Premiums Prop Up Homeowners

Independent agent Wayne Syrek lives and works in Mesa, Ariz., where the price of housing has swooned in the last three years, and immobile construction cranes are still decorated with ornaments from Christmas 2007. “We’re in one of the trouble spots,” sighs Syrek, a partner at The Adams Agency.

Like other agents in regions of the country where new home starts are a fading memory, foreclosures are frustratingly frequent and only the most financially distressed homeowners are selling their undervalued houses, Syrek says he is trying to weather the storm. “There’s good news and bad news—the good news is that according to economists in Arizona we are officially at bottom,” he says. “The bad news is no one knows how long we’ll be there.”

Robert Ludwig can relate to Syrek’s woeful tale. His agency also conducts business in a part of the country decimated by the housing crisis—Sarasota, Fla. “Florida is such a mess,” says Ludwig. “Housing has been hit hard—no new sales, construction all dried up and realtors calling to handle mostly foreclosures and short sales.”

Renewals Steady, Premium Up

The two agents’ stories are writ large across the nation, where the annual rate of new home construction starts is 72% below the early 2006 peak, when the speculative building boom began a steep descent that ended in June 2007, the acknowledged start of the recession. Still, not all regions are experiencing anything like the housing crisis in Arizona or Florida, not to mention Las Vegas, Detroit and parts of southern California. Many other regions are faring reasonably well, with home prices enjoying a measure of stability. Stable pricing affects the psychological willingness to sell a home and buy another, giving agents in these areas the opportunity to build their homeowners insurance book of business.
For agents like Syrek and Ludwig, however, selling insurance in places where “for sale” signs seem a permanent fixture, they’re at least maintaining their policy renewals. Well, not entirely. “We’re losing the business that happens to go through a foreclosure, which is then force-placed with another carrier,” Syrek explains. “Other than that, we’re holding steady.”

There is a silver lining in the housing crisis for agents—homeowners insurance premiums have risen in the last couple years, making up some of the shortfall in new business. “Although the price of homes in many regions is plummeting, the price of homeowners insurance is not,” says Robert Hartwig, president and chief economist at the New York-based Insurance Information Institute. “The market price is different than what it costs to repair or rebuild a home that is damaged—costs that are rising and are reflected in the premium for homeowners insurance.”

Nationally, Hartwig estimates that homeowners premiums have increased 2.5% to 3% in the past year, and are continuing to rise in 2010.

All Housing Trends are Local
Not every region falls into that category, though. Bill Lafayette, an economist with the Columbus Chamber of Commerce, notes that in Phoenix, where home prices have fallen through the floor, area residents have the financial wherewithal to purchase a house but in Miami, where homes have equally cratered, residents generally can’t afford them. “That tells me that the Phoenix market is in a better position to revive than the Miami market,” he says. “Really, this is a regional housing crisis, if not a local one.”

IA asked three independent agents in three different parts of Massachusetts to describe the housing market in their respective cities and regions, and the effect on their homeowners insurance book of business. The agents might have well lived on different planets—one agent is doing bullish business, another so-so and the third coping with a severe housing market downturn.

Bill Lapointe, president of Lapointe Insurance Agency in Fall Rivers, is agent number three. “There is no new construction activity in the south coast area to speak of,” he says. “We’re still in crisis mode here. Real estate values are quite depressed. It’s a zero-sum game—no one is building and few people are selling, creating fewer opportunities for us to write new business. From an agency standpoint, we’re definitely feeling the pinch.”

In 2008 and 2009, Lapointe was able to write some new business through the state’s residual market mechanism, but this has dried up. “There are some high-end homes moving along the coastline, but their location makes them an underwriting issue for a lot of carriers,” he says. “In many states, the high-end market is a good place for agents to write new business because it’s less price-sensitive, but here such homes tend to be on the water. Carriers are having trouble finding reinsurance to underwrite such homes, which is affecting their appetite to write coastal exposures.”

Other problems adversely affecting his business include existing clients looking to save premium by taking larger deductibles and/or gutting coverages and limits; widespread declines in consumer credit scores forcing clients out of many carriers’ “preferred” rating tiers and a pileup in agency work to satisfy customer endorsement requests to address new mortgage financing requirements.

Most of these migraines have bypassed Henry Risman, president of Risman Insurance Agency in Medford, about 10 miles north of Boston. Risman owns and runs another agency in Tewksbury. Both offices are faring quite well in the region’s housing market.

“We’ve been fortunate here in eastern Massachusetts,” he says. “The real estate market wasn’t hit as hard as in many other parts of the country. Values have fallen a bit and there have been some foreclosures, but nowhere to the extent as Florida, Arizona and Las Vegas.”

Risman is cognizant that the sales volume of existing and new homes is lower in other regions of Massachusetts—“but not here,” he says. “Homeowners insurance actually is one of our more profitable lines, given the softness in commercial lines. Premiums have risen, loss ratios are solid and commissions have been good. We’re writing a lot of new homeowners business, and our book is growing.”

