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Roughly 36 homes in Sussex County were impacted by the tornado last spring. Insurance Companies are becoming more selective in what policies to offer and where to offer them. State officials note that half a dozen insurers have left Delaware recently. | PHOTO COURTESY OF SUSSEX EMERGENCY OPERATIONS CENTER[/caption]
You’ve probably heard about the “butterfly effect” – the idea that all weather is so interconnected and potentially magnified that if a butterfly flaps its wings in the Amazon rainforest it may eventually jumpstart a hurricane half a world away.
Something similar is affecting policy costs in Delaware for home, rental, business and auto insurance.
Spurred on by climate change, weather-related catastrophes are increasing in severity around the world, and these catastrophes are resulting in higher insurance prices in every state. Additionally, the bad-weather “butterflies” have been flapping their wings locally, as well.
“It seems like we are now having 500-year storms every two to three years,” said Delaware Insurance Commissioner Trinidad Navarro, whose agency regulates rates and oversees claims by insurance companies working within the state. “We’ve been having large convection storms over Delaware that have caused major wind damage and flooding. As a result, claims jumped significantly for both businesses and homeowners.”
Sarah Johnson, a forecaster with the National Weather Service (NWS) regional office in Mt. Holly, N.J., said that it isn’t just tornadoes that residents should be concerned about.
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Delaware is experiencing more frequent storm events, like an EF-3 tornado that ripped through 14 miles in Sussex County in April. Those storms can have effects on home premiums, and the state already pays an average of $907 on policies. | PHOTO COURTESY OF SUSSEX EMERGENCY OPERATIONS CENTER[/caption]
“Partly as a result of changed meteorological patterns for the past five years, the number of tornadoes and wind events locally has been above normal, with the exception of last year,” she said. “And straight-line winds, such as we had on Aug. 7 (in Newark), can be almost as high as tornados and often cut a wider path of damage.”
The result has been a flurry in recent months of frantic insurance shopping as rates have gone up for most policyholders, and cancellations and refusals to renew policies have increased for many others.
“It’s such a hard market that people are opting for cheaper coverage,” said Lisa Broadbent, president and owner of Broadbent Insurance in Newark and Wilmington. “By a hard market, I mean that insurance companies have been ultra-picky about writing policies. Usually, they would only look at claims records for three years. Now it’s sometimes up to five. And if you have one fire claim or one roof claim, they might not take you.”
That is especially true for car insurance. According to the latest study published by the National Association of Insurance Commissioners, an average auto policy in Delaware in 2020 cost about $1,252, the eighth most expensive among the states and the District of Columbia.
The cost of homeowners insurance, however, is another matter. The same study showed the average homeowner’s policy in Delaware cost $907, which was the 43rd most expensive – meaning only seven states had lower average rates. Insurance costs for renters fell in the middle, ranking the 29th most expensive, with an average cost of $151.
Let’s talk about the weather
“The planet’s continued warming trend is affecting the frequency and severity of natural disasters,” said Karen Collins, vice president of property and environmental for the American Property Casualty Insurance Association, the industry’s primary trade organization. “Numerous studies have shown hurricanes are increasing in strength, drought conditions are becoming more widespread and persistent, wildfires are intensifying and sea levels are rising, affecting storm surge and coastal properties. NOAA [National Oceanic and Atmospheric Administration] predicts that by 2050, sea levels will rise by an average of 10 to 12 inches and up to $106 billion of coastal property in the U.S. will likely be underwater.”
David Phillips, regional spokesperson for State Farm, Delaware’s largest insurer, notes that while “Delaware has only had one catastrophe event in the last few years, with Hurricane Isaias on Aug. 3 and 4, 2020, there have been frequent and intense storm events including isolated tornadoes in Delaware over the last several years.”
Johnson, of NWS, noted that Isaias spawned four tornadoes in Delaware, including the longest one recorded in the state, slashing 35 miles from Dover to Summit Bridge.
“Remnants for tropical storms are notorious for bringing tornadoes,” she said.
Additionally, while not yet a tornado alley, Delaware is relatively flat and has sources of large bodies of water on each side that lend moisture needed for tornado conditions.
Broadbent suggested that events like those occurring with Isaias, along with frequent broadcasts of official tornado watches and warnings during summer storms, may have sensitized Delawareans to tornadoes. Plus, wind-damage photos now circulate widely on social media.
And those photos are likely to worsen as tornados become increasingly common in the East. Collins said that between 1950 and 2019 “the number of tornadoes in the Great Plains decreased by 20%, while in the Southeast the number of tornadoes increased by 42% and were noted to be twice as deadly as tornadoes elsewhere in the U.S.'' She adds that “according to NOAA’s Storm Prediction Center, over the past five years there has been a slight uptick in tornado activity in this region, including Delaware, New York, New Jersey and Pennsylvania.”
The damages are adding up
Weather experts and insurers are on the same page in assessing global warming – it’s not so much that there are more storms occurring but that their severity is increasing, and they are occurring in places they previously had not.
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The state estimated that DelDOT's Newton Road Area 2 Yard might have sustained about $5 million in damage during the April tornado that tore through Sussex County. | PHOTO COURTESY OF DELAWARE DEPARTMENT OF TRANSPORTATION[/caption]
To illustrate the extent these storms have been destroying property, they cite such examples as Hurricane Harvey, which struck Texas in 2017 leaving in its wake damages of $125 billion and ruining an estimated one million cars and trucks, the most vehicles ever destroyed in the U.S. by a single weather event.
