PETER P. CASEY
‘Growing concern’
What insurers are calling the perfect storm may not have wreaked major damage to the Bay State’s real estate industry as of yet.
But some local real estate professionals are keeping their eye on rising homeowner’s insurance premiums and the tougher underwriting requirements that in the future could affect real estate transactions in Massachusetts.
Multimillion-dollar losses from claims, lawsuits and poor stock market investments during the last several years have created a “perfect storm” scenario for property casualty insurers, according to industry analysts. To offset the losses and minimize risk, insurers are raising premiums and making it more difficult for some homebuyers to secure insurance.
Homebuyers in states like Florida, California and Texas, where insurance companies have had to pay for costly weather-related damages and mold claims, have experienced the biggest challenges when it comes to insurance. Realtors in some states – where large insurers have stopped writing new homeowner’s policies and have hiked their premiums by double digits – have seen real estate deals collapse because buyers can’t obtain insurance.
While Realtors interviewed by Banker & Tradesman say that the insurance issue hasn’t had as huge an impact in Massachusetts, they acknowledged that skyrocketing rates and the unavailability of insurance are becoming issues to watch.
“I would say that we’re seeing slightly more difficulty with buyers obtaining insurance in some cases,” said Susan Renfrew, a Greenfield Realtor and vice president of legal affairs for the Massachusetts Association of Realtors. “I don’t think it’s reached a point of people being denied, but it’s getting more tough, or significantly more expensive, for some people to get insurance.”
According to real estate insiders, owners of multi-unit properties in the Bay State have already started seeing a jump in insurance costs.
In Massachusetts, where home prices have escalated beyond the reach of many first-time buyers, the higher insurance costs for multifamily properties could have a significant impact. Especially, in the state’s urban areas – where two- and three-family homes are often the best option for first-time homebuyers who can use the other units for rental income – the higher rates and stricter underwriting standards will be another obstacle buyers have to overcome.
“Is it [rising rates] going to have a giant impact? No, but I would say it would certainly impact the purchase of a home as far as qualification is concerned because although insurance has always been included in the qualification for a mortgage, I think it’s going to be concentrated on more specifically, because certain areas of certain towns are eventually going to get hit substantially,” said Mark B. Hutchinson, president of the Eastern Middlesex Association of Realtors.
Ron Phipps, the vice president for New England for the National Association of Realtors, said that homeowner’s insurance problem is affecting the real estate industry in this region “to probably a greater degree than the public knows.”
Many insurance companies in New England won’t insure properties that are within a mile of water, he said, or are hesitant to insure older properties, particularly multifamily homes, that may have lead paint hazards. Insurers are also issuing policies with more exclusions to what is covered, he said.
One of the latest trends is for insurance companies to not only check how many claims a particular buyer has made, but to also track a property’s claim history. If multiple claims have been filed from a particular home, that property is deemed high-risk. Insurers are also assessing risk by checking the credit ratings of prospective policy-holders and some companies are treating mere inquiries about coverage from policyholders as actual claims and raising rates.
“It’s a big issue in a lot of states – in states in the Southwest in particular,” said Gil Woods, owner of Edmund G. Woods Co. in Holyoke. “I’ve talked to some brokers in other states who have had very expensive sales deals collapse two days before the closing because the house itself was red-flagged as a problem or the person buying the house had made claims.”
‘A Good Deal’
Woods said he hasn’t seen that happen here. However, while the unavailability of homeowner’s insurance hasn’t been a big threat to real estate transactions in this region, Phipps said because of rising rates and the tougher underwriting requirements, Realtors are now spending more time focusing on whether a client has insurance and referring buyers to independent agents that can get them insurance.
In the past, brokers spent more time on the financing end of the transaction, but today the focus is gradually shifting to insurance, said Phipps, owner of Phipps Realty in Warwick, R.I.
“This is a national … growing concern that in Massachusetts, in particular, developers, multi-unit owners and investors, essentially, are already seeing,” said Peter P. Casey, president of the Massachusetts Association of Realtors, during a recent interview.
Casey said that the issue eventually would affect the single-family housing market, as well.
According to the National Association of Independent Insurers, the property/casualty insurance industry posted a $7.9 billion next loss in 2001. That was its first-ever net loss.
‘They’re [insurance companies] doing what they can to recover, but what they’re doing is, in effect, reducing the availability of insurance and or making it more expensive,” said Casey, president of Prudential Wilmot Whitney Real Estate in Weston.
NAR has created a task force to examine the problems associated with obtaining insurance and work with experts to develop solutions. NAR also features a fact sheet and tip on its Web site for members to get more information about the insurance problem.
Timothy Farrell, an insurance broker with Farrell Insurance in Greenfield, said that premiums for insurance policies on single-family homes and condominiums are still a “good bargain” – at least in Western Massachusetts. The annual insurance premium for an average home in Greenfield and most of Western Massachusetts is between $350 and $450, he said.
But premiums for older multifamily homes, particularly properties that are not owner-occupied, have gone up by as much as 30 percent, said Farrell.
“I just had a $250,000 four-family house with a $2,800 annual premium,” said Farrell. “If it was a single-family [home] at the same price the insurance policy would be about $500.”
Homebuyers in Massachusetts, however, are luckier than their counterparts in other states in some respects.
Even if a buyer can’t secure insurance from a traditional insurer because of the underwriting criteria, the buyer is virtually guaranteed a standard homeowner’s policy through the Massachusetts Property Insurance Underwriting Association under what’s known as the FAIR, or Fair Access to Insurance Requirements, Plan.
Irene Morrill, director of technical affairs for the Massachusetts Association of Insurance Agents, said agents can submit an application to the MPIUA and a person can get an insurance policy that might be a little more expensive than a standard policy elsewhere.
In other states, people who have trouble getting a standard policy are forced to go through other channels to get a policy that will be three or four times more expensive, she explained.
“We have a good deal in this state,” said Morrill.
According to Morrill, real estate transactions won’t feel a big pinch from higher rates and stricter underwriting rules.
“I can’t imagine that house sales will be drastically affected,” said Morrill.
