Politics, Policyholder Sentiment Drive Rapid Residual Market Growth

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

A combination of higher coastal populations, artificially suppressed rates for last-resort insurers, and the inability of insurers to charge rates commensurate with risk along the coast has driven the residual property market in hurricane-exposed states to new peaks in both exposure value and policy levels, says the Insurance 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 from 1990 to 2011, policy counts in FAIR and beach and windstorm plans have grown from 931,550 to 3.3 million. Total exposure to loss during that time has gone from $54.7 billion in 1990 to $884.7 billion in 2011, an increase of 1,517 percent.

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

With the added risk comes added volatility. I.I.I. says of the 31 FAIR plans for which data is available, 28 have incurred at least one operating deficit since 1999. All of the six beach and windstorm plans for which data is available have sustained at least one underwriting loss in that time.

Citing a Government Accountability Office study, I.I.I. says that between 2005 and 2009, plans in Mississippi, Texas and Florida showed the largest percentage of growth in terms of both exposure and number of policyholders. 

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

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

I.I.I. says part of the reason for these plans' growth is the growing population in coastline counties, which has increased by 84 percent 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 urban areas, are acting as insurers of last resort for residents in shoreline communities in states that do not have beach and windstorm plans. Beach and windstorm plans are being merged with FAIR plans in states such as Florida and Louisiana. I.I.I. says this phenomenon makes it difficult to make direct comparisons in policy counts with earlier years. “What is clear, however, is that the rapid growth in the FAIR plans is due in part to these mergers,” I.I.I. says.

And because rates for these plans are controlled by regulators and legislatures, I.I.I. says prices are “vulnerable to political manipulation,” which leads to rate suppression.  

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

While some private insurers made a conscious decision after Hurricane Katrina to limit their coastal exposure, I.I.I. President Robert Hartwig tells PC360 that insurers made those decisions not just out of fear of losses, but with the understanding that they will never be able charge rates that reflect risk.

Noting how the private market, if left to its own devices, can adequately cover coastal risks, Hartwig says coastal availability issues are virtually nonexistent for commercial property risks because private insurers are allowed to decide what risks they want to assume and what rates to charge. 

“Go to Florida; go to riskiest spot on Key West to a bar or restaurant, and that is insured by the private sector,” Hartwig says, noting that the premiums charged do not prevent businesses there from growing and thriving. “The reality is that every business in Florida, no matter how risky, is insured in private market,” he says.

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

Complicating matters, Hartwig says people in high-risk areas have become accustomed to entitlements and subsidies, and enacting policies that would raise rates are unpopular. “Even conservatives appreciate getting a subsidy,” Hartwig says, pointing out that those who typically are in favor smaller government are not eager to give up their artificially low rates.

Examining two different post-Katrina approaches to residual markets, Hartwig says Louisiana, which was heavily impacted by the storm has been bucking the national trend and shrinking its last-resort insurer by adopting the approach that the state cannot and should not assume massive risk in its state-run plan. Louisiana, he says, is “not willing to bet the state's future on coastal subsidies,” and is allowing insurers to charge actuarially sound rates. 

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