NU Online News Service, July 12, 2:58 p.m.EDT

A combination of higher coastal populations, artificiallysuppressed rates for last-resort insurers, and the inability ofinsurers to charge rates commensurate with risk along the coast hasdriven the residual property market in hurricane-exposed states tonew peaks in both exposure value and policy levels, says theInsurance Information Institute.

I.I.I. says, in a report titled “Residual Market Property Plans:From Markets of Last Resort to Markets of First Choice,” that from1990 to 2011, policy counts in FAIR and beach and windstorm planshave grown from 931,550 to 3.3 million. Total exposure to lossduring that time has gone from $54.7 billion in 1990 to $884.7billion in 2011, an increase of 1,517 percent.

“Arguably, many of the plans have become a home for the mosthighly exposed, wind-only risks–in other words the least attractivetypes of business,” says I.I.I. “In some cases, this has left planswith huge concentrations of risk.”

With the added risk comes added volatility. I.I.I. says of the31 FAIR plans for which data is available, 28 have incurred atleast one operating deficit since 1999. All of the six beach andwindstorm plans for which data is available have sustained at leastone underwriting loss in that time.

Citing a Government Accountability Office study, I.I.I. saysthat between 2005 and 2009, plans in Mississippi, Texas and Floridashowed the largest percentage of growth in terms of both exposureand number of policyholders.

Florida's Citizens Property Insurance Company accounts for 71percent of the total exposure for FAIR plans, and 62 percent ofFAIR plans' policy counts, says I.I.I. Massachusetts has the nextlargest number of policies with 8 percent of total FAIR planpolicies.

For beach and windstorm plans, the Texas Beach and WindstormPlan leads the way with 274,654 policies.

I.I.I. says part of the reason for these plans' growth is thegrowing population in coastline counties, which has increased by 84percent between 1960 and 2008.

The changing nature of the plans themselves also plays a role.FAIR plans, traditionally used as a last-resort market in urbanareas, are acting as insurers of last resort for residents inshoreline communities in states that do not have beach andwindstorm plans. Beach and windstorm plans are being merged withFAIR plans in states such as Florida and Louisiana. I.I.I. saysthis phenomenon makes it difficult to make direct comparisons inpolicy counts with earlier years. “What is clear, however, is thatthe rapid growth in the FAIR plans is due in part to thesemergers,” I.I.I. says.

And because rates for these plans are controlled by regulatorsand legislatures, I.I.I. says prices are “vulnerable to politicalmanipulation,” which leads to rate suppression.

Private insurers, in turn, are unable to achieve adequate ratesfor coastal risks, and pull out of markets, creating availabilityissues and driving even more people into last-resort insurers,I.I.l. says.

While some private insurers made a conscious decision afterHurricane Katrina to limit their coastal exposure, I.I.I. PresidentRobert Hartwig tells PC360 that insurers made those decisions notjust out of fear of losses, but with the understanding that theywill never be able charge rates that reflect risk.

Noting how the private market, if left to its own devices, canadequately cover coastal risks, Hartwig says coastal availabilityissues are virtually nonexistent for commercial property risksbecause private insurers are allowed to decide what risks they wantto assume and what rates to charge.

“Go to Florida; go to riskiest spot on Key West to a bar orrestaurant, and that is insured by the private sector,” Hartwigsays, noting that the premiums charged do not prevent businessesthere from growing and thriving. “The reality is that everybusiness in Florida, no matter how risky, is insured in privatemarket,” he says.

In the personal-lines market, though, insurers do not know whatthey will be able to charge, he says, leading them to limit theirexposure in riskier areas.

Complicating matters, Hartwig says people in high-risk areashave become accustomed to entitlements and subsidies, and enactingpolicies that would raise rates are unpopular. “Even conservativesappreciate getting a subsidy,” Hartwig says, pointing out thatthose who typically are in favor smaller government are not eagerto give up their artificially low rates.

Examining two different post-Katrina approaches to residualmarkets, Hartwig says Louisiana, which was heavily impacted by thestorm has been bucking the national trend and shrinking itslast-resort insurer by adopting the approach that the state cannotand should not assume massive risk in its state-run plan.Louisiana, he says, is “not willing to bet the state's future oncoastal subsidies,” and is allowing insurers to charge actuariallysound rates.

Florida, on the other hand, “has squandered dozens ofopportunities over the last 20 years” to address its residualmarket, says Hartwig. The state, he contends, should be put on afive-year glide path that would align risks with adequate rates.“Once again, this is not popular because people will losesubsidies,” he says.