The 800-pound gorilla: Coastal Property Dominates East Coast Insurance Scene

And coastal development still continues, and would be booming if not for the recession. Six of the top 10 states for coastal population growth from 1980 to 2003 are located along
the Eastern seaboard: Florida, Virginia, New Hampshire, Delaware, Georgia and South Carolina, according to the Insurance Information Institute (III).

"Coastal property coverage will always be an issue that won't go away," said Shawn Viana, senior vice president of Marshall & Sterling, Poughkeepsie, N.Y. "And carriers' weather models expect another heavy hurricane season in '09." (According to WSI Corp., there could be as many as 13 named tropical storms in the 2009 season, with 7 developing into full-blown hurricanes.)

Further down the coast in Florida, an underfunded cat fund is the "800-pound gorilla" lurking behind all of the state's insurance issues, including State Farm's recent announcement that it's pulling out of the Florida property market, said Jeff Grady, president and CEO of the Florida Assn. of Insurance Agents.

Away from the coast, agents in other Eastern states are experiencing the same economic problems afflicting the rest of the country, although some regional problems are related to indigenous industries, such as tourism in Florida and construction in New York.

"The economic conditions in our region are probably better than in many others, but that is not saying much," said J. Stuart Patterson, president of Preston-Patterson Co., a multiline agency in Conshohocken, Pa., just outside of Philadelphia. "Our general commercial accounts are seeing their second year of reduced exposures and premium determinants: reduced number of employees, lower revenue projections, lower payroll projections and a reduction in automobile fleets."

Is there any good news on the coast? Maybe: Early signs in some states like New York may suggest that the official prognosticators are right and some segments of the market may be starting to harden, at least in some areas and lines of business.

According to CIAB's Commercial P/C Market Index Survey, fourth quarter 2008 pricing in the Northeast and Southeast was up between 4 percent and 17 percent in lines like broker E&O, commercial property, construction risks, D&O, fl ood, EPL, marine, medical malpractice, terrorism and umbrella.

"Anecdotally, we may be starting to see tightening in premium pricing and insistence on underwriting guidelines in our region," said Ellen Kiehl, senior research analyst, PIA of New York, Connecticut, New Hampshire and New Jersey.

What follows is a state-by state report of what's going on along the East Coast. Although we covered trends and market conditions in 17 states, we've selected six for a close-up view: Florida, Massachusetts, New York, North Carolina, Maryland and South Carolina. Visit our Web site to read about other states.

AA&B managing editor Melissa Hillebrand and assistant editor Andrea Fridley contributed to this report.

Florida
There seems to be no end to the pain for the Florida property insurance market, especially with another hurricane season looming. State Farm's recent decision to pull out of the Florida property market leaves Citizens Property Insurance Corp., the state run insurer for high-risk accounts that combines the state's FAIR and Beach Plans, as Florida's largest property insurer, with more than 1 million policies. Citizens and private insurers alike rely on the Florida Hurricane Catastrophe Fund as a financial backstop.

But the cat fund is estimated to be $15 billion short of its $28 billion of full capacity to back up losses if there's a monster storm.

While observers argue the pros and cons of State Farm's latest insult to injury, the fact remains that Florida lawmakers must move quickly to stabilize the troubled cat fund, said Sam Miller, president of the Florida Insurance Council (FIC), Tallahassee, Fla. "Citizens' rates have been frozen for 3 years; they're lower than anything in the private market," he said. "It's bigger than it needs to be and doesn't have the revenues to get by after a major hurricane without statewide assessments."

FIC estimates that during the past 15 years, this underfunding has resulted in insurer underwriting losses that exceed premiums in Florida by an estimated $6.23 billion.

Unfortunately, property insurance rate increases are a political hot potato. Many Florida politicians, including Gov. Charlie Crist, have publicly opposed any rate increases, said Jeff Grady, president and CEO of the Florida Assn. of Insurance Agents. To bring the cat fund up to adequate levels could involve rate increases of as much as 20 percent–an unpopular move that few politicians want to make, he said.

And the irony of the state's ongoing political tug of war over cat fund adequacy is that it tops the country's states for coastal population growth: a 75 percent increase from 1980 to 2003, according to the III.

The situation is frustrating for agents and brokers who have to do business in the state. "It's out of control," said Thomas M. Cotton, president of Hugh Cotton Insurance Inc., a 60-year-old agency in Orlando that writes personal and commercial business, along with employee benefits and marine coverage. "Regulators turn a blind eye to companies violating state law and unfair or deceptive trade practices, so long as they are taking policies out on Citizens."

