CRITICAL ISSUE REPORT

HOMEOWNERS INSURANCE
AVAILABILITY IN COASTAL AREAS

Proposed partnership between insurers
and state might offer a potential solution

By Phil Zinkewicz

The property-casualty insurance industry appears a bit healthier these days, according to recent industry reports. Black ink rules as they say, as insurers are posting better bottom line results. In years past, that might bode well for independent insurance agents, as insurers, during good times, traditionally open their arms to the more volatile risks they shunned during hard times.

But there's one area which, despite a more optimistic financial scenario for insurers, still remains a problem--a problem that promises dire consequences if a solution is not found. That area is coastal property catastrophe insurance coverage. In the property cat arena, especially in coastal areas, insurers have not budged very much from the stance they took following Hurricane Andrew earlier this decade.

"It's time for insurance and reinsurance leaders to focus on catastrophe issues," says Tal P. Piccione, chairman and chief executive officer of the Manhattan-based U.S. RE Corp. Writing in the company's newsletter, "US RE Views," Piccione says: "Current exposures reflect not only the tremendous growth in insured values in disaster-prone areas but also the increasing frequency of major storms. A sobering report from the Insurance Services Office estimates that a catastrophe costing the industry $50 billion to $100 billion could result in the insolvency of up to 36% of all insurers, depending on where the event occurs, and leave unfunded claims of up to $56 billion."

In addition, Piccione says that it is estimated that roughly $20 billion of aggregate catastrophe excess of loss reinsurance is being provided currently to insurers across the United States. This represents at best 10% to 15% of the worse case scenario. The global reinsurance market does not have sufficient capital to meet U.S. catastrophe coverage requirements, Piccione says.

"Many insurers underestimate their exposures in the new era of escalating frequency and severity," says Piccione. "Their reinsurance programs are predicated on probable maximum loss estimates that may have been reasonable pre-Andrew, but would leave them severely impaired if the Big One hits any time soon. For the past several years, an industry coalition has sought federal legislation to provide a safety net. So far, Congress has failed to act."

Piccione believes that the answer to the coastal area insurance problem might lie at the state level, rather than at the federal level. He points to a piece of proposed legislation in New York which would create a partnership between the private sector and state government to maintain the availability of homeowners insurance in coastal areas around Long Island which, next to Florida, is the most vulnerable area in the country to hurricane losses. The bill also would make maximum use of private sector reinsurance.

"The legislation to create the New York Windstorm Catastrophe Fund was introduced in the State Senate by Senate Deputy Majority Leader Dean G. Skelos (R-Rockville Centre)," says Piccione. "Skelos represents a significant coastal region in southwestern Nassau County, an area susceptible to hurricanes. Other storm-ravaged states such as California, Florida and Hawaii currently have such catastrophe funds."

According to Piccione, Skelos' bill would create an optional windstorm catastrophe fund to protect insurers who must pay claims after a big storm hits. "We applaud Senator Skelos for addressing the problem besetting homeowners and for his legislative initiative that encompasses the private sector," says Piccione. "The bill incorporates major elements of U.S. RE's proposal for a state-private sector approach. Funding would come from insurance companies writing insurance in affected areas. This would provide insurers significant tax relief without diminishing their capital and surplus. The state contribution would be in the form of premium tax contributions to the fund. While the state will sustain a small loss in revenue from premium taxes on contributions to the fund, it stands to gain significantly from reduced disaster relief costs and assured availability of homeowners insurance to citizens in exposed areas," said Piccione.

The emphasis of the fund, it should be noted, is on the private sector. Insurers would be encouraged to accept private reinsurance to whatever extent capacity is available before accessing the reinsurance offered by the fund. In addition, insurers could avail themselves of the monies in the fund only after they have exhausted their reinsurance capacity and only after a particular net dollar loss.

The 1997 hurricane season officially opened on June 1 and runs through November. Peak exposure is from mid-August to mid-October. A category 5 hurricane (with speeds of 155 miles an hour or more) could cost more than $110 billion if it hit the New England coastline.

The seriousness of the situation cannot be overstated. Efforts to encourage federal attention regarding this matter have apparently been unsuccessful. Without that attention, it must be left to the states to respond. The U.S. RE approach embodied in Skelos' proposal appears to be a viable one. Agents want to provide the homeowners protection for their clients in coastal areas. Homeowners certainly need it. The private sector alone appears unable to respond. But a joint effort on the part of the state government and the private sector may be the answer. *

©COPYRIGHT: The Rough Notes Magazine, 1997