As someone who’s lived through hurricane season in Florida, Helaine Catalano said what keeps her up at night isn’t the threat of one hitting Rehoboth Beach.
It’s the thought of an accident, like a fire in one of her neighbor’s condominiums at the Grande at Canal Pointe. It’s the thought of a leak in someone’s ceiling. Or it’s another strong thunderstorm blowing through Delaware’s coast, damaging the roof of many buildings in the condo complex.
“I’m just an optimistic person. In Florida, you pull the shutters and wait for the hurricane to blow through. But here, we’ve been fortunate with nothing major happening in terms of weather,” said Catalano, who serves as the president of the Grande at Canal Pointe Condo Association. “But that’s why you have to have a good insurance agent, who’s watching this more closely than you are.”
L&W Insurance Vice President Erik Kaufman is one of those agents watching the skies a little more carefully — and how it’s impacting the insurance market. The Grande at Canal Point, which sits 2 miles from the ocean, has millions in insurance policies, and Kauffman works with the condo association to help find the best policy for the 265-unit complex.
“Insurance premiums in the coastal marketplace have and continue to increase. In addition, there is discussion about inflation and how the cost of building materials have increased,” Kaufmann said. “Nor'easters seem to do more damage to our area than hurricanes and tropical storms. However, hurricanes and tropical storms seem to spawn off tornadoes which can also cause significant damage.”
In 2019, the Insurance Information Institute ranked Delaware the 43rd most expensive state when it comes to homeowner premiums at an average rate of $908. In 2021, that rate may be closer to $677, according to Insurify, a insurance comparison shopping website. But in the last decade, insurance rates were on the rise: in 2007, the premium average was $559.
Premiums may be lower than compared to Florida, but that it’s still an expense that makes a difference to a retiree enjoying a second home down at a Delaware beach.
“Our association fees pay for it, but it's about thousands of dollars a year altogether. And with a small condo, we watch every penny we have,” Catalano said. “We’re pretty much at the mercy of these insurance companies, and when you’re buying on a limited budget it can be a lot. But it’s the one bill you don’t want to miss.”
Nationwide, insured losses have grown by 700% since the 1980s, and the top six costliest natural disasters have occurred in the last decade, according to the Insurance Information Institute. Hurricane Katrina wreaked $9.7 billion (valued at 2021 dollars) in property damage across six states remains the costliest event.
Hurricane Sandy caused $35.1 billion in property damage along the East Coast, adjusted for inflation. Delaware alone reported $96 million in property losses in the wake of Sandy, excluding flood insurance claims, according to the Institute.
The First State may not be the most recognized site of devastating natural disasters. But the insurance industry has taken note of extreme heat, torrential rain and blustering winds have been playing out in increased frequency across the country — and how it changes the balance sheet.
“It’s getting more challenging every year,” Kaufmann said. “When you look at our coastal area and the availability of insurance carriers, there’s a limited number of carriers who will include wind/hail coverage within a certain distance from the coastline. And some of those carriers have a limited amount of coverage they’re willing to write within a geographical area.”
“They want to spread out their risks,” he added. “But from Lewes to Fenwick Island, there’s only so much room to play with.”
[caption id="attachment_225717" align="alignleft" width="300"]
Delaware’s population grew by 10.2% in the last decade, and Sussex County likely saw the bulk of it with more retirees coming
for the beaches like the one in Lewes. But with extreme weather events bringing strong winds and torrential rains, insurance
agents and brokers are seeing more insurance companies adjust policies offered. | DBT PHOTO BY JACOB OWENS[/caption]
Capacity in the Small Wonder
Insurance companies are always weighing capacity, or the largest amount of liability a company can handle, when it comes to issuing policies. Risk is distributed across various locations and different policies to lessen the chance that one company doesn’t have to bear the full repayment of a loss alone. The model works best when many people buy policies and only few come to collect on major payouts.
But that model also forces some structures with dense populations like condos and hotels, to find unique solutions. Sharing and layering insurance coverage is one way to do that, where one structure could have policies with dozens of carriers, because one insurance carrier is not likely to take on liability in excess of $50 million on its own.
“It’s like a puzzle. If you take a piece of the puzzle out, that piece could represent half of the first layer,” Insurance Buyers' Council President Chris Franki said. “For example, $10 million [of coverage] could include three or four different carriers. There’s assets that do this for an entire placement, whether it’s $50 million or $500 million.”
Franki is a risk management consultant for a variety of clients, including condos, commercial and municipal assets in Delaware and Ocean City, Md. The “tower” of insurance coverage is pretty common for these types of structures, he said, and layering offers a different percentage of coverage from carriers. That makes it more competitive for the carriers, and more beneficial for the customer.
In general, the market got so competitive that Franki said he saw some property insurance renewal rates drop between 10% and 15%. But a wind shift changed that for a time, starting around 2017 with the triple threat of Hurricanes Harvey, Maria and Irma. With wildfires in California and hailstorms in Colorado the following year, Franki saw the insurance market sit up and take notice.
“With these catastrophe losses around 2018, it completely turned things around,” he said. “With [assets] that are concentrated into a single location, they were hit with rate increases like 300% or 400% with deductibles and increases and coverage restrictions at the same time.”
The market is stabilizing these days, but with replacement costs now up 20%, the value of the structure rises and so do premiums. In the last five years, Franki sees less competition among carriers, and the terms of policies change.
“You have some insurers go as far as to distinguish between a named storm and just plain old wind,” he said. “Five years ago there was more room to negotiate some retention, limits and coverages to be more favorable to buyers. But we’re not in that market at this time.”
