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Climate Change Causing Insurance Rate Hikes along the US Coast

Scientists say the jury is still out on whether rising sea temperatures will cause more hurricanes to hit U.S. coastlines. Yet some insurance companies are boosting premiums based on assumptions that they will. Others are withdrawing from coastal communities altogether.

Last year, Leanne Lord of Marion, Massachusetts, decided to put her house up for sale after her insurance premiums more than doubled to about $2,892 a year since 2005. Many of her Cape Cod neighbors, who hadn’t seen a hurricane in the area since 1991, followed suit. Today, there’s a glut of houses on the local market.

Costs for homeowner insurance along the East and Gulf coasts have risen 20% to 100% since 2004, says the Insurance Information Institute, a trade group. In the three years through 2006, says the institute, property and casualty insurers registered record profits, topping out at $65.8 billion in 2006. (Despite severe U.S. weather that has caused about $8.9 billion in insured property losses to date this year, it’s too early to forecast 2008 profits.)

Helping to drive these developments is a little-known tool of the insurance world: Computerized catastrophe modeling. Crafted by several independent firms and used by most insurers, so-called cat models rely on complex data to estimate probable losses from hurricanes.

But regulators and other critics contend that the latest cat models — which include assumptions about various climate changes — are triggering higher insurance rates.

Starting in the early 1990s, cat models began to replace the industry’s older tools. Previously, insurers based their rates and underwriting policies largely on historical records of past claims. The turning point in methodology came after 1992, when Hurricane Andrew wrought damages in excess of $15.5 billion and left about a dozen insurers insolvent.

The original purpose of cat models was to help stabilize the insurance market and ensure affordable coverage in risky areas. To do this, the first versions used historical weather data to project long-term future losses.

In the wake of the punishing 2004 and 2005 hurricane seasons, many cat models saw drastic revisions. Rather than take a traditional longterm view, some attempted to estimate what might happen in the next several years. Modelers also factored in dramatically higher rebuilding costs when a large area is hit. The result: big premium hikes and higher deductibles.

Underlying the newer cat models are scientific theories that rising sea temperatures will result in more intense, and possibly more frequent, hurricanes. The hypotheses suggest that catastrophic hurricanes like 2005’s Rita, Wilma and Katrina weren’t an aberration, but rather the shape of things to come.

Large reinsurance companies, such as Swiss Re and Munich Re, were early converts to theories of global warming and cite warming of the earth’s oceans when predicting massive damages from future storms.

“Losses from hurricanes and tropical storms have risen along with sea temperatures,” says Eberhard Faust, a climate scientist at Munich Re. “This is [the assumption] from where all the modelers start.”

The impact from cat models on homeowners along the East and Gulf coasts has stirred some of the greatest controversy. In New Jersey, State Farm Mutual Insurance Co. and a subsidiary of Allstate Corp. have declined to renew at least 12,000 customers with homes near the ocean. In Mississippi, several insurers, including Nationwide Mutual Insurance Co., have stopped covering wind damage in six counties along the Gulf. Some homeowners in the region got a 90% premium increase in 2006. And in Florida, State Farm, the largest private insurer there, said recently it would no longer write new homeowner policies and planned to drop 50,000 existing ones.

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