"Wind pools" or "beach plans" are those programs created by state statutue and regulation intended to provide essential wind, fire and multiperil insurance to owners of properties located in areas at the highest risk of catastrophic windstorm. These are the properties that we see on television now, utterly destroyed by Hurricane Katrina. Without such programs, such properties would be unable to obtain insurance against windstorms, because no rational commercial insurer would write coverage in such areas at a rate acceptable to the public. These programs fall in the more general category of "residual market" or "assigned risk" plans.
A look at rough numbers in the financial statements for the three most affected wind pools indicates some $17,000 million of property value insured by such pools, about 90% of that in Louisiana. Some early estimates are that 50% of those properties have claims, many of them total losses. For the sake of argument, let's think about a 25% loss, or 4,250 million, just for windstorm losses covered by the pools.
Except for approximately $600 million in reinsurance and less than $100 million in cash on hand, virtually all of the money to pay those windstorm claims will come not from the surplus of individual insurers, but from pro-rata assessments spread over the coming decades against all the property insurers in those states. That load will be added to the rate base, so that all the property owners in those states will be paying for the Katrina wind pool losses for decades. In the interim, the necessary cash flow ($4,250 million loss minus $700 million cash and reinsurance equals $3,550 million) will come from municipal bond issuance unless government relief is implemented.
For supporting detail and links, see below.
Beach plans vary on a central theme by which the exposure is taken up and distributed (through reinsurance or a syndicate policy) to all property insurers licensed in that state. In many cases, government stands behind the pool's ability to raise cash in a pinch, by authorizing the issuance of tax-free municipal bonds following a mega-catastrophe. Of course, such bonds, like your home mortgage, must be repaid and the cost of repayment must fall upon someone. Most pools are politically unable to lay aside invested reserves or a "rainy day fund" for future catastrophes that all know are inevitable. Instead, like the federal government, they depend upon their ability to make assessments upon their members for operating losses, assessments that are distributed among members in proportion to their "voluntary" premium written in the state.
Paying those assessments, sometimes for many years after such a disaster, becomes a cost and opportunity of doing business for member insurers. In theory, this spreads the burden of insuring properties near the beach throughout the state's entire rating base. Of course, these assessment costs, like other "board and bureau" costs, become part of the rate base that insurance departments must consider when reviewing and approving premium rate filings for property insurance. So, those costs are paid by the people of the affected state, for years thereafter. In effect, all insurance ratepayers in the state subsidize the insurance costs of their brethren and sistren who build houses, apartments and businesses near the shore, and subsidize their rebuilding on the same locations. See also an Insurance Information Institute (III) backgrounder that includes recent developments in wind pool legislation and policy: III - Residual Markets
Although the hard data is not yet publicly available, insurance pros know, as surely as the Mighty Mississippi flows to the sea, that when a hurricane like Camille, Hugo, Andrew or Katrina comes, the wind pools will take the brunt of the damage. Those wind pools, like other windstorm insurers, have for decades excluded damage due to flood or rising water, whether caused by windstorm or storm-induced levee break or any other direct, indirect, proximate or concurrent cause. (See: Unintended Consequences: Flood Insurance and Exclusions, Proximate and Concurrent Causation)
If the public and private lawsuits aimed at invalidating the long-standing precedents behind those exclusions succeed (See: Unintended Consequences: Mississippi AG's Complaint Seeking to Void Standard Flood Exclusions), the biggest impact is likely to be upon those pools. Accordingly, to understand the implications of those lawsuits requires getting a strong cup of coffee and wading into the deep waters of the law and economics of windstorm pools. This is not stuff that makes for good television, and not the stuff that makes for politicians' sound bites. It is the stuff that rebuilds America after the devastation of natural diaster, and keeps an insurance market alive for the recovery.
Recent rough estimates use figures of $60 billion in insured losses, many more in uninsured losses, such as damage and loss of government infrastructure and costs of fire, police, military and other first responders. Most of that will be in Alabama, Mississippi and Louisiana. When reading the following figures, which are in single and tens of millions, remember that the early estimate is $60,000 million of insured losses. BestWire has provided some information about the status of those states' residual market plans.
Best reported on 9/1/05 that the Alabama Insurance Underwriting Association ("Beach Pool") has $8.6 million in