For years, natural disaster experts outside the insurance industry have wondered whether the pricing of property insurance could be used to give homeowners incentives to upgrade or retrofit their structures to mitigate damage from windstorms.

The logic seems simple enough: If dwellings and related structures are reinforced and secured to withstand wind damage, that should translate into fewer losses and lower cost insurance.

That logic runs into a stubborn fact, however: The cost of implementing wind mitigation features on a home often far exceeds the annual cost of homeowners insurance, even in distressed markets with relatively high rates.

For example, the average homeowners insurance premium in Florida in 2005 was about $1,500, according to figures from the Florida Office of Insurance Regulation. By most accounts, that cost has risen considerably since the state was hit by four major hurricanes that year.

Even so, the cost of installing hurricane shutters, a basic mitigation measure that typically involves no structural modifications, “can range from $6,000 to $30,000” in Florida, says Debbie Wagner, vice president of sales for e2Value, Inc., Stamford, Conn.

E2Value provides automated online construction valuation services available on the AAISdirect Internet service, as well as directly.

According to Wagner, “$6,000 to $10,000 would be the low end for an average home of about 2,400 square feet with no unusual windows.”

So, even at the lower end of the cost range, it would take several years of completely free property insurance to recoup the cost of even the most basic mitigation measures. Given that, a small insurance discount is hardly a factor in deciding whether to spend thousands of dollars on mitigation measures.

Mandates

For that and other reasons, the development of insurance pricing incentives for retrofitting existing structures have apparently not met the expectations of certain public officials in hurricane-prone states.

“[Insurance pricing incentives] weren’t developing on their own,” says Florida State Sen. Steven Geller, former president of the National Council of Insurance Legislators and a prominent proponent of publicly mandated premium discounts for windstorm damage mitigation measures.

“I’m as much of a free market guy as the next guy,” he says, “but people were putting up shutters and getting a 2% discount when it should have been much, much more.

“We gave insurers a chance to [provide discounts] voluntarily, but people will never go out and spend $10,000 on shutters if they only get a $100 a year discount.”

Led by Geller and others, Florida enacted a law several years ago requiring insurers to provide premium credits to residential policyholders who had structural features in place deemed to mitigate loss from hurricanes. For example, the discounts must be offered for protecting windows and securing a roof.

(The credits are inter-related and not entirely cumulative. A policyholder that protects his/her windows and secures his/her roof could get a discount greater than either of those measures alone, but not necessarily equal to the sum of both.)

The size of the credits was later increased as part of the package of insurance measures enacted by the Florida legislature in January 2007.

Since Florida took action, Connecticut, Louisiana, and South Carolina have followed suit.

In Connecticut, insurers must offer credits on the standard rate of insurance for homes
that have storm shutters and/or building glass installed.

Louisiana requires all homeowners rate filings submitted after March 31, 2008 to include premium discounts when a dwelling is built or retrofitted to comply with requirements of the state’s uniform construction code, has damage mitigation features installed, or is retrofitted to utilize construction techniques demonstrated to reduce windstorm loss.

Qualifying mitigation measures include roof bracings and secondary water barriers, among others.

South Carolina requires insurers to develop separate rating factors for building features that affect propensity for wind damage. In that state, insurers must offer credit factors for roof shape, storm shutters, roof-to-wall attachments, and other features that affect propensity for wind damage.

South Carolina also mandates a premium debit for having an unrestrained wall-to-foundation connection.

AAIS is taking filing action to fulfill these mandates on behalf of its affiliates in affected lines and states. To date, AAIS has received approvals from Connecticut, Florida, and South Carolina.

Activism

Apart from these initiatives, other states are enacting measures to regulate insurance pricing for windstorm loss.

North Carolina has joined those states that allow wind and hail coverage to be excluded from homeowners policies covering properties eligible for the state’s wind pool. Premium credits must be provided to reflect removal of that coverage.

In Rhode Island, separate, higher deductibles are now permitted for hurricane losses, but not for other types of windstorm loss. However, the hurricane deductible cannot exceed 5% of the dwelling limit, and must be waived when property is protected by certain windstorm loss mitigation measures.

For many public officials, mandated premium discounts serve to convey a message more important than the dollars at stake for homeowners or insurers. In their estimation, anything that encourages people to implement mitigation measures will ensure that more homes remain habitable in the aftermath of a disaster, thus reducing the severity and cost of a public emergency.

This state activism gets, at best, a lukewarm reception from insurance groups, including those whose mission it is to encourage citizens and communities to prepare better for hurricanes and other natural disasters.

“We are not in favor of mandatory discounts,” says Julie Rochman, president and CEO of the Institute for Business and Home Safety, an organization created by property insurers to promote construction and land use practices that will reduce disaster losses.

“By mandating, you don’t allow people to be creative,” she says. “It ought not always be up to the insurer to tell people to protect their property. It benefits others besides insurers.”

Given the relatively low cost of residential property insurance compared to mitigation measures, “the financial incentive is just not there,” says Robert Detlefsen, vice president for public policy at the National Association of Mutual Insurance Companies.

According to Detlefsen, premium discounts, whether mandated or voluntary, will have little impact on homeowners’ decisions until insurers have more flexibility to structure and price policies in hurricane-prone states.

For example, he says, restrictions on writing multi-year policies suppress a technique that might allow some insurers to provide long-term coverage discounts that can show policyholders a return on their mitigation investment.

Level

Whether they provide effective incentives or not, the implementation of mandated discounts and credits may not prove to be too onerous for the insurance industry.

“Publicly, insurers say they don’t like mandates,” says Robert Klein, a professor or insurance and risk management at Georgia State University. “Privately, however, some will say, ‘Well, if we’re all mandated to do the same thing, it’s less of a problem. At least they’re maintaining a level playing field.”

Geller, the Florida state sentator, argues that the mandates will improve conditions for insurers.

“If we get older structures [retrofitted], it will help individuals and reduce the demand for reinsurance,” he says. “If we reduce the demand for reinsurance, the cost of reinsurance will go down.”