Rising Coastal House Insurance Rates

We've all heard of Katrina and the waves. No, not the pop band. They didn't do near the damage that a single hurricane has done. And the ripple effect from the natural disaster is being felt years later all along the ocean coastlines in the form of homeowners insurance rates doubling, tripling, quadrupling, and worse.

Florida's home and condo owners have seen rates rise 400%. And were it not for the Mississippi state insurance commissioner homeowners in Mississippi, also hit very hard by Katrina, would have been met with a 397% increase in their coastal house insurance rates. (He set the increase cap at 90% - still a huge increase by normal standards of measure.) In Louisiana, insurers are adding a premium of 5% for windstorm coverage, while many are refusing to cover wind damage at all!

Ripples Felt Far Beyond the Gulf Coast

But you don't have to live in hurricane country to feel the effects on your homeowners insurance for homes in coastal areas. Not only are insurance companies cutting back coverage all along the east coast, some risk models are suggesting the areas from the Carolinas as far north as New England's coasts could soon see a major hurricane event. Long Island, New York, has seen insurers stop insuring homes altogether. Other coastal locales like coastal Maryland and Virginia, as well as Cape Cod, Nantucket and Martha's Vineyard, have likewise seen insurers reluctant to write homeowners policies.

Can National Disaster Insurance Be Far Behind?

Many are suggesting that the federal government should step in and force insurance companies to right policies for such potentially at-risk homes. Other are taking it a step further and asking for the federal government to actually offer national disaster insurance, much as has been done for flooding, and earthquakes in some places. The reasons are many:

• Insurance companies cherry-pick risks - The insurance industry as a whole can simply decide not to cover certain things because the costs and risks are just deemed too high. This has already been done with flood insurance, and the government chose not to force underwriting those events, but rather chose to offer federal flood insurance. And at present, insurance companies are not required to take risks that could make their industry unprofitable.
• Insurers have been known to take bad risks - With each major disaster, some insurers either abandon affected states or severely cut back the number of policies they issue. The reason? They miscalculated the risks - and they lost. Many insurance companies have been bankrupted due to policies written in hurricane prone states, like Florida and Louisiana. But its not just coastal cities. All major insurance companies stopped writing policies in California after a major earthquake there.
• Few pay for disaster coverages - For those in flood-risk areas, one in four has coverage. In California, where earthquakes happen regularly, only one in seven has earthquake protection. That means the few who do have it bear a greater burden, so such coverage is very high cost. It creates a cycle of higher premiums and fewer signing up for coverage. Most hope for a government bailout should the President declare a disaster area.

In the end, it will be a battle of competing interests: Real estate industry and homeowners versus insurance companies, all with various organizations lobbying the federal government. While homeowners and real estate companies who are driven by sales may want the aid of federal insurance, the insurance companies will also see a drop in their business, which is predicated on the science of risks and probabilities. How it will all play out is anyone's guess. But in the interim, those who own property along America's ocean and gulf coasts will continue to see their homeowners insurance rates rise considerably, as high as the market will bear. And some will be forced to play their own game of balancing risks versus the likelihood of disaster striking their coastal home. And it could be a game that costs you big.