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GULF COAST INSURANCE IS ‘GONE WITH THE WIND’

By Steve McLinden

Shopping center owners on the Gulf Coast are paying twice what they did before Hurricane Katrina, in 2005, for wind insurance — and getting one-third less coverage and higher deductibles for the money, according to a study from The Rand Corp., a Santa Monica, Calif., nonprofit.

The Sembler Co., a St. Petersburg, Fla.-based shopping center owner-developer, has seen wind insurance rates rise between two and four times the pre-2005 rates, with the buildings constructed before the more-stringent codes of 1996 bearing the brunt, says Craig Sher, president of Sembler. The firm controls about 7 million square feet in Florida.

Regency Centers said this summer that it has been able to maintain its coverage levels in storm-vulnerable states such as Florida, but at costs up to 50 percent higher. “It’s a significant issue, because there’s been a perfect storm of issues hitting at the same time, including seriously higher commercial property taxes,” Sher said. “And for the first time, people are questioning whether they will be moving to Florida. Some are exiting the state, so all that growth we thought was predictable isn’t as predictable.”

Among the reasons for the increases were a higher number of projected hurricanes, a tightening of capital-adequacy requirements for insurers and the ongoing uncertainty over litigation and policy enforcement. Though some of those factors are temporary, expectations for future storms and higher repair costs are likely to keep wind insurance rates from ever returning to pre-Katrina levels, says Lloyd Dixon, a Rand researcher and the study’s lead author.

Small businesses in the hardest-hit areas had difficulty finding wind insurance, the price increases notwithstanding, Dixon says. “Some couldn’t get insurance at any price,” he said. Underwriters see small businesses as being riskier than larger ones, because they are less diversified geographically. Smaller companies must bargain from a weaker position, too, of course.

Insurance regulators in Florida were expecting to see rate relief for fall renewals following an insurance reform bill passed in January. But they got a surprise when several commercial carriers submitted rate-increase requests ranging between 142 percent and 225 percent.

Because many carriers are either picking up no new business or failing to renew old business, it is hard for smaller tenants and local mom-and-pops to close deals if their centers are unable to cover their wind insurance as a pass-through cost, says Howard Rosenthal, senior vice president and director of property management at Tampa, Fla.-based Colliers Arnold. “Some owners who would be paying twice as much now are deciding to go without wind coverage entirely because of the cost,” Rosenthal said. But owners with loans on their properties generally must have some insurance as a stipulation.

Many centers have been forced to ask tenants to bear a portion of the coverage, says James Macdonald, director of the insurance and claims practice of Chicago-based Navigant Consulting and co-author of the Rand study. Some anchors are apparently subsidizing those costs, he says. “They don’t want to see their centers devastated if the small guys pull out,” Macdonald said.

There are rays of hope. Centers that had to turn to state-run “residual” insurance to get any wind insurance can expect higher coverage. At press time state-run Citizens Property Insurance was set to begin writing wind insurance up to $2.5 million per policy, up from the previous $1 million limit, for businesses in the state’s designated wind-pool area along the entire Florida coastline. Moreover, wind premiums for operations in hurricane-exposed areas showed only modest increases in the first quarter, while larger companies with geographically dispersed operations actually saw some price declines following the unexpectedly tame 2006 storm season, the Rand study said.

Some coastal real estate companies, including Colliers Arnold, are trying to put together insurance pools of their own. The Colliers Arnold pool, which would use some overseas carriers, would take effect next year for properties it manages, says Rosenthal. Further, in early August hurricane researcher William Gray lowered his 2007 forecast from nine hurricanes (five in the intense category), to eight (four intense). Still, cautions abound. If a 250-year storm were to hit Florida, the state’s unfunded liabilities could be upwards of $54 billion, Macdonald says.

Areas that continue to be hardest hit by wind insurance rate increases are Florida, all the Louisiana parishes south of interstates 10 and 12, and the entire Mississippi and Texas coastal regions, says Macdonald. Houston, considered a less-severe, tier-2 insurance risk before the 2005 hurricane season, is now a tier 1, or top risk, joining its neighbor to the south, Galveston.

Said Sembler’s Sher: “It all will boil down to weather patterns and the current storm season. We just need a couple of quiet years.”