EconSouth (Third Quarter 2006)
Volume 8, Number 3
Third Quarter 2006
Rebuilding along the Gulf Coast takes more than hard work and optimism: It also requires affordable and dependable insurance for homeowners and business. The region now faces the task of fostering viable insurance coverage.
Insurance payouts go through the roof
According to the Insurance Information Institute, seven of the 10 most expensive hurricanes in U.S. history occurred between August 2004 and October 2005 (see chart). The 2005 hurricane season alone was unparalleled: More than three million insurance claims totaling some $57 billion resulted from just four (Katrina, Wilma, Rita, and Dennis) of the year’s more than two dozen significant storms.
Hurricane Katrina generated the largest single loss in the history of U.S. insurance—$40.6 billion stemming from more than 1.7 million claims. This dollar figure does not include the $15.3 billion in losses from flooding insured by the National Flood Insurance Program or the estimated $2.5 billion of insured damages to energy facilities in the Gulf of Mexico. Louisiana accounted for 62 percent of the $40.6 billion insured losses from Hurricane Katrina, while Mississippi accounted for another third of the total.
Insurers were able to manage the unprecedented claims from the 2005 storms by relying on reinsurance companies (companies that essentially insure the insurers), which absorbed half the $55 billion in Katrina losses. In response, reinsurance firms are increasing their rates in coastal areas and across Florida, making it more expensive for insurance companies to sell policies. In addition, insurance companies are reevaluating their exposure to catastrophic events and adjusting their rates in response. As a result, property insurers are passing along the higher costs in the form of higher premiums and higher deductibles.
Sam Miller, executive vice president of the Florida Insurance Council (FIC), a nonprofit insurance trade association, said in May that although “[the] FIC recognizes that higher rates are difficult on some policyholders, we must take into consideration and be grateful that the industry has survived the past two seasons and is still taking on the risk of insuring the homes of millions of Floridians.”
Paying up, then up some more
Businesses and homeowners, meanwhile, are feeling anything but grateful. News reports are rife with stories of individuals stating that their premiums have as much as quadrupled, while deductibles have risen significantly as well. Many have no choice but to pay up because their mortgage companies require coverage. Some consumers have had their insurance policies cancelled outright by their insurers or have been told their policies would not be renewed when they expire. Some owners of homes and businesses in Florida and other states’ coastal areas are reportedly unable to secure policies for wind damage because insurance carriers in their area are simply not offering the coverage.
Florida storms ahead
Homebuilders’ risk insurance is becoming more expensive as well. In May 2002 the Florida legislature created the Citizens Property Insurance Corp. by merging the Florida Windstorm Underwriting Association and the Florida Residential Property and Casualty Joint Underwriting Association. The company provides coverage to property owners unable to obtain coverage from private insurers. (By law, rates of the state-backed Citizens Property Insurance Corp. have to be higher than private insurers’ rates in all areas of the state.)
In June, Citizens notified its policyholders that it would discontinue builders’ risk coverage in mid-July. But Florida government officials decided that canceling the coverage would imperil the state’s vibrant construction industry, and Citizen’s withdrew cancellation notices and instead announced in July that wind coverage for builders would increase by an average of about 151 percent statewide.
To help Floridians identify ways to strengthen their homes against hurricanes, the Florida Comprehensive Hurricane Damage Mitigation Program, launched in July, offers free inspections to eligible homeowners. Floridians whose homes have undergone a wind certification and hurricane damage mitigation inspection approved by the state’s Department of Financial Services can apply for matching grants of up to $5,000 to better hurricane-proof their homes. Low-income households will be exempt from having to provide matching dollars.
Besides these measures, Florida officials presented a plan in mid-August to address the problems that businesses encounter when obtaining commercial insurance. Gov. Jeb Bush approved an emergency rule establishing a property and casualty joint underwriting association to make commercial property insurance available to Florida businesses that are otherwise unable to find coverage.
Another, existing program also helps keep insurance rates manageable. The Florida Hurricane Catastrophe Fund (FHCF Fund, also known as the CAT Fund) was created in November 1993 during a special legislative session following Hurricane Andrew. The purpose of the FHCF is to protect and advance the state’s interest in maintaining insurance capacity in Florida by providing reimbursements to insurers for a portion of their catastrophic hurricane losses. Because of the 2004 and 2005 hurricanes, the FHCF has exhausted nearly all of the $6 billion in reserves it has accumulated since its inception.
The Florida State Board of Administration, the body that oversees the FHCF, directed the Office of Insurance Regulation to levy an emergency assessment upon all property and casualty business in the state to help replenish the fund’s reserves. In addition, in July the fund completed $2.8 billion in financing to fund a five-year liquidity program in anticipation of future hurricanes. “The liquidity program will strengthen the CAT Fund’s ability to continue to reimburse losses for insurance claims in a timely manner,” said Jack Nicholson, a senior FHCF officer.
Elsewhere in the Southeast
In Alabama, lawmakers approved a law allowing groups such as condo associations to self-insure through the creation of their own insurance companies. In turn, these groups could get a reinsurance company to write a policy to cover the property. But it’s unclear how easily these groups will be able to secure a reinsurance policy and whether mortgage companies will agree to accept self-insurance programs.
In Louisiana, a state “wind pool”—a government program that provides basic wind-damage coverage to property owners located in high-risk areas—is under consideration, and the governor has said rebuilding efforts will be hampered without wind coverage. Citizen’s Property Insurance, the state-backed insurer of last resort, said that it could cover the dropped policies—but not all at once. The insurance commissioner has pledged to take legal means if necessary to enforce the consumer protection law that restricts when insurers can cancel policies. Under current law, an insurer cannot drop a customer who has had a policy for at least three years and filed no more than two non-act-of-God claims.
Along the Mississippi coast, homeowners insurance rates have risen significantly since Katrina, and some companies have cancelled wind coverage altogether. The Mississippi Windstorm Underwriting Association, the state’s wind pool, increased its rates 90 percent for single-family homes and 286 percent for commercial property.
The road ahead
The high cost and availability of homeowners insurance may be affecting Florida’s previously booming housing market. According to the Florida Realtors Association, existing home sales were down 33 percent in July 2006 compared with a year earlier. While the deceleration in home sales is attributable partly to rising mortgage rates and other economic factors, the additional burden of higher premiums and deductibles cannot be ignored.
All along the Katrina- and Rita-ravaged Gulf Coast, manageable insurance rates are key to a successful rebuilding program and will help attract people and businesses who relocated in the wake of the storms. Making those rates available is a hurdle for insurers and the region’s governments alike.
This article was written by Michael Chriszt, director of international and regional analysis for the regional group of the Atlanta Fed’s research department.