NU Online News Service, Sept. 4, 10:50 a.m.EDT

State-run property insurers of last resort in somehurricane-exposed states "are on shaky ground" financially, theInsurance Information Institute (I.I.I.) warned.

A white paper released by I.I.I., titled "Residual MarketProperty Plans: From Markets of Last Resort to Markets of FirstChoice" said, "The credit crunch and prolonged economic downturnhave exacerbated the already vulnerable financial condition ofcertain plans, making it more difficult for states to borrowfunds."

Robert Hartwig, I.I.I.'s president, and Claire Wilkinson, I.I.I.vice president of global issues, co-authors of the paper, said,"State-run insurers are putting themselves at increased riskthrough greater dependence on bond markets even as credit marketsstruggle to recover from the current financial crisis. Disruptionsto credit markets will likely make it more difficult and moreexpensive for some of these plans to issue debt to pay forhurricane losses."

Using Florida as an example, they noted that, "Ill-advisedlegislative steps over the course of several years have alsoexpanded the exposure base of a number of plans such as Florida,yet at the same time curbed the rates they can charge. Such movesput state finances under threat and leave taxpayers andpolicyholders facing the potential for increased assessments in theyears to come."

The study notes that total exposure to loss in FAIR, Beach, andWindstorm Plans (state sponsored insurance plans for last resort)combined has increased 1,173 percent from 1990 to 2008 – from $54.7billion to $696.4 billion. Total policies in force in those plansballooned from 931,550 in 1990 to 2.6 million in 2008.

"While a number of factors have contributed to the overallgrowth of the plans in the course of the last 20 years, the I.I.I.found that in some states, such plans have shifted away from theiroriginal purpose as predominantly urban property insurers," theI.I.I. said. "As a result, many have evolved from their traditionalrole as markets of last resort into much larger insuranceproviders, in some cases even becoming the largest property insurerin the state."

Using Florida again as an example, the study said the state'sresidual market property insurer, Citizens, which accounts for 69percent of all state residual market FAIR Plans' exposure to loss,saw its exposure more than double from $210.6 billion in 2005 to$485.1 billion in 2007, "reflecting rising coastal property valuesand higher building and reconstruction costs."

Florida Citizens' exposure to loss declined somewhat to $421.9billion in 2008, and by June 30, 2009, around $400 billion, I.I.I.noted.

The study also notes that legislation passed in several keystates this year has started to address some of the problems facingcertain plans. Over the past two years there has been a noticeablereduction in the number of policies and exposures in some parts ofthe residual property market due largely to the real estate bustand the addition of newly established insurance companies whosefinancial strength has yet to be tested by a major catastrophe.

The study also points out that insurers need to be able tocharge premiums commensurate with the risks they assume in coastalareas.

"Rate and underwriting restrictions on property insurers canresult in a situation where high-risk property owners actually paylower premiums, while low-risk property owners pay artificiallyhigher premiums. This leads to unfair cross-subsidization amongrisk classes and discourages mitigation," the authors wrote.