Aside from coastal property, however, Florida is struggling with the same soft market and poor economy as the rest of the country. And the state's top industries–construction, home sales and tourism–have all taken heavy hits from the rough economy.

"We see a mixed bag due to the unique Florida property situations, but most carriers are fighting to keep renewals," Cotton said. "We do business in more than 20 states and overseas, but our primary trade area is the southeastern states." The agency's top insurers include Fireman's Fund, Safeco, Travelers, Tower Hill and FCCI.

Cotton admits that apart from coastal property, both commercial and personal lines sales are "challenging," with "any large property schedule presenting a problem."

Massachusetts
Coastal exposures, coupled with industries such as high tech that are suffering in the current recession, have the potential to make Massachusetts an ugly state in which to do business.

However, there is a recent bright spot on the scene: cooperation between the insurance industry and state legislators over auto insurance reform. Last year, the Massachusetts Insurance Federation, the Fairness for Good Drivers Coalition and Insurance Commissioner Nonnie Burnes worked together to establish a new rating system where insurance companies establish their own competitive rates based on driving records rather than on credit. The law went into effect last April.

Like New Jersey, Massachusetts struggled for years with a tightly regulated auto system based on subsidizing urban drivers, a system so fl awed that on average, Massachusetts drivers ended up paying the fourth-highest auto insurance rates in the country. After the reform legislation was introduced last year, customers had the freedom to shop for the best coverage and prices and choose their insurers. Based on rate filings, some insurers were able to offer lower rates to nearly 70 percent of their customers, with the best drivers getting premium reductions of as much as 35 percent, according to the Property Casualty Insurers Assn. of America. Observers hailed the move as "the most significant development in 30 years of auto insurance regulation in Massachusetts."

Apart from the auto insurance turnaround, insurance pricing and availability in the state is "stable," said Frank Mancini, president and CEO of the Massachusetts Assoc. of Insurance Agents. And although the prophesized hard market isn't showing up yet, carriers are tightening up their underwriting standards. "We're not seeing a hardening of the market in terms of price. But certainly, the carriers are pickier about what they want to write," he said.

More insurers are willing to write in the state, possibly because of the auto reform, Mancini said. For commercial lines, carriers like Travelers and Peerless are active, while the leading auto insurers are Commerce, Safety Insurance Co. and Arbella, which combined write about 50 percent of the market. On the property side, Commerce is a major player, followed by the Andover companies, he said.

Prevalent industries in the state include technology and biotech firms, as well as educational institutions, especially in Boston with Harvard and MIT. Much of the research at these institutions is funded by the government, which impacts the Massachusetts economy if federal funding dwindles.

In the legislature, there are a number of proposals for 2009 and 2010 session, but those are mostly exclusive to the personal lines area, he said. In personal lines, the biggest piece of legislation would prohibit the use of credit to rate or underwrite private passenger automobile services–there is a regulation which prohibits that. The legislation would make that permanent.

And of course, the coastal property issue hovers over all. "We have a lot of coastline in Massachusetts, and like other coastal states, there has been a withdrawal from those areas by a number of insurers," Mancini said. "We do see some companies beginning to come back a little over the last year or so, but a lot of coastal property is in the residual market."

Massachusetts has a FAIR plan that provides wind and hail coverage for certain coastal communities, but does not have a beach or windstorm plan. The Massachusetts FAIR plan had more than 233,000 active habitational policies in 2007, with $79 million in exposures, III states.

New York
When it comes to coastal insurance, the issue in New York, Connecticut, New Hampshire and New Jersey is "affordability more than availability," Kiehl said. "Each of our states has taken special action on commercial property and homeowners coverage, especially on the homeowners side, to ensure that consumers are served, such as setting up market assistance programs to place coastal risks that might have otherwise been declined," she said. "It really does come down to some properties ending up in the surplus lines market and the consumers having to pay higher premiums."

However, most of these state programs haven't seen that much activity, an indication that the standard market is doing its job, Kiehl added. The market assistance program in New York has been in place since the 1990s, but hasn't seen tremendous growth, she said. New York has a FAIR plan, the New York Property Insurance Underwriting Assn., that provides property insurance statewide, including for coastal communities, but does not have a separate beach or windstorm plan. In 2007, the state's FAIR plan had less than 60,000 active habitational policies and $13 million in exposures in 2007, III states.

New York recently passed some innovative legislation to provide incentives for insurers to write coastal homeowners insurance and improve the coverage fi t between policies issued through the coastal market assistance program and the FAIR plan, Kiehl said. Using this program, the majority of the property risk is written through the New York Property Underwriting Assn., but there are coverage gaps.

