appraisals, phone calls and quotes” involved in the shift of accounts, he now may need to hire additional staff, which is easier said than done due to the shortage of qualified personnel on Cape Cod. As a result, he may simply tell many of his long-term clients he simply cannot accommodate their insurance needs and to go elsewhere.

Thomson says the Mass. FAIR Plan is doing a good job in meeting some of the insurance needs, but cannot meet them all, and should not be relied upon to write the vast majority of the homeowners insurance policies for Cape Cod.

John K. Golembeski, president of the Mass. FAIR Plan, agrees. He said his staff is handling the influx of business but is worried that its rates will not support the additional exposures. Right now, the FAIR plan’s ability to raise rates as losses rise in the Cape area is limited. Its rates are tied to what the top 10 homeowners carriers do with their pricing statewide and are further restricted in areas, like the Cape, in which the FAIR Plan has a sizable market share.

A bill to change that and give Golembeski’s underwriters more pricing flexibility has been pending in the legislature for more than a year. Golembeski does not expect this measure will advance until the spring. Golembeski said that while he understands that agents are in a bind, philosophically he opposes expanding the residual market.

But MAIA thinks that expansion may be the best and quickest solution. MAIA is urging passage of legislation (H 1880) currently before the insurance committee that would widen the coverages available in the FAIR Plan to include DP-2, DP-3 and personal liability coverages.

Everyone involved blames the high cost of reinsurance and the computer models that show what could happen if Cape Cod, proudly sticking into the Atlantic, were hit by a hurricane.

But Thomson thinks that’s “ridiculous.” The last time the Cape had a hurricane was 1991 and Hurricane Bob was pretty “modest,” he said. What’s more, he added, his agency and many that write for the Andover are “pretty selective” and have “squeaky-clean” accounts. He’s even turned away accounts from agents in other Cape towns because he has not wanted to dump business on companies he had that were still willing to accept homeowners.

Thomson said the pull-outs are ‘knee jerk’ reactions by companies that are not thinking about the effect on agents and the public. He believes the story has to get beyond the trade press and get out to the public. As people rush to real estate closings and need last minute binders, agents are not going to be able to help them, which he predicts will begin to affect the real estate market on the fast-growing Cape.