Policy Analysis | November 2013

Wind Pool Insurance in the SLC States

Sujit CanagaRetna

In recent years, states in the CSG-South region as well as the nation as a whole have been exposed to significant risks due to hurricanes and tornadoes. These immense storms have caused immeasurable damage in terms of the loss of human life and billions of dollars in economic costs. As a result, homeowners face the challenges of not only securing insurance for their homes and property in affected areas, but also dealing with steep premium increases. In response to this development, a number of Southern states are continuing to devise measures to provide homeowners with wind pool insurance coverage at affordable rates. Given the growing importance of this issue in the region, the SLC coordinated a webinar to feature presentations on what some of these measures are, the broad trends associated with wind pool insurance, best practices and how international developments impact premiums here in the United States.

In recent years, the insurance industry has documented that catastrophe losses, or losses related to major disasters such as Hurricanes Katrina, Ike, Ivan and Super Storm Sandy and the tornados that swept over Moore, Oklahoma, Tuscaloosa, Alabama and Joplin, Missouri, have been extremely high. This has proven to be an enormous fiscal challenge to both property owners (home and commercial) and insurance companies. Consequently, state lawmakers and policymakers have been entrusted with devising solutions that are smart, sensible and reasonable from the perspectives of both property owners and insurance companies.

The Insurance Information Institute notes that in the first six months of 2013, there were 460 natural catastrophes worldwide; in contrast, for all 12 months in 1980, there were less than 350 natural catastrophes worldwide. This statistic is a clear indication that the incidence of catastrophes across the globe, including in the United States, has increased significantly in the last 30+ years.

A 2013 study of the Atlantic and Gulf coastlines by CoreLogic noted that 4.2 million homes, with $1.2 trillion in total property exposure, are at risk of damage caused by hurricane storm surge flooding.

Most coastal states have wind pools, i.e., government-chartered organizations that insure high-risk homes and buildings. These wind pools are supposed to be the market of last resort for home and commercial property owners who have no other alternative in securing insurance coverage due to private insurers declining such coverage.

In the aftermath of major storms like Hurricanes Katrina, Ivan and others, many property owners (home and commercial) relied on these government-chartered wind pools to secure coverage for their properties. For instance, in Mississippi, the wind pool is the insurer of last resort for Mississippi’s six southernmost counties. Before Katrina, the state’s wind pool consisted of 16,000 to 17,000 policies; as private insurers dropped wind coverage along the Mississippi coast, wind pool policies climbed to about 46,000 policies in this part of the state. Similarly, in Alabama, the state’s Beach Pool coverage, i.e., wind pool coverage for those who cannot receive it elsewhere, saw an increase from under 3,000 in 2004 to over 22,000 in 2011.

These entities collect substantial amounts in premiums every year. Florida’s wind pool, Citizens Property Insurance Company insures 1.4 million properties and collects $3 billion in premiums a year. South Carolina’s wind pool, the S.C. Wind and Hail Association, collects nearly $100 million in premiums every year from 46,000 private homes and 1,000 commercial properties in the state.

Rates offered by wind pools also have been climbing steadily in recent years, a development that poses enormous fiscal challenges to homeowners. In the aftermath of Super Storm Sandy, thousands of homeowners in New York and New Jersey face annual flood insurance rates projected to top $20,000. In Isle of Palms, South Carolina, outside Charleston, it is not unusual for homeowners to pay as much as $5,000 annually for coverage through the state’s wind pool. In Texas, in August 2013, the state’s coastal windstorm insurance pool voted to raise premium rates charged to consumers by 5 percent, while narrowly rejecting a proposal to restore the association’s strained coffers through a $575 million assessment against member insurance companies. In Mississippi, on December 1, 2013, owners of homes and mobile homes will see hikes of 3.2 percent, while commercial policies will rise by 5 percent. Commercial property owners face similar challenges too.

In many states, such as Louisiana and Mississippi, federal flood insurance premiums are scheduled to increase, an effort by Congress to make the National Flood Insurance Program financially solvent after it fell into massive debt after Hurricane Katrina swept over the states. Federal lawmakers in a number of SLC states (Florida, Georgia, Louisiana and Mississippi) are requesting that the federal government delay the rate increase. A bipartisan bill currently moving through Congress seeks to delay premium increases for about four years from the date of passage ‐ until the Federal Emergency Management Agency completes an affordability study ‐ and would apply retroactively to the rate hikes that took effect on October 1, 2013.

In Florida, state regulators are working on luring private companies to provide flood insurance as an alternate to the current federal flood insurance program, a program that has seen steeply spiraling premium increases recently. For certain homes in Florida, the increase could mean their rates will rocket from $500 to $16,000 annually.

There is momentum in certain states, Louisiana and Texas, for instance, toward creating a multi-state wind pool, with a number of states pooling their resources, both financial and non-financial, to grapple with the challenges of providing insurance coverage to property owners (both private and commercial).