PIA members in the state are concerned that certain high frequency claims might not get paid through this mechanism. The New York legislature has addressed the issue and now the FAIR plan is working out the details, which will allow it to write broad form coverage.

Some of the biggest writers of homeowners insurance through independent agents in the fourt-state region are Travelers, Chubb, Liberty Mutual, New York Central Mutual, The Hartford, Met Life, Franklin Mutual Group, the Concord Group, and the Andover Group, Kiehl said.

Insurance regulation in these states is "sophisticated and good," with New Hampshire Commissioner Roger Sevigny recently named NAIC president, New York Superintendent Eric Dinallo at the forefront of the financial services issue and the AIG bailout, and both New Jersey Commissioner Steven M. Goldman and Connecticut Commissioner Thomas Sullivan showing good leadership skills and employing top-notch people. "All these commissioners are proactive when it comes to consumer protection and are supportive of state regulation of insurance," Kiehl said.

One of the main industry issues in New York is the pricing and availability of contractors insurance. PIA members in all four states in the region historically have reported having more difficulty placing this coverage than any other line of business, Kiehl said.

New York's unique labor laws are often cited as the reason for the tough market.

For example, Labor Law 240 and 241 do not require proof of contractor negligence in injury-related lawsuits. An outgrowth of New York's old scaffolding laws–which were designed to protect construction workers prior to the state's workers' compensation system–these regulations make New York the only state in the country that does not provide for proof of negligence.

This unique condition is a double edged sword for agents because although it may render coverage availability difficult, it also raises the possibility of hardening rates should Labor Law 240/241 be reformed, said Shawn Viana, vice president of Marshall & Sterling in Poughkeepsie, N.Y. and a past PIANY president.

"All the factors that drive a hard market are starting to come into play," he said. "Construction is a good part of our book of business, and we're most receptive to risk management issues, which is where we differentiate ourselves from Main Street agencies," he said. "The lower Hudson Valley is still fairly active, even for contractors. Should the commercial lines rates firm up this year, we will experience revenue growth, unless the exposure base is reduced, which unfortunately is quite likely."

As far as unique risks, "I don't know how much we differ from other regions; for the most part, carriers find the Northeast and New York to be profitable. Probably the biggest challenge we face in upstate New York is the limited population growth we're going to experience over the next 10 to 15 years. That will create challenges not only for agents but carriers as well. Where Florida and Arizona have seen 30 percent growth rates, New York state is lucky if it's grown 1 percent. Along with that goes the economy and business."

North Carolina
North Carolina was once noted for its textile and tobacco industries, both of which have been shifting overseas and have caused big job losses, said Stuart Powell, vice president of insurance operations and technical affairs of the Independent Insurance Agents of North Carolina. "In terms of unemployment, we're pretty close to the national average, although things do tend to be worse in non-urban areas," Powell said.

As far as insurance pricing and availability, things are still somewhat soft in commercial, although observers anticipate commercial hardening as the year goes on. The residential property market is slightly hardening, he added.

Like other coastal states, North Carolina is especially concerned with high-risk property, which is insured by the North Carolina Insurance Underwriting Assn., known as the Beach Plan. The plan was established to provide windstorm coverage to coastal homeowners on the barrier islands who could not get coverage through the private market.

Independent actuarial studies by PCI and others suggest that the plan is not financially capable of weathering a major storm because of inadequate rates. It insures almost $70 billion of coastal property and is growing by $1 billion each month, but only has resources to pay about $1.5 billion in damages. A big storm could inflict more than $7 billion in damages.

A recent study commissioned last fall by the North Carolina General Assembly is tasked with making policy recommendations for 2009. "There is anticipation that there will be activity with this issue this year, looking at re-engineering and tightening of some areas, and providing more specific guidance in areas," Powell said. "There won't be an overhaul– just more of a shoring up of the Beach Plan."

Maryland
Evidence of rates hardening? Not in Maryland, says Shelley Arnold, executive vice president of the Independent Insurance Agents of Maryland. "There are not a lot of signs that rates will harden right now, but it is expected to begin by the end of the year," she said. "Affordability and availability of coverage is a problem right now because or our coastal situation."

Like most other coastal states, Maryland has a FAIR plan, with only abut 7,000 policies enrolled, according to III statistics. Regional insurers like Harleysville, Brethren Mutual Insurance Co. and Peninsula Insurance Co. (and national insurers including Travelers, Progressive and Hartford) are more than willing to pick up the coverage.

