‘State of change’

The National Association of Realtors criticized the insurance industry last week, releasing dramatic statements on how homeowner’s insurance has become a barrier to ownership, and members of the industry have responded in kind.

NAR President Cathy Whatley held a press conference Feb. 26 to speak against the rising costs of homeowner’s insurance.

“The crisis in insurance is putting homeownership beyond the reach of many young families, minorities and other Americans who have yet to achieve the American dream. Many factors are contributing to the crisis, but the use of credit scores to deny coverage raises questions about fairness and equality, despite the insurance industry’s acknowledgment that there has been no research which has proven a causal relationship between credit history and the likelihood that one will file an insurance claim,” said Whatley, who is the owner of Buck & Buck in Jacksonville, Fla.

The Alliance of American Insurers, a national industry organization based in Downers Grove, Ill., immediately responded by issuing its own statements.

“The insurance industry, like the real estate industry, has a vested interest in helping people achieve the American dream of homeownership,” said Rodger Lawson, AAI president. “While the value of the average American home has increased significantly over the years … homeowners’ rates have not risen in direct correlation to home prices.”

Lawson noted that the price of homeowner’s insurance relative to the cost of the median purchase of an existing home fell 13 percent between 1994 and 2002.

“Homeowner’s insurance has been a bargain, and remains a bargain, despite recent increases,” he said.

‘Real Issues’

Allyson J. Bernard, 2001 president of the Connecticut Association of Realtors and a member of the Real Estate Professionals of Connecticut in Danbury, said homeowner’s insurance is “definitely becoming more difficult to get and more expensive than it has been in the past.”

She remarked that insurance has become a particularly tough issue for houses near wetlands or along the coastline where properties are more susceptible to damage by natural disaster.

“Insurance costs have increased tremendously in the last couple of years in all sections of the industry,” said Bernard.

She said Connecticut will be especially affected because of all the wetlands, rivers, lakes and coastal areas throughout the state.

“The processes that insurance companies use to review applicants are much more rigorous than they were three or four years ago. If you couple that with an increase in sale costs and an increase in the marketplace, real estate values start to get out of hand,” said Bernard. “First-time homebuyers are going in and insurance is triple what they thought it would be because there’s a brook next to the house, or the gutters are rotting off and they can’t get it insured at all.”

In a prepared fact sheet, NAR points out that the average cost of homeowners insurance rose by about 8 percent in 2002 and is expected to rise another 9 percent in 2003, and even higher in some states, according to the Insurance Information Institute.

“Insurance companies are looking at people with past history of claims and also their credit ratings,” said Bernard. “The theory is that people who are not financially responsible are not responsible with property and would be more likely to make a claim, or an unsubstantiated claim.”

She added, “Frankly, there are people who abuse the system, but personally I don’t feel that a credit rating directly affects insurance obligations.”

“I can see that there are some real issues, but I haven’t had deals fall apart because of it [insurance],” said Mike Sexton with H. Pearce Co. in New Haven.

Mark Barillaro, an independent insurance agent with Marchetti, Brown and Bishop in Branford, said that many of the increases he’s seen are related to fire safety.

“The biggest thing is access to water in case of a fire,” he said, adding that proximity to the ocean is another factor. In order to combat the increases, homeowners are often recommended to go with a higher deductible, but the extra money might be too much for some first-time homebuyers.

“The [insurance] companies are taking a little harder look than they have in the past,” said Barillaro. “Not all companies are relying on credit scores exclusively, and some aren’t using them at all. I feel that the industry is getting brushed with that and it’s not entirely fair.”

As an independent agent, Barillaro has access to several carriers and has noticed that they have been getting more particular, saying, “I just think they’re taking an extra look at new risks than they have in the past.”

Sexton put it this way: “The insurance industry has not seen that property and casualty is a profit maker for them and they’re going to make it one.”

Lawson said, “No company can afford to continue to lose money on a line of business over that period of time. Companies today are adjusting their underwriting standards and their premiums to reflect the reality of the homeowner’s market. Using valuable tools like credit-based scores … helps establish rates that reflect the risk associated with individual coverage.”

Whatley had questioned the use by insurers of credit scores and the CLUE (Comprehensive Loss Underwriting Exchange) database, which contains claim histories of both individuals and properties for a five-year period. She believes that some borrowers who can qualify for mortgages are being turned down for homeowner’s insurance, and others are finding that phone calls to their insurance agent are recorded on their CLUE file and may jeopardize their coverage.

Barillaro said he works with homeowners to get insurance and that typically most people can get insured for the right price.

“I don’t think it’s bad as they [NAR] are making it out to be,” he said.

“You can always get insurance for a price,” said Sexton. He remarked that often a company would insure a house for one year prior to an inspection.

“Then they’ll go out and physically inspect the property and be sad with themselves that they took the house on. They’ll honor the commitment but might not renew next year,” said Sexton.

He said another problem popping up of late is that Realtors have been underestimating the cost of insurance.

“We’re going to have to raise our estimates of insurance expense for the average property,” he said.

However, he noted that he hasn’t seen too many problems yet, but is anticipating that more may come in the future.

“The insurance industry is in a real state of change,” said Sexton.