insurance

 

Coastal Insurance
Disparity Abounds From State To State
By Lance Davis
Insurance for a condo building is the most important (and expensive) item that protects our coastal investment.

But overactive hurricane seasons in 2004 and 2005 had a chilling effect on coastal insurance markets. While Florida, Alabama and Mississippi report that improvements have been made, there’s still significant disparity in available insurance coverages and especially in cost.

Florida
Florida in particular has suffered the aftermath of having back-to-back hurricanes strike its shores in 2004 and 2005. But, along the northern gulf coast of the state, residents also enjoy some of the lowest insurance rates thanks to the state-run Citizens Property Insurance Corporation.

The Florida Legislature created the Citizens Property Insurance Corporation in 2002 by combining the Florida Residential Property and Casualty Joint Underwriting Association and the Florida Windstorm Underwriting Association. Citizens provides insurance to homeowners in the state’s high-risk areas and to others who cannot buy policies from private insurers. Currently, Citizens is the only insurer writing policies along Florida’s coastlines.

John Kuczwanski, public information manager for Citizens, said the state’s insurer of last resort has now become the largest insurer in Florida through legislative involvement.

When it was formed, Citizens was available only to property owners who could not obtain insurance from private carriers. But now, Citizens is available to consumers who can purchase private insurance but find the rates are too expensive. “People who want to come to Citizens have to prove the private market is at least 15 percent higher than what they could get through us,” Kuczwanski said. But, to be fair, Florida is the highest risk state in the nation, with more than $2 trillion in developed coastal property, according to the Florida Insurance Council. New York and California rate a distant second and third.

Citizens insures the vast majority of that property in Florida—1.2 million homes. The upside is that Citizens is mandated by the state to keep insurance premiums low. But some industry experts believe Citizens’ rates are too low, which prevents private insurers from coming back into Florida’s market.

“In 2006, the Florida Legislature froze Citizens’ rates at 2005 levels, which are inadequate. Even Citizens told them that was 75 percent below where the rates should be,” said Gary Landry, vice president of the Florida Insurance Council. Landry said there is also concern in the state that should Florida suffer another hurricane season similar to 2004 or 2005, Citizens won’t be able to cover all its claims. Citizens, working through the Florida Hurricane Catastrophe Fund, could generate up to $28 billion to cover claims.

But Landry said a catastrophic storm, or several smaller storms, could deplete Citizens’ reserves. “When you take into consideration a hurricane like Andrew, or two smaller hurricanes in one year, you’re going to have extreme problems. Andrew in today’s dollars caused $28 billion in damages. And, as the 2004 and 2005 seasons showed, you can have multiple storms in a single year, and that can cause losses to go higher and higher,” Landry said.

Alabama
Yet, it is still significantly cheaper to insure a home in Florida than in Alabama and Mississippi. “This is due to the Citizens’ effect,” said Bruce White Jr., CEO of Gulf Shores, Ala.-based Whitehaven Insurance Group. Whitehaven writes condo insurance policies in Alabama and Florida. “Alabama rates are down to 85 cents per $100 of appraised value range,” he said. “Florida rates are in the 40 cents to 45 cents per $100 of appraised value range.”

Alabama State Sen. Ben Brooks of Mobile has made affordable insurance along the state’s coast a top priority. He sponsored an insurance reform bill that passed both houses of the legislature earlier this year. Essentially, the bill would allow homeowners and cities in high-risk coastal areas, including Baldwin and Mobile counties, to form their own captive insurance companies. Brooks believes the bill would keep the state’s large insurers from having to provide policies in certain high-risk areas, subsequently lowering insurance costs statewide. Brooks said he does not think a state underwritten carrier like Citizens is a prudent model for Alabama to follow.

“We took a consensus feeling from a broad range of people to see what we could do toward reform. We came up with two ways to tackle the insurance problem,” Brooks said. “The first is to foster the marketplace and the second is to be the marketplace like they did in Florida.”

Brooks said he favored fostering the marketplace. He cited the potential liability of taxpayers across the state should a weather event such as Hurricane Katrina strike the Alabama Gulf Coast as one of the primary deterrents of state-backed insurance.

Alabama, like Florida and Mississippi, offers an insurer of last resort for homeowners in coastal areas of Baldwin and Mobile counties. The Alabama Insurance Underwriting Association, or “beach pool,” provides basic homeowners insurance to property owners in those counties who can’t buy private insurance.

By design, AIUA policies provide basic, no frills, coverage at rates that are generally higher than the average rates offered in the private market. Rates are filed with the Alabama Department of Insurance where they are carefully analyzed before they are approved and implemented.

Unlike Florida’s state-funded program, the AIUA beach pool is backed by 1,700 private insurance companies incorporated under the Insurance Service Office of New York (ISO). A private market insurer’s participation in the AIUA is determined, generally, based on the percentage of market share each company writes in coastal areas of Baldwin and Mobile counties compared to the percentage of market share that the company writes in the entire state. A company that voluntarily writes its share or more in the coastal areas (as compared to its state-wide market share) will generally have a smaller percentage or no share of participation in the beach pool.

Mississippi
In Mississippi, where insurance companies paid more than $13 billion in claims following Hurricane Katrina in 2005, the Department of Insurance is working double-time to reduce rates and stabilize the insurance market.

Mike Chaney, who was elected the state’s insurance commissioner in 2007, has already overseen an 11 percent reduction in Mississippi’s wind pool premium. The wind pool, or Mississippi Windstorm Underwriting Association, is the state’s insurer of last resort and provides wind and hail policies in the Mississippi’s six southernmost counties.

In a press release from the Mississippi Insurance Department, Chaney said that $100,000 worth of wind pool coverage on a masonry dwelling would drop to $1,189. The same amount of coverage in August 2005 cost $679. One year after Hurricane Katrina, the cost was $1,290.

“The wind pool is very important to Mississippi because it has helped stabilize insurance markets in the rest of the state,” Chaney said. “We’ve also been able to purchase $1 billion worth of reinsurance for the wind pool, so we’re somewhat more solvent than Louisiana and Florida.”

Chaney said the state’s effort to attract insurers back to Mississippi’s coast have been largely successful. He said efforts to enforce building codes, funding the wind pool and wind mitigation legislation have provided a safe and stable environment for insurance companies.

Even though State Farm stopped writing policies in some areas and will not renew policies within 1,000 feet of the coastline, Chaney said the state has been able to get independent insurers such as Travelers and Republic to write policies in those areas.

But don’t think homeowner’s insurance is all that’s needed to adequately protect waterfront property. Flood insurance, either private or through the National Flood Insurance Program, is the only way to protect a home from flooding associated with storm surge and rising rivers associated and other water born perils associated with hurricanes.

NFIP is a voluntary program, and policies are only sold to homeowners who live in communities that participate in it. The federally backed policy is one that won’t increase regardless of the risk or the number of claims filed with it. NFIP rates, which are set by Congress and can’t increase more than 10 percent per year, depend on a number of factors such as a building’s location in a flood zone—the type of flood zone and building elevation. But, Cottril said, the rates are set nationally, so identical structures in Florida, Alabama and Mississippi would pay the same premium.

“We’re not the only provider, but we are the least expensive,” said Jody Cottril of Federal Emergency Management Agency’s Atlanta office.

—With additional reporting by Clayton Wallace