State Property Insurers On 'Shaky' Financial Ground

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

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

A white paper released by I.I.I., titled "Residual Market Property Plans: From Markets of Last Resort to Markets of First Choice" said, "The credit crunch and prolonged economic downturn have exacerbated the already vulnerable financial condition of certain plans, making it more difficult for states to borrow funds."

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 risk through greater dependence on bond markets even as credit markets struggle to recover from the current financial crisis. Disruptions to credit markets will likely make it more difficult and more expensive for some of these plans to issue debt to pay for hurricane losses."

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

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

"While a number of factors have contributed to the overall growth 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 their original purpose as predominantly urban property insurers," the I.I.I. said. "As a result, many have evolved from their traditional role as markets of last resort into much larger insurance providers, in some cases even becoming the largest property insurer in the state."

Using Florida again as an example, the study said the state's residual market property insurer, Citizens, which accounts for 69 percent 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 values and higher building and reconstruction costs."

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

The study also notes that legislation passed in several key states this year has started to address some of the problems facing certain plans. Over the past two years there has been a noticeable reduction in the number of policies and exposures in some parts of the residual property market due largely to the real estate bust and the addition of newly established insurance companies whose financial strength has yet to be tested by a major catastrophe.

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

"Rate and underwriting restrictions on property insurers can result in a situation where high-risk property owners actually pay lower premiums, while low-risk property owners pay artificially higher premiums. This leads to unfair cross-subsidization among risk classes and discourages mitigation," the authors wrote.