By Peter Blais

Many operations in hurricane-prone areas are still struggling to insure their property. Is the market finally softening?

Jimmy Fayard has a dilemma.  Insurance premiums at Gulf Hills Golf Club have tripled since Hurricane Katrina struck the Mississippi coast in late summer 2005 and left a path of destruction at his semi-private facility. What’s more, many insurance companies have pulled out of coastal markets altogether following the hurricanes of 2004 and 2005. Even though Fayard has managed to maintain coverage at Gulf Hills, the club has been assigned to a high-risk, high-cost state insurance pool.
 
Something has to give.

“We’re in the process of re-evaluating our coverages,” says the general manager, noting that he’ll likely be forced to select policies with much higher deductibles than the club has carried in the past. “We’ll be cutting out a few policies on equipment, probably maintaining insurance on high-end items and deleting the low-end. Those are the types of choices we’re having to make.”

Indeed, the choices have been tough for many course operators in coastal regions since the record-breaking storm seasons of 2004 and 2005. Consider the case of Brian Kroh, general manager of Johns Island Club in Vero Beach, Florida. Before hurricanes Frances and Jeanne slammed into the Sunshine State in 2004, Kroh carried insurance that covered debris and tree removal, as well as landscaping and many other course-related losses. Last year, his insurance company discontinued those types of course-specific packages.
 
Similar stories of woe—some much more nightmarish than the tales shared by Fayard and Kroh—have been repeated across the Gulf Coast states and along the Eastern seaboard. The repercussions have even affected ancillary golf businesses, including the Charleston and South Carolina chapter offices of the NGCOA.
 
“We were insured with a company for 10 years for our office building,” notes Terry Sedalik, executive director of the two chapters. “Our insurance company just cancelled our policy because they’re not doing anything along the coast anymore.”

Yet here’s an interesting paradox: Many observers contend the insurance market has softened. As such, it stands to reason that options should start presenting themselves for course owners. But that hasn’t necessarily been the case. Plus, the coverage limits on plans that are available are typically so low—and premiums and deductibles so high—that operators find little to no value in taking the insurance.
 
Given the current state of insurance affairs, Kroh believes operators have two reasonable options: set aside resources in case you suffer a loss or, in the case of private clubs, wait until you have a loss, then assess the members if you need more money.
 
“Neither is a great option,” admits Kroh, who adds that prior to the hurricanes, selecting insurance coverage was a fairly easy process. “Basically, we’re paying more and receiving less for our premiums.”

Two Sides To Every Story

To be fair, it’s understandable that insurance companies have been hesitant to insure property—including golf facilities—in storm-prone areas. After all, the hurricanes of 2004 and 2005 wrought $79.4 billion worth of insured damages in Mississippi, Louisiana and Florida. Hurricane Katrina alone generated the largest single loss in the history of U.S. insurance: $40.6 billion stemming from more than 1.7 million claims.

The figures are staggering. In Mississippi, for example, Hurricane Katrina claimed approximately 100,000 trees at coastal-area courses. Kevin Drum, executive director of the Mississippi Gulf Coast Golf Association and member of the governor’s commission on recovery, estimates it cost, on average, $100 per tree to remove. That equates to roughly $10 million for tree removal at golf courses alone. Factor in the cost to reimburse course owners for damage to buildings, turf and equipment, and the costs grow exponentially.
  
Given the losses caused by Katrina and the other named storms of 2004 and 2005, many insurance companies drastically altered their policies. The first types of coverage to be jettisoned (or at least priced to nearly unaffordable levels) were wind and tree-damage insurance. In some cases, insurance companies pulled out of coastal regions altogether. (An October 2006 article in Risk & Insurance Magazine listed a number of companies that had either substantially altered or discontinued coverages in coastal areas. They included Zurich Financial Services, Safeco Insurance, St. Paul Travelers, Arrowhead General Insurance, International Catastrophe Insurance Managers and Bollinger Insurance.)

“Coastal property premiums are going up, and coverage is going away,” says Joel Willis, program director of Clubsurance, a division of The Commonwealth Insurance Group in Charleston, South Carolina. “Many companies that were writing tee, green and fairway insurance have abandoned that market. So, there’s less competition in the market.”

According to experts, the reason some operators are being dropped by their insurance companies in hurricane-prone areas has to do with basic survival. Fran Coulter, president of Massachusetts-based Fairway Underwriters, notes that losses from windstorm coverage in a coastal area could “potentially bankrupt the golf program.” Even still, some companies continue to write windstorm insurance—they’re just very selective about for whom and where they do it.
 
“What everyone (insurance companies) is trying to avoid is the catastrophic loss,” Coulter adds. “You don’t want to have six courses in one place and have them all get wiped out. That’s why most insurance companies are wary of providing wind insurance; they’re looking very closely at their concentration of risk.”

In addition to policy changes, storm losses of recent years have yielded a new insurance vocabulary. For instance, in Louisiana, “coastal” now means 100 miles inland. “So during Katrina, even though we were not insuring anyone on the coast, we took losses 100 miles back,” Coulter notes.
 
Major payouts have also prompted many insurance providers to hedge their bets, in a manner of speaking. For example, a company may write one policy in Florida then try to offset the risk by writing, say, three policies in traditionally “safe” states. Even still, Coulter points out that obtaining windstorm insurance in Gulf Coast states is “both difficult and expensive.”

