What is PIA?
   •  Join Now
   •  Contact Us
PIA of Louisiana
   •  Board
   •  Committees
   •  Staff
PIA National
Local Chapters
   •  Conference
1752 Club






New Study Finds That Storm Risk Stats
For New Orleans May Be Skewed

Homes are better built and hurricane wind risk in New Orleans is lower than what many insurers typically assume, so policyholders may be paying more than they need to for homeowner's insurance, a new study commissioned by the New Orleans Redevelopment Authority reveals.

While peak gusts on the Louisiana coast hit about 130 miles per hour in a hundred-year storm, the peak wind gusts in New Orleans only reach 117 miles per hour an average of once every hundred years.

"A lot of people think that New Orleans is right on the coast, and it isn't. There's about a 10-15 mile per hour difference between New Orleans and the nearest point on the coast in the wind speeds," said Lawrence Twisdale Jr., vice president and principal engineer at Applied Research Associates. "That's a pretty big difference."

Ommeed Sathe, director of real estate strategy at NORA, said that while the finding may seem obvious to locals, it's important to formally document it. "In some ways it's proving scientifically what people saw with their own eyes, which is, that people's roofs stayed on. And if they stayed on during (Hurricane) Katrina, it's reasonable to think that they'd stay on during future events."

The finding is one of several revelations regarding risk, insurance cost and mitigation potential from a unique, community-based risk model commissioned by NORA, which has been frustrated that the high cost of homeowner's insurance makes it too expensive for many people to buy homes that were relinquished to the state after Hurricane Katrina.

Sathe said the cost of homeowner's insurance has been a real obstacle in getting the 5,000 Louisiana Land Trust homes in NORA's care back into commerce. Rates went up five-fold after Katrina, Sathe said, which is tantamount to adding $50,000 onto the cost of a home and knocking many potential buyers out of the market.

Sathe hopes that the study will show insurers that the risk of hurricane wind damage in New Orleans isn't as bad as they might think, and there's plenty of latitude for new insurers to come in and undercut the market prices while still covering their costs for risk. "Before, no one really knew what the risk was," he said.

Insurance Commissioner Jim Donelon said the study gives him something to show insurers to challenge their assumptions about hurricane risk in Louisiana, and his actuarial staff is reviewing the findings. "Anything that says we're a better market than we're perceived to be is helpful," he said.

Taking a fresh tack

In performing the study, the modeling firm Applied Research Associates inspected 542 Louisiana Land Trust homes around the city to assess the quality of construction, then looked at the 15 biggest hurricanes to have hit New Orleans over the past century, figured out what the actual wind speed was when the storms reached New Orleans, assessed how local properties would fare, and compared its findings to what insurers actually paid for damages and what consumers actually pay for premiums.

The $403,000 study, funded in large part by a grant from the Rockefeller Foundation as result of lobbying by Ezra Rapport, the former No. 2 official in the Nagin administration's Office of Recovery and Development, is considered unique because it uses actual homes instead of theoretical ones in a "ground-up" study, and documents the quality of construction of the housing stock of the city.

The study found that the 10- to 15 mile-per-hour difference in wind speeds from the coast to the city means that the potential for damage in New Orleans is lower. But because the models used by insurance companies to estimate risk use coastal wind speed, they show greater potential for wind damage, which is reflected in homeowner's insurance prices.

Weighing costs

By Applied Research Associates' calculations, the risk of wind damage to a NORA property is about $4 to $5 per $1,000 of home value. But according to homeowner's rate comparison guide compiled by the Louisiana Department of Insurance, it costs between $11 and $20 per $1,000 of home value to insure a home in New Orleans.

Wind risk in the New Orleans area accounts for about 58 percent to 65 percent of the premiums people pay; the rest is the cost of covering fire, theft and liability.

Sathe said that the findings show that consumers aren't paying an actuarial rate for homeowner's insurance, but whether they're paying a fair price is "a trickier question." Insurers are charging what they're comfortable with, and they clearly don't see themselves making a bundle, or companies would be flocking to Louisiana rather than trying to flee from it. The problem, Sathe said, is that insurers aren't set up to handle the sudden capital demands of a catastrophe.

Donelon said he does not believe consumers in Louisiana are overpaying to insure their homes. If one considers that Louisianians pay collectively about $2.3 billion per year in property insurance premiums, yet insurers paid $25 billion for insured property losses of all types in Katrina, $3 billion in Rita, and $2.8 billion in Gustav, insurers are paying out more than they take in.

"For Katrina alone, we collected more than 10 years of every premium dollar we paid," Donelon said. "In my lifetime, no insurer doing business here in Louisiana in 2005 will be profitable in Louisiana."

Donelon said he sees a general problem with hurricane models, because they seem to say whatever the clients want them to say. They're widely used by insurers and reinsurers to justify rates, it's difficult to check their assumptions, and Donelon has rejected the use of two commercially available models because insurers were using them to justify rates that were too high. His skepticism extends to NORA's research.

"It's a relatively new science, it's relatively self-serving, and it's universally used. It's very difficult for us to second-guess it," Donelon said. "This most recent one by NORA seems way out of line with everything being used by industry."

Focusing on solutions

Another major finding of the study is that if homeowners take steps to mitigate their wind risk, the cost of wind damage risk falls to 60 cents to $2 per $1,000 of home value. And the most cost-effective steps aren't the big things like installing storm shutters, Sathe said, but little things to help keep the roof on such as using thicker nails and more of them in the roof decking and adding hurricane straps.

Twisdale said that nearly all existing homes can be retrofitted and greatly reduce their risk of hurricane damage.

Because the mitigation payoff is so great, Sathe said NORA has started placing building requirements above and beyond the building code in developments NORA supports. NORA is also documenting upgrades on these homes in hopes that it will help make the case to insurers that its homes are built with hurricanes in mind.

Sathe said it is his hope that the city of New Orleans or other groups will adopt NORA's extra criteria to help upgrade the resiliency of the overall housing stock in the area to help draw a second look from insurers, and that the industry will become more sophisticated about the mitigation discounts it offers.

"If we can get a pricing break for mitigated properties, it creates a permanent private incentive for individual citizens to do this work. We think that's so much more powerful than paying people to do it."

Times Picayune—New Orleans, La.

Thanks to Our 2023 PIA Partners:
AFCO Capital Premium Financing CRC Group Gulf States Insurance Co.
LRA Workers' Comp National General, an Allstate company Stonetrust Insurance
Professional Insurance Agents of Louisiana
4021 W. E. Heck Ct., Building K • Baton Rouge, Louisiana 70816
(800) 349-3434 • (225) 766-7770 • (225) 766-1601 (fax)