Unlike Lapointe, he isn’t receiving phone calls from existing customers looking to decrease coverages and insured limits, although he has fielded several requests for reduced deductibles. “It’s much better anyway for them to take a lower deductible than lower limits or remove coverages,” Risman says.

In between these stories is the tale told by Craig Thompson, president of the 110 year-old Sampson Insurance Agency in Weymouth. This suburban bedroom community south of Boston is beginning to feel some relief from the housing crisis. Not total relief, however. Foreclosures remain a thorny problem, the loan process is taking longer, more properties are vacant and homes priced at around $1 million aren’t moving. Nevertheless, the Obama Administration’s first-time homebuyer credit is spurring sales of lower to-mid-priced homes. As Thompson puts it “Things seem to be thawing.” Thompson points to low mortgage rates as another factor giving the market some life. “It’s a buyer’s market here and people are taking notice,” he says. “Still, many are waiting to see if prices fall even lower. And the mortgage loan process remains so difficult that many folks who might otherwise sell their homes are sitting tight. It’s easier to get TARP money than get a loan done these days.”

While policy volume growth in Thompson’s traditional homeowners book of business has slowed, he is writing a greater volume of smaller homes being snapped up by the first-time buyers. He’s also making up the shortfall in vacant-home policies written by the specialty insurance market. Although the latter requires additional agency work and less commission, it is somewhat balanced by higher premiums.

“It could be worse,” he says.

Combating the Downturn

Even Syrek says he’d rather be writing personal lines in a housing crisis than be confined to writing purely commercial lines in the current soft market.

The agents also have some marketing strategies up their collective sleeves to build business. All of them are finding merit in marketing homeowners insurance with automobile insurance as a one-two punch, given the volume-based credits many carriers offer. “It’s helped to drive new homeowners business here,” Thompson says.

Ludwig concurs: “We’ve empowered our CSRs to do more account rounding, which has helped our new business a bit.”
Lapointe has added to his policy volume by marketing the agency’s “family branding” concept to prospective customers.
“What we’ve done is turn our backs on all but what we consider our core market—families with a primary residence and second home who have a need for insurance guidance,” he explains. “Life for such families is tending to get complicated. They may have youthful (car) operators, and need an agent’s trusted advice. They’re not a good market for online applications and quotes because their risk exposures are too complicated for that platform.” He estimates that the branding strategy has helped grow his homeowners policy count by 3% annually.

Carriers say account rounding and other strategies are smart moves in the current marketplace. “The more policies you have the more touch points with the consumer and thus a higher retention rate,” says Jim Fiske, U.S. marketing manager at Chubb Personal Insurance.

To build business, Fiske advises agents to consider diversifying how the business gets in the front door. “As you document where your policyholders are coming from, consider additional referral sources like CPAs, real estate attorneys or financial planners,” he explains.

ACE Private Risk Services, which focuses on the insurance needs of the affluent demographic, counsels agents to contemplate moving up the value chain to service higher net worth individuals. High-priced homes in many regions remain a robust market, outpacing the sales volume of less expensive houses, while retaining their greater market values. “In an economic downturn, affluent people in particular have the potential to become a target for frivolous lawsuits, such as those brought by uninsured and underinsured motorists,” says John Paolini, the insurer’s chief operating officer. “One driver out of six today is underinsured, requiring high net worth clients to consider higher coverage and umbrella limits. It’s solid advice that an agent can provide.”

While each of the agents profiled say the better-than-average pricing in the homeowners market has cushioned the impact of the housing crisis, they are acutely aware that the industry’s market cycle is constantly grinding. “Things will change,” says Ludwig. “I just hope not for the worst.”

Banham (Russ@RussBanham.com) is an IA senior contributing writer.

Tracking the Turnaround

Although predicting the end of the housing crisis is a tough call to make, Bill Lafayette, Ph.D., an economist with the Columbus Chamber of Commerce who reports regularly on the real estate market across the United States, is guardedly optimistic. “It certainly looks like it is getting better,” says Fafayette. “While there was a downturn in sales of existing houses in the last couple months, we attribute that more to bad weather than anything else. It was pretty brutal out there in many places.”

On the bright side, Lafayette says the “first inklings” of a revival in the housing market are apparent, which would guide a revival in consumer confidence. “For example, Pittsburgh has revived in terms of housing prices, as has Houston, Boston and San Diego,” he says. “Scattered places in the Northeast have also come back, as have areas of the South outside Florida. The prices are higher than they were when the bubble burst in June 2007.”

But what about sales? “We look at metrics indicating `housing affordability’— the ability of an individual household to purchase a home—and in the areas I mentioned people are able to buy, even with the higher prices,” Lafayette says.
—R.B.