Flood Insurance gap
Even though only two storms have reached hurricane-level winds in Delaware and none have directly hit the state, nor’easters and low-pressure storms can still drop large amounts of rain. Flooding remains a real threat for the coastal state.
With few insurance companies offering flood insurance, the federal government fills the void with the National Flood Insurance Program (NFIP) to offer coverage to those in areas deemed high risk in flood zones, per maps created by the Federal Emergency Management Agency (FEMA).
In Delaware, there are roughly 23,300 NFIP policies issued today. Roughly 19,510 of those policies are issued in Sussex County alone. In the last decade, the average NFIP claim payout to a Delaware property owner was $11,700.
“Here, flood is the first peril that comes to mind, and you’re seeing increasing numbers of flash floods everywhere around the country,” independent insurance broker Lisa Broadbent said. “There’s so much built up and not enough soil to absorb the water, and that’s especially true in Delaware. There’s clients who think if they’re not in a flood zone, they’re OK from these 100-year events. But what they don’t realize is Mother Nature can’t count. She’s not going to wait until the 101 year to have another flood.”
For decades, the FEMA flood maps have been used not only to determine risk, but who should be required to buy a policy. But with its newly-minted approach of Risk Rating 2.0, FEMA changed the process to account for building materials, how old the structure is, flood openings in the building's crawl space, and more.
In Delaware, more than half of the properties in the NFIP saw their insurance increase by $20 or less. Thirty-seven percent of policies saw a decrease in premiums, but 22% of those decreases were $20 or less.
Regardless of the assessment for individual property for premiums, FEMA’s flood maps as a standard for flood risk assessment have stayed the same. The last time FEMA updated its maps with detailed coastal analysis was in 2014 for Kent County and 2015 for New Castle and Sussex counties. Flood studies before that were dated as late as 2007.
But a recent North Carolina State University study suggests that there may be a higher probability of flood damage than previously thought. Using 14 years of data on accurate coordinates of rainfall from the National Oceanic and Atmospheric Administration, NC State researchers used computer modeling to predict flood damage is likely to occur.
Eighty-five percent of the data showed flood damage events happened outside areas deemed high risk by FEMA. The computer modeling also showed a high probability of flood damage for more than 1.01 million square miles across the United States. That’s 790,000 square miles more than the flood risk zones identified in the FEMA maps.
“Coastal communities and their residents rely on the flood maps to make decisions on where and how to build. But these flood maps can be static, and it can present a problem in my mind,” said Georgina Sanchez, a research associate at the NC State University Center for Geospatial Analytics. “We need to stop thinking in terms of inside and outside a zone, because that oversimplifies it. Because if you’re ‘outside’ it, you can be a meter from the boundary and still think you’re safe.”
Nationally, about 15% of households carry flood insurance, according to the Insurance Information Institute. In Delaware, FEMA anticipates that 363,000 properties are not covered by the NFIP. Only 7% of properties are, although there could be homes that have tapped into the rare private program.
“Part of the problem is that nobody’s talking about the real issue because it’s so politically charged,” said Broadbent, who has been working in insurance for 35 years and underwrites policies in seven states. “The real issue is climate change, and that we’re experiencing severe weather. Weather is what the insurance industry bases their rates on. So how do we make people more aware of it and deal with it as an industry without becoming politically charged?”
[caption id="attachment_225719" align="alignright" width="300"]
Lisa Broadbent, who is an independent insurance broker, notes the challenge with homeowners seeking flood insurance policies in Delaware. | PHOTO COURTESY OF LISA BROADBENT INSURANCE INC.[/caption]
Small state, unique problems
Delaware measures 1,982 square miles in total and runs 96 miles long, with more than a third of its length considered beachfront. Twenty-eight miles is the ocean coastline. Those factors alone can limit the risk an insurance company is willing to take. When Hurricane Andrew hit Florida in 1992, the industry took notice, and companies started limiting policies within 2,500 feet of coasts, Broadbent said. Based on our geographical location, Delaware’s restricted when it comes to the coastline.
Another factor is coastal states are seeing the highest population growth across the country. Delaware’s population grew 10.2% between 2010 to 2020, making it the fourth highest in the country, according to the Insurance Information Institute. With population growth comes potential building growth, and the higher potential for loss, said Mark Friedlander, communications director of the Insurance Information Institute.
“What we’re seeing now is these events are getting more expensive because the growth is bringing bigger, more expensive homes that are built closer to the coast,” Friedlander added. “Replacement costs for homes have also nearly doubled. We’re seeing a major insurance gap as properties can be underinsured due to the value of the replacement costs having changed.”
Insurers and condo associations have been quick to study the fallout of the Surfside condo collapse in Miami last year, where long-term wear on the structural support caused the building to cave in and kill 98 people.
“That got a lot of people’s attention, and our habitational clients really started to look at their coverage and risk exposures,” Kaufmann said. “From a market standpoint, underwriting guidelines definitely became more stringent. And from the clients perspective, you’re not only looking at it from the property coverage side, but also making sure you have adequate liability limits to protect from injury. There’s more thought given when it comes to making decisions on coverage from both the clients and the insurance companies.”
Policies are also seeing changes in deductibles and terms, such as taking a closer look at cosmetic roof damage caused by a storm event. Recently, Kaufmann noticed that a wind and hail deductible jumped from a flat per occurrence deductible of $25,000 to a 2% per building wind/hail deductible.
“That’s 2% of the total building limit, not a percentage of the claim itself. For example, if you have a building insured at $5 million, the wind/hail deductible at 2% equates to a $100,000 deductible” he added.