The state of the economy isn't much of a help. Maryland has applied for more than $2 billion in a federal stimulus package, and circumstances are worse in some areas than others, although Arnold said she is not seeing much downsizing yet on the agency and carrier side.

The state has pockets of different types of industries, with watermen on the eastern shore and tech and government business with the state's proximity to Washington, D.C. Unique coverages include coastal and habitational coverage. "A good portion of our state is a vacation destination with vacation homes and tourists, although business has been more difficult to cover since Katrina," Arnold said.

The state legislative session recently began, and over 40 property/casualty insurance-related bills are in the hopper, some dealing with condominium coverages–a contentious issue in the state.

In 2008, the Maryland Court of Appeals ruled that a condominium association's master insurance policy isn't required to cover damage to an individual unit but is rather covered under an owner's individual policy. Also, in 2008, the Maryland General Assembly passed HB646, which allowed condominium associations to assess the condominium's deductible, up to $5,000, to the unit owner where the damage originated.

Sen. Delores G. Kelley (D. 10th district) has introduced a remedy–a bill clarifying that the council of unit owners of a condominium is responsible for the repair or replacement of condominium units, exclusive of improvements and betterments installed by unit owners, in the event of damage to or destruction of the condominium; and clarifying that a council of unit owners is required to maintain specified insurance on a condominium's common elements and units, exclusive of improvements and betterments installed in units by unit owners.

Senator Kelly's bill is not the only bill attempting to rectify the court's ruling. House Bill 287, introduced by Delegate Pamela Beidle, also attempts to clarify the insurance requirements of the condominium association and their unit owners. This bill appears to be gaining momentum. A glitch in the bill, which would increase the deductible provision to $10,000, has been withdrawn and the deductible will remain at the $5,000 passed last session.

According to Arnold, one of the problems unit owners are experiencing is the deductible and if their insurance would provide coverage if that particular assessment were made. The forms vary. ISO's form has a deductible assessment provision, which allows the insured to receive up to $1,000 as a result of a deductible assessment. Not all carriers have addressed how they would respond.

"I believe the general consensus of the industry is to get the condominium market back to pre-Andersen. A working group has been established by Delegate Beidle and includes members of our association, the Independent Insurance Agents of Maryland, as well as carriers and condominium association representatives," Arnold said.

South Carolina has the third highest unemployment rate in the nation– according to the South Carolina Employment Security Commission, the state's jobless rate in December was 9.5 percent. "Tourism is one of our largest industries, and tourism is always the industry most affected in a slower economy," said G. Frank Sheppard, AAI, CAE, president of the Independent Insurance Agents & Brokers of South Carolina. "When the tourism industry declines, it trickles down to many different things, including the hotel and restaurant industries." The textile industry also used to be a huge industry in the state, but that has shifted away in the past few years with jobs moving overseas.

Sheppard said that coastal property is probably the No. 1 insurance issue in South Carolina because of heavy exposure and high concentrations of property in the Myrtle Beach/Grand Strand area, Charleston area and the Beaufort/ Hilton Head area. In 2007, the state passed the South Carolina Omnibus Coastal Insurance Act, which allows consumers to create catastrophe savings accounts; introduced the Hurricane Loss Mitigation Grant Program, providing consumers with state tax credits for loss mitigation efforts; and expanded the S.C. Wind and Hail Underwriting Assn. "We seem to be making improvements, but there are pockets that need attention," Sheppard said.

Workers' compensation is also an issue that is still being watched. According to Sheppard, the state adopted workers' reforms, including phasing out the Second Injury Fund. "There isn't anything actively being addressed with workers' comp right now, but we are still paying attention," Sheppard said. "It is still a little early to see how these reforms will help, but they are all positive steps in our minds."

As far as hardening rates, South Carolina is not seeing them yet. "Like the rest of the country, we are soft," Sheppard said. Though availability for homeowners' insurance is competitive and prices have held their own, nothing else is beginning to turn, he added. Travelers, Hartford, State Farm and Allstate are national insurers that are active in the state, and South Carolina Farm Bureau Mutual Insurance Co., Auto-Owners Insurance Co., StateAuto, Main Street America are active regional insurers.

The state is not expecting anything major in the way of legislative issues. A bill has been introduced that would ban the use of credit scoring when underwriting automobile insurance–the state already has guidelines that credit scoring can't be a sole determinant in writing insurance. Sheppard said there also will be some business-related introduction of tort reform measures, though they will not be directly associated with insurance.