Another example is last year’s Hurricane Ian, when enormous storm surges pushed Gulf of Mexico waters into previously untouched waterfront properties in Fort Myers Beach and Sannibel Island, Fla., causing $112.9 billion in damages.
Even before all repairs could be made, Hurricane Idalia took a similar, if less devastating, path in late August of this year.
Wildfires, once random rural events, are becoming more severe in size, intensity and the ability to cause death and destruction, even in cities and towns. In addition to the many lives lost, the recent West Maui fire in Hawaii damaged 2,207 structures and will cost an estimated $5.52 billion in repairs, according to the Federal Emergency Management Agency (FEMA).
Over the past decade, U.S. weather catastrophes have caused an average of $70 billion annually in damages adjusted to 2022 dollars, according to the management consulting company, Aon. After a relatively calm 2019 – with only $45.2 billion in storm damages, the last three years have averaged $98.6 billion annually, a 41% increase above average.
Currently, most homeowners’ policies cover tornado and other wind damage as well as wildfires. Flood damage, however, requires separate insurance approved by FEMA. Due to increases in coastal flooding and small stream flooding, Insurance Commissioner Navarro is adamant about the need for flood insurance.
“If you live in an area where it rains then it can flood,” he warned.
The damages double-whammy
While part of the increase in property damages has been the result of severe weather caused in part by global warming, the cost for repairing or replacing those damages has also shot up, in part a result of COVID.
“Since the start of the Covid-19 pandemic, the price of single-family residential home construction materials rose by 35.4%, while labor costs rose by 30% from January 2020 through June 2023,” said the APCIA’s Collins, “exerting further [costs] pressure, while the growth of population, housing and businesses in hazard-prone areas are exacerbating the effects of climate change. Collectively, these trends are leading to more frequent and severe catastrophe losses.”
Additionally, the disruption of manufacturing and supply chains during the pandemic caused auto-parts shortages, compounded by skilled worker shortages, to further raise the price of automotive repairs. And a scheduled minor repair in Delaware may take weeks, even months.
Insurance companies are also facing another problem, a headache that some policy owners might call poetic justice. Like everyone else, insurance companies have to buy insurance to help cover higher-than-anticipated losses. They do this from reinsurers, a global network of lenders that in good times compete for business by lowering rates and loosening terms. In bad times, they raise rates and become more picky about which companies they reinsure.
A recent New York Times article reported that, according to the Reinsurance Association of America, re-insurers have been losing money the past few years. Accordingly, the article said, reinsurance rates to insurance companies rose by as much as 40% from Jan. 1, 2022, to Jan. 1, 2023.
The ways of reckoning
As a result of themselves being hit financially by this perfect storm, insurance companies in Delaware have had several choices – to seek state approval of rate increases, to write fewer and more restrictive policies, or to just quit writing policies in the state altogether.
In response, consumers and business owners have their set of options. They can decide to accept the increases and pay up, shop around for less expensive coverage or accept less coverage and possibly higher deductibles.
Navarro said that when insurance companies petition his agency for a rate increase, they must prove the hikes are not “excessive, inadequate or discriminatory.” These are not industry-wide increases, he explained, but are determined on a request-by-request basis by individual companies. Requests are first reviewed by an independent actuarial, who makes a recommendation to the commission, which it can then decide to accept, reject or amend.
“What the public may not understand is that a company may ask for a 40% increase, but we may only grant a 10% increase,” Navarro said. “We are the public’s advocate if they think a claim has not been settled fairly. You always have the option to call us and contest. Sometimes a phone call [from the commission] is enough, because companies prefer not to have a record with us.”
If the commission sees a pattern of improper behavior, it also can launch a market conduct investigation.
In addition to seeking rate increases, companies can become choosier about who and what they insure, as Broadbent has pointed out. Or they can quit offering policies. California Casualty once wrote policies in Delaware, but now has a message on its website stating, “We're sorry, California Casualty is not currently writing new insurance in Delaware.”
“They also quit writing policies in about 30 other states,” Navarro said. “Half a dozen or so companies have left the state recently. It’s nothing massive, but we are concerned when any company leaves or decides to offer fewer options. Some, for example, have started having separate deductions for wind and hail.”
Broadbent said that some of her customers have opted for higher deductibles to keep costs down. Then there are two opposite approaches – trying to get lower combined rates by bundling coverages with one company or, conversely, electing different coverages with different companies or opting out of some coverages.
“To help reduce insurance costs, homeowners may consider increasing their deductible and discuss any potential discounts they might be eligible for,” Collins advised. “This might include any mitigation efforts to harden the exterior of a home to be more resilient to natural disasters, as well as potential discounts for smart home technology that might help detect and prevent losses from occurring within the home, such as security cameras, leak detection sensors and automatic shut-off valves.”
Another example is the defensive driving course given by the state Department of Motor Vehicles, which can reduce auto insurance costs.
“Insurance is simply the cost of claims,” the APICIA’s Collins concluded. “So, the more we work together [with businesses and consumers] to mitigate homes and properties to help bend down the loss curve, this should have a positive impact in the cost of insurance.”
