Travelers to Sop. Ummm, You Forgot Something Bub.

Indeed I did forget something earlier today when I profiled the latest coastal multi peril insurance plan, namely, the Travelers-Nationwide plan that was floated out 10 days or so ago. Before I get to the 4-pillars-plan I’m going to share a bit of insight I gained last night when, for the first time in literally months I was able to catch up with the guys from Soggy Bottom, shoot the breeze and a have few brews with them. What I heard last night reminded me my first finance board offline gathering after the storm in the Atlanta area, when my good cyberfriend Buford made a prediction about the coast real estate market after I described the problems with getting insurance coverage.

Don’t buy now, when the market capitulates you’ll be able to buy cheap.

Given real estate pricing here back in January 2006 I thought it was an awfully bold prediction but Buford, the sage college finance professor knows his stuff. Here is the dynamic of how the sky high costs of insurance can crater the real estate market despite pent up demand.

1. Katrina floods but does not destroy the house. Owner, with help from the SBA, insurance and private lending fixes the residence and re-occupies. Or, house is destroyed and owner buys nearby at an inflated post storm demand driven price.
2. Insurance renews for 2006-2007, the increase in premiums is astronomic. Family budgets are strained.
3. Gasoline and rising food costs coupled with the out of sight costs of insurance pushes many residents into mortgage default, home is repossessed. Many were already active listings on the market.
4. Bank gets first insurance bill and makes the wise business decision that they want no part of a three to four bedroom house with a $7000 plus total annual insurance charge. Fire sales the repos to move from inventory. Price declines kill non repo listings and make new single family construction not cost feasible.
5. Appraisals decline perpetuating the cyclical cycle.

I haven’t seen the MLS yet myself but I was talking with “money on the line” so I consider the information authoritative. Right now Hancock County has gone through bullet point 4. For me it means my long delayed rebuild will most likely be delayed indefinitely.

It is against this backdrop that I cited some hope earlier today for the slabbed in the ongoing discussion of solutions to the coastal insurance crisis. A reader from the Travelers reminded me I had missed their plan, “which is a private market solution, without federal subsidies, based on four principles: regulatory consistency for coastal zones (across state lines) so more companies offer coastal insurance, greater transparency in the pricing process, federal reinsurance for extreme events with premiums paid by the insurance industry, and appropriate building codes and land use planning for stronger homes.”

I appreciate the reminder and the fact the good people at the Travelers felt they could come to us to insure the record of discourse in solutions is complete.  In the process I can elimiate on of my many saved links from the past month by linking the Sun Herald story on the 4 pillars plan which represents an excellent example of the type of solutions we’re remaining very open to at slabbed. As Brain Martin’s comments indicate much more discussion is needed before we can cross the finish line:

Two major insurance companies and two national agent/broker companies are pitching a coastal insurance program that would give incentives to private companies that offer wind coverage and to homeowners who build stronger.

The program would not resolve the wind vs. water debate that ensues after hurricanes. After Katrina, thousands of homeowners sued insurance companies, claiming the carriers underpaid wind claims by blaming damage on tidal surge the National Flood Insurance Program covers.

The Travelers Companies Inc., Nationwide Mutual Insurance Co., the Independent Insurance Agents and Brokers of America and The Council of Insurance Agents and Brokers believe their Coastal Insurance Solution would bring insurance companies back into the wind market.

“We’re trying to provide leadership to help solve the issue,” said Eric Nelson, vice president of risk management at Travelers. With insurance companies pulling off the Coast, Nelson said availability is the biggest issue.

He said four components will make the proposal work in areas from Texas to Maine:

• The federal government would sell at cost to insurance companies coverage to reimburse them for catastrophic losses.

• Wind coverage for customers in coastal zones from Texas to Maine would be regulated by a federal body working with uniform rules, while states would continue to regulate other portions of insurance policies.

• Approved standards and wind-risk models would be used to set rates, which would be adjusted if models and actual experience conflict.

• Local and state governments would have incentives to adopt federal guidelines and land-use plans for stronger construction, with premium discounts for homeowners who build to those standards.

“As governor of a Gulf Coast state, I’m encouraged by the principles outlined with these four pillars,” Haley Barbour said in an insurance company news release about the proposal. “With the projections of risk from future hurricanes, I’m committed to working with my fellow governors, Congress and others to find solutions to the current insurance market issues. We should not wait for the next major storm before solving the substantial challenges of coastal insurance availability and affordability.”

U.S. Rep. Gene Taylor, D-Miss., will continue to work for wind and flood insurance in one policy.

His senior policy adviser, Brian Martin, questions whether the insurance proposal would really bring companies back to the coastal market.

“You really would have to have broad industry buy-in to the concept, so that 20 to 30 companies were selling the product,” Martin said. “And then when a hurricane comes, will they all go away?”