December 2012

Are You Paying Too Much for Hurricane Insurance?

Author: Frank Dunne, Jr.

Shhh! You’re not supposed to talk about it. Bad juju and all that.
What are you talking about? You mean that thing where we’re not supposed to mention how Beaufort County skates harmlessly through hurricane season year after year?

Oh! Now you’ve done it!

Have I? Fine. If you’re highly superstitious, don’t read the rest of this. But if you have an inquisitive mind and would like some factual affirmation that, compared to the Gulf states and the rest of the southeast Atlantic coast, you’re sitting in the best place to be when hurricanes and tropical storms are churning their way across the Atlantic, read on.

A few months ago I ran into prominent Hilton Head real estate professional, Andy Twisdale, in a coffee shop where I do much of my profound and brilliant thinking, and he handed me a copy of a 15-page whitepaper written by a concerned citizen. The author, Daryl Ferguson of Beaufort, driven by his own curiosity, embarked on a three-year investigation to find out the truth about the risk of a hurricane strike in the Lowcountry. Yes, as you suspected, our good fortune is partly due to the coastline’s westward curvature, which keeps us out of Atlantic hurricanes’ typical northerly tracks, and there is a high-pressure center along the coast that tends to push the storms seaward. It gets even better in the fall, the busy season for Atlantic hurricanes, when the jet stream moves south, strengthening both the high-pressure front and west-to-east winds. There’s more meteorological mumbo jumbo to explain how these phenomena affect the storms than I have room to cover, but the bottom line is the National Hurricane Center (NHC) rates our level of risk as “relatively low” and projects that if a major hurricane (Category 3-5) is to strike us, we should expect it in about 79 years. That’s the good news.

Now the bad news. In his paper, Mr. Ferguson raises concern that the mere perception that Beaufort County is in the middle of “Hurricane Alley” may be hurting us economically. First, fear of a hurricane strike may drive people’s decision against moving and retiring here. Second, we may be missing out on a sizeable fall tourism market. Third, and this is what we’re going to focus on, homeowner’s insurance premiums in the Lowcountry are set at rates reflecting much higher hurricane risk factors. This takes millions of dollars out of consumers’ pockets that could otherwise be spent in the local economy and makes it prohibitively expensive for some people to purchase a home in the area.

Mr. Ferguson was kind enough to participate in a very enlightening Q & A about his research:

Frank Dunne: Can you start us off with some background info? Who is Daryl Ferguson? Where do you live? Where are you from? What’s your professional background?

Daryl Ferguson: I’d be glad to. I’m originally from South Dakota and I’ve lived in Beaufort since 2000. I retired from Citizens Utilities, which is the country’s largest multi-utility, in 2000 as president of the parent company and immediately went to work at Europe’s Hungarian Telephone Company, which serves the eastern Europe telecommunications, as the chairman of the board. It was bought out in 2005.
I currently do consulting on turnaround companies and developing product lines…and trying to get the state to be more alert to its opportunities. I’ve also got a doctorate in business from George Washington University. That’s how I know research.

FD: It sure looks like you do. Your paper is a great read. Did you intend to have it published when you wrote it?

DF: No. I wrote it for myself. Basically I was curious about the real risk of hurricanes along the coastline here. Every fall I hear people say things like, “Are we gonna get hit tomorrow?” or “We haven’t been hit yet!”

FD: You also referred in your paper to the head of South Carolina’s Department of Parks, Recreation, and Tourism’s forecast for 2012, which was: “Good, as long as the hurricanes stay away.” It seems that we’re projecting the negative.

DF: And I simultaneously saw that in Beaufort County our tourism dropped off 65 percent from summer to the fall, but it didn’t drop off at all in Jacksonville, Florida right down the road. And so I dug into it for three years. I spent a couple of thousand hours on it. Half my time in the last three years I spent digging into it, talking to hundreds of people.

FD: We’ve only got a couple of pages. Can you narrow it down to a few?

DF: The NHC has hurricane specialists, but they won’t talk to you unless you know the hurricane jargon and understand the meteorology. So I went and schooled myself on that until I finally got to four hurricane specialists who gave me data that basically said our risk is relatively low here.

