In a newly revised white paper titled "Residual Market Property Plans: From Markets of Last Resort to Markets of First Choice," the Insurance Information Institute (I.I.I.) cautioned that the finances of many residual market property plans in hurricane-exposed states lack solid footing.
In the report, I.I.I. explained that certain plans are increasingly strained by the credit crunch and the prolonged economic downturn. This means that it is more difficult to borrow funds and therefore many state-run insurers are putting themselves at a heightened risk through greater dependence on bond markets.
"Disruptions to credit markets will likely make it more expensive for some of these plans to issue debt to pay for hurricane losses," wrote I.I.I. President and Economist Robert Hartwig and Claire Wilkinson, I.I.I. vice president – Global Issues, co-authors of the paper. "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."
Positive strides have been made, however. I.I.I. noted that legislation passed just this year in several key states has started addressing some issues. Moreover, the last two years have brought about a noticeable reduction in the number of policies and exposures in parts of the residual property market. In large part, this stems from the real estate bust, as well as newly established insurers, whose financial strength has yet to be tested by a major catastrophe.
I.I.I. pointed out that state-run property insurers have experienced substantial growth, both in terms of the number of policies issued and the exposure value covered. From 1990 to 2008 — a period characterized by major catastrophes such as Hurricanes Andrew and Katrina — this growth has actually accelerated. Total policies in force (both habitational and commercial) in the nation's FAIR, Beach and Windstorm plans combined nearly tripled from 931,550 in 1990 to 2.6 million in 2008. Additionally, total exposure to loss in the plans surged from $54.7 billion in 1990 to $696.4 billion in 2008.
Several factors have contributed to the overall growth of the plans in the course of the last 20 years, but I.I.I. emphasized that such plans have shifted away from their original purpose as predominantly urban property insurers. This has meant that many evolved from their traditional role as markets of last resort to much larger insurance providers, in some cases even becoming the largest property insurer in the state.
In the study, I.I.I. cited Florida as an example. Florida Citizens — a plan that accounts for 69 percent of the total FAIR plans exposure to loss — witnessed its exposure more than double, from $210.6 billion in 2005 to $485.1 billion in 2007. This reflected rising coastal property values and higher building and reconstruction costs. Citizens' exposure to loss declined somewhat to $421.9 billion in 2008 and by June 30, 2009, to around $400 billion.
I.I.I. went on to say that, while residual market property plans fulfill a crucial role by ensuring that policyholders can obtain insurance coverage, their exponential growth during the last two decades has key implications for insurers and insurance buyers moving forward. Public policy considerations will need to be addressed as insurers, regulators, and legislators seek a long-term solution to managing and funding catastrophic risk in the future.
Source: www.iii.org
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