States' Residual Market Exposure Hits $650 Billion

NU Online News Service

The Insurance Information Institute in a new study said total exposure to loss by state-run property insurers of last resort has exceeded an estimated $650 billion.

The New York-based I.I.I. warned that the soaring growth of the state-run operations may ultimately shift much long-term risk of hurricane-related losses to policyholders and taxpayers, even those who live nowhere near the coast.

According to I.I.I., the $650 billion number is an incomplete total for 2006, which compares with $54.7 billion in 1990. Total policies in force, I.I.I. found, have also risen to more than two million.

Claire Wilkinson, I.I.I. vice president for global issues, noted that in Florida by the end of this first quarter, Citizens, the state's insurer of last resort, had a $430 billion exposure--up from $210.6 billion in 2005. "In over a year it has more than doubled," she said.

She noted that I.I.I. had decided to do the state residual market study because of "recent demographic shifts and how challenging it is for insurers writing in coastal and high risk markets."

Ms. Wilkinson said the flow into state funds was occurring because insurers were not able to charge rates commensurate with the risk.

I.I.I.'s study called the state insurers' growth "explosive" and attributable to factors that included the rapid rise in coastal development and property values and the changing shape and role of state-run property insurers in a number of states.

Robert P. Hartwig, president and chief economist of the I.I.I., said: "While state-run insurers of last resort fulfill a key role by ensuring that policyholders can obtain insurance coverage, many have morphed from their traditional role as urban property insurers into major providers of insurance in high-risk coastal areas."

The shift of high-risk exposure away from the private property insurance market, Mr. Hartwig said, is placing an enormous financial burden on state-run insurers, leaving a number of them operating at substantial deficits.

As a result, he said, state-run insurers of last resort may end up shifting the long-term risks of hurricane-related losses to policyholders and taxpayers who do not live near the coast.

"Depending on the state, the redistribution of costs is commonly achieved via laws that allow state-run insurers (which are often the largest insurers in the most hazardous areas) to recover their losses in excess of their claims-paying resources by assessing (effectively taxing) the insurance policies of homeowners and business owners throughout the state, including those well away from the coast and those who have never filed a claim," he said.

"In some cases," he added, "even unrelated types of insurance such as auto insurance and commercial liability coverage can be assessed."

Miss Wilkinson, who co-authored the study, said, "Even in states where the value of insured coastal property represents a relatively small percentage of total insured property values, this does not mean that state-run property insurers are not experiencing rapid growth."

It was noted as an example that North Carolina's $105.3 billion in insured coastal exposure represents just 9 percent of the state's total insured property values. Yet, the state's beach and windstorm plan saw its exposure and total policy count more than double between 2003 and 2006.

Mr. Hartwig remarked, "The insurance industry is committed to working in partnership with public policymakers, consumers and businesses in developing solutions to the formidable challenges posed by catastrophe risks in future."

The full report, "Residual Market Property Plans: From Markets of Last Resort to Markets of First Choice," is available to I.I.I. member companies at http://www.iii.org/members/special2005.htm