Then I checked insurance. I’m right on the Whale Branch River, and I compared a $400,000 house on this lot with what it would be in the middle of Katrina (Gulf Port, Mississippi). My insurance company, USAA, couldn’t give me a comparison that included wind because they don’t offer it in Mississippi. So they gave a comparison with everything but wind, which is fine because I just wanted a comparison of how they see the risk. The NHC said the risk in the Gulf down there in Mississippi is three times what it is here. Well, USAA said my rates would be twice as high here as in Gulf Port. It would cost $1,400 here and $488 there. It made no sense!

FD: So now you became curious about how insurance companies assess the risk and set their rates, and how the South Carolina Department of Insurance (SCDOI) goes about approving or rejecting those rates?

DF: Before I went to SCDOI, I did some studying on how insurance companies get their risk analyses. They no longer get it from the NHC, which gives them only 100 years of data. They get it from catastrophic modeling companies. (These companies use computer models to project risk based on 100,000 years of data.)

There are 11 of them. The problem is they’re paid for by the insurance companies, so the average guy has no access to them; but I placed a call to a senior research officer…he’s one of the gurus in the industry from one of the largest companies.

FD: Would this be the “Deep Throat” you referred to in your paper?

DF: (Laughs) Deep Throat! And he answered my call. I called him at his house on a weekend. After about four or five conversations, you know, we’ve got some chemistry, so I said look, give me some details that give me some comfort on why my state has insurance this high. So he gave me the internal data that they only share with the insurance companies. And it showed that, for example, along our coastline our cost of insurance in Beaufort County is only $1.50 or $2.00 per $1,000 valuation. Say you had a $500,000 house, that’d be $1,000. And they would say to an insurance company like USAA, Daryl’s cost for projected hurricane damage is $1,000 a year. Let’s say they added $1,000 to it (operating costs and profit). My cost shouldn’t be over $2,000, but any way you look at it, it’s higher.

FD: This is where you started to connect the dots to SCDOI?

DF: There’s a huge mismatch. I also found out that to evaluate a rate increase for an insurance company that uses catastrophic models, you have to have a team of experts come in periodically and evaluate them.

FD: Right. You need checks and balances—somebody who understands how to interpret the models.

DF: Yeah. A normal staff can’t evaluate at all.

FD: What did you learn?

DF: I spoke to Leslie Jones (SCDOI’s deputy director of property insurance) and some of the actuaries. They have no idea what the risk is along the coast. None. Zero. Some of them said the risk is higher in the south than it is in the north. I mean there’s just no knowledge.

Most important, they do not bring a team in. They may call another state like Florida and say what do you think of this model? So, my God! It’s basically an open door for an insurance company.

FD: To set premium rates with no oversight. But there’s more to the story, isn’t there?

DF: I called Elliott Elam, the state’s consumer advocate. He said, “Daryl, you’ve only found half the problem.” The other half is the state has an unknown law that passed in 2004 that allows any insurance company to come in (with an automatically approved rate increase) as long as it’s under seven percent (on average). What they’re coming in on is 6.9 with most of their increases. And I’ll tell you one thing; they’re weighting most of the increase on the coast.

I couldn’t believe what I was hearing. As president at one of the biggest utility companies in the United States, I know how you get your money. You get it from states that have a weak door on the regulation side. So I knew what was going on, a very weak open door for any company that wanted to have a rate increase.

I found an expert by the name of Martin Simons. He used to head up the property side of SCDOI then went off on his own and became an expert on witnessing cases and knowing how to test catastrophic modeling companies. He said, “I know exactly what you want to find out. You want to know why the state doesn’t regulate homeowner’s insurance.”

I said you’ve hit it right on the head. So he confirmed to me…his same analysis is that the state is not regulating homeowner’s insurance.

FD: What did you do next?

DF: I tried very hard to go up the line at SCDOI and talk to the actual commissioner. And I tried to get the acting commissioner. No access. So I said to hell with it. I’m going to talk to the Post & Courier and they jumped on it. They went to a catastrophic modeling company to test my findings and they confirmed what I said. Basically what it shows is a $2 billion opportunity in the next two to three years.

FD: What opportunity is that?

DF: Total property insurance premiums (in South Carolina) are about $1.4 billion on the residential side and another $200-300 million on the business side. So you’re at $1.6 billion. Deep Throat told me that he believes we could decrease our premium by 30-50 percent. That’s what Florida did when they got into trouble in the early 2000s.

FD: At 30 percent, that’s over $400 million back in consumers’ and businesses’ pockets.

