Insurance Information InstituteResidual MarketProperty Plans: From Markets of Last Resort to Markets of FirstChoice

Florida's Citizens Property InsuranceCorp., the largest property insurer of last resort in the U.S.,provides insurance to residential and commercial property ownersunable to purchase coverage in the standard market. Yet FloridaCitizens saw the number of its total policies in force drop to 1.2million at year-end 2009, down 14 percent from 1.4 million atyear-end 2008. Meanwhile, Louisiana Citizens Property InsuranceCorp., the fourth largest state-run property insurer of last resortin the U.S. in terms of total policies in force behind Texas andMassachusetts, has seen an even more dramatic reduction in itstotal policy count. Louisiana Citizens had about 165,000 policiesin force in June 2008, a figure that dropped to 127,000 policies asof June 2010, a reduction of around 40 percent.

"However, this year's report by the Insurance InformationInstitute, like the reports of the last two years, records theongoing growth in the exposure base of the residual market propertyinsurers along with the still-precarious financial condition ofsome plans. This growth comes despite a collapse in the housingsector that has brought development in many catastrophe-prone areasto a near standstill," write the report's co-authors, Dr. RobertHartwig, president of the I.I.I. and an economist, and ClaireWilkinson, vice president of Global Issues at the I.I.I.

The I.I.I. estimates that, even as the number of policyholdersin Florida, Louisiana and the 32 other Fair Access to InsuranceRequirements (FAIR) Plans for which data are available dropped to2.47 million from 2.62 million between 2008 and 2009, theircumulative exposure to loss grew to $614.9 billion in 2009 from$612.7 billion in 2008. The nation's FAIR plans account for by farthe majority of policies and exposure in the U.S. overall residualproperty market. But when the FAIR Plan exposures are added tothose incurred by Beach and Windstorm Plans, such as those in placein states such as Alabama and Mississippi, the U.S. residual marketexposure to loss grows to $703 billion (2009) from $696 billion,according to the Property Insurance Plans Service Office(PIPSO).

"As long as [these] plans continue to grow, state finances willremain under threat and ultimately taxpayers, many of whom livenowhere near the coast, will continue to face the prospect ofincreased assessments in the years ahead," Dr. Hartwig and Ms.Wilkinson state.

Since state property insurers of last resort often chargepremium rates that do not reflect the risk they are incurring onthe policyholder's behalf, the claims paying capacity of FAIR,Beach or Windstorm Plans is relatively limited, and often exhaustedquickly in the event of a severe storm. Should this occur, a numberof capital-raising options are available to state-run propertyinsurers. The two main options -- levying assessments on allpolicyholders and issuing bonds that must be paid back by all statetaxpayers -- often result in higher costs for all of the state'spolicyholders, no matter where they live, as these costs are passedalong in the form of premium surcharges or higher taxes. Everyhomeowners insurer doing business in a particular state isgenerally a member of a state-run residual market program, just asauto insurers join forces to spread the risks involved in coveringproblematic drivers through assigned risk programs.

"Increasingly plans are being bailed out by a diversion of taxrevenues," the I.I.I. report states, pointing to the fact that in2008, after Hurricane Ike struck the Texas coastline, $230 millionof the $430 million in assessments incurred by the Texas WindstormInsurance Association's (TWIA) member insurers were subject topremium tax credits. TWIA is the state's insurer of last resort forwind and hail coverage in 14 coastal Texas counties and parts ofHarris County.

The report also notes that Mississippi enacted legislation in2007 to allow a one-time diversion of $80 million in federal andstate funds to the Mississippi Windstorm Underwriting Association(MWUA), one of the state's two residual market plans, to boost theMWUA's reserves for windstorm damage claims and protect MWUApolicyholders against rate increases.

The I.I.I. report also offers a detailed analysis of theresidual market plans in North Carolina and South Carolina, as wellas the states cited previously, a list which includes Florida,Louisiana, Massachusetts, Texas, Alabama and Mississippi.Policymakers and other interested parties seeking an update on thepending federal pieces of legislation on the issue of naturalcatastrophe risk should consult the I.I.I. report's Appendix, whichcan be found on the final two pages of the 51-page document.

See also Citizens Under Fire for Contracts, Citizens Enhances Outreach Program