Despite the inherent risks of writing policies in coastal regions, many signs suggest the insurance market is beginning to soften and policies, though expensive, are being written. The reason: A virtually hurricane-free 2006, coupled with a fairly strong stock market, has left insurers seeking additional liquidity. With insurance companies searching for more cash, the easiest solution is to drop rates and sell more insurance.

“Currently in the insurance market, you have falling premiums in property, general liability, auto, umbrella, inland marine and workers compensation coverage, as long as it is not coastal property,” Willis explains. “So, you have a hardening of prices and coverages in the coastal property market and a softening in everything else.”

Coulter agrees. “Companies jacked up their premiums after Katrina and the rest of the hurricanes,” he says. “Then last year, we had no hurricanes. They (insurance companies) have so much money they don’t know what to do with it.”

Statements like these and the general perception that the insurance market is softening are of little comfort to operators like Kroh. He and others “have seen more availability in terms of property and casualty as well as wind insurance,” but the packages being offered remain extremely expensive and are saddled with high deductibles. What’s more, Kroh and other Florida operators have to re-insure those deductibles with the state’s windstorm insurance pool.
 
“A business can insure up to $1 million, but at a much higher rate,” Kroh adds. “And, the pool has its own deductible, too. It could be a $200,000 to $300,000 deductible.”
In other instances, insurers have started applying  percentage wind deductibles to claims. According to Willis, the market has gone from  $1,000 flat property deductibles to a 5 percent wind deductible. “Whether the premium changed or not, that means a huge increase in total insurance costs,” he adds.

Bright Side Of the Storm

As absurd as it may sound given these numbers and the damage caused by the storms, some observers suggest that the hurricanes of 2004 and 2005 actually yielded some positive effects. That is, of course, if you view things with a glass-half-full perspective.
 
“We didn’t realize how much a closure could affect a golf course,” says Drum, who also serves as executive director of the Gulf Coast Chapter of the NGCOA. “Taking a course out of play for six months can get it back into great condition. Losing trees increased sun exposure and airflow, which has helped some areas grow grass better.”

For proof of this better-than-before scenario, Drum points to The Bridges Golf Club in Bay St. Louis and Sunkist Country Club in Biloxi. Following the storms, Arnold Palmer came in to renovate The Bridges, while Sunkist officials made time to reconstruct its greens during the downtime.
 
Jokingly, Kroh adds that Hurricane Frances provided a labor-free pruning program at Johns Island Club. “We have an aggressive pruning program, but it’s not based on the difficulty of obtaining insurance. We instituted it because of the area we are in and the health of the trees. Insurance has not changed our maintenance practices.”

What has changed, however, is the amount of time Kroh and other club officials spend researching and evaluating insurance programs, and determining a balancing point between deductibles and insurance payments. “Prior to the hurricanes, that was a fairly easy process; now, we spend a lot of time giving serious thought to value,” says Kroh, adding that he benefits from a finance committee staffed with insurance experts and a strong, longstanding relationship with his broker. “Typically, we would look at our broker relationship every five years to make sure we’re getting value. We didn’t do that during the hurricane run.”

Meanwhile, Fayard says the storm reinforced his belief that he and the club had a strong storm plan in place, although no one could fully prepare for a hurricane of Katrina’s magnitude. “For example,” he recalls, “we opted to purchase rather than lease all of our maintenance equipment and golf cars. So, we didn’t have to make any additional payments on equipment broken during the storm.
 
“It would have been tough otherwise,” Fayard adds. “We’re a member-owned course, and that could have been devastating.”

Round and Round

While wind and tree-damage coverage may slowly become more available and affordable, Coulter warns that price hikes and lack-of-coverage issues can return as soon as another major storm hits. It’s the nature of the insurance industry, a trait he describes as “knee-jerk.” To illustrate his point, Coulter points to the most unlikely of examples.
 
“I remember there was one child-molestation case in California back in the 1980s,” he says. “Yet no one, even on the East Coast, could find liability insurance for daycare centers after that.”

Call it the cyclical nature of the beast. Insurers try to maximize their investment dollars and when those efforts are going well, they often drop their rates. When rates are low and losses begin to mount, the cycle evolves from a soft to a hard market.
 
“It’s happened that way for a long time,” Coulter adds. “Insurance companies react to losing money when trees are damaged at golf courses by no longer covering trees.”

Kroh shares Coulter’s guarded optimism, noting that the next major windstorm will likely make matters even worse. Conversely, another year or two without major storms could further soften prices and prompt more companies to enter (or return to) the Florida coastal market.
 
“From 2006 to 2007, we saw it open up a little bit,” Kroh says. “Companies are becoming a little more aggressive in writing policies, even along the barrier islands.”

The future aside, many operators are facing tough decisions right now. According to Willis, operators who cannot find insurance in the standard market will likely be forced to search the excess and surplus lines market, which generally offers fire coverage and some wind coverage at an extremely high rate. “Self-insurance is a possibility,” Willis adds, “but it’s tough to tell owners that if they have a framed building on the coast.” He’s quick to note, however, that self-insurance can make sense “if they’ve taken all the precautions and built the structure properly, with the ability to handle sustained winds.”
 
Regardless of building structures or the current insurance climate, Fayard, for one, remains bullish on the future golf market—even in coastal areas.

“We believe we have a good future,” he says. “We hope all the courses around here hang in there. We’ll all be even better prepared next time, and I’m sure we’ll never forget what happened two years ago.”

Peter Blais is a Maine-based freelance writer.