DF: On just reducing the cost. So I started asking around the county to find some good senior businesspeople who could possibly be interested in making a case and getting some action.

FD: Who’s on your team so far?

DF: Andy Twisdale (you know Andy), and David Ames, one of the plantation developers; Stu Rodman on the county council, and Terry Ennis, a former VP at DuPont are involved, and some others have helped, including Larry Roland, the historian, and Tom Davis, the senator.

FD: What’s the plan?

DF: One, you’ve got to have a stronger commissioner. The state’s typically been hiring people that are either from the legislature or (insurance) agency people. I talked to one of the former commissioners of the Department of Insurance and said, “Look, you knew that the risk was higher in Myrtle Beach than down here. Why did you approve 10 companies having the same rates in the northern counties as in the southern counties?” He said, “Well, if I did that I’d upset some legislators.” Can you imagine that?

FD: So they’re hiring the wrong people for the wrong reasons?

DF: They’re politically tuned in, but they don’t have the right experience. You’ve got to have people that have been in an operating position in a middle sized to large company. And you’ve got all kinds of early-retired people in this state that could fill that bill. You know, they’re not intimidated or, they don’t owe the legislature anything.
Our team also strongly believes that we’ve got to eliminate that 2004 law—the one where insurance companies can come in and get an automatic annual increase.

FD: Those sound like steps in the right direction.

DF: And we’ve found out, Frank, some really interesting stuff that could really help the real estate market.

FD: Such as?

DF: We found out from Deep Throat, the catastrophic modeler, insurance companies can now set rates by the house. Your rate can be different than your neighbors’ because they have that degree of detail. That information would be a real plus for a real estate agent.

FD: Not to mention the homeowner.

DF: You can sell your home better knowing that it’s on a little bit higher ground, or the winds don’t blow quite as strongly as a few houses over.
I challenged USAA on this and they agreed that they can set rates by the house. Within six months, they said they’d go from a few rates to 517 different rates.
We also found out, for example, that we know the different risk along the coastline. North Carolina is…

FD: Much higher risk.

DF: Much higher risk. Yet, they pay a third less in average premiums. Why is that? Again it’s because we have an open door to insurance companies. We don’t regulate them. So that’s just our little committee working unofficially.

FD: Unofficially?

DF: We’re proposing in our team that we work with the insurance industry to help us lower rates. I’ve contacted one company that said, “That’s a novel approach, and we believe that we could work with you on that.” So…

FD: Is this company currently writing in this state?

DF: Yes. It’s a big company, and they’re a major player in this state. But we’re an unofficial group of businesspeople, so they said, “Guys, you’ve got to get authorized by somebody to negotiate with us.” That, again, is why you need a commissioner who’s got a very strong background.

FD: You’re trying to get a meeting with Governor Haley about this. How’s that going?

DF: We sent her a letter on May 25 or so. One of her assistants is trying to line up a meeting.

FD: You also wrote in your paper that you were able to reduce your own homeowner’s premium by about $2,000. Any advice to others who might want to take a crack at it?

DF: Sure. First shop the rates. The first two people that I mentioned this to got the same savings. They shopped around and they saved a couple of thousand dollars. Call around. Compare rates. Call local reps, but call the national reps too. I got one rate from an insurance company, the local guy, and another rate by calling their national office. It helps if you have a good credit rating too.

FD: What about challenging them on the hurricane risk issue? You know, do a little homework and show them that you know something about the real hurricane risk factor for this area and that you can set rates by the house?

DF: Yes. I think it helps you. I would certainly let them know that you know that in our area we have a relatively low risk for hurricanes in the fall.

FD: And the insurance people will cooperate?

DF: Yeah, and again, I think that’s why I’d go for a national number when calling.

FD: Sounds like it’s worth a try. Thanks for sharing this with us, Daryl.

DF: You’re welcome. It’s been my pleasure.

  1. I heard Mr. Ferguson speak yesterday at a luncheon in Hilton Head he is very impressive and know what he is talking about.

    — Forrest McIntyre    Dec 4, 01:30 pm   


    — malcolm atrange    Dec 4, 04:27 pm   

  3. SC insurance companies have outsourced their Wind and Hail coverage to the SC Wind and Hail Underwriting Association. How can a homeowner negotiate with this organization?

    — Joan E. Deery    Dec 17, 02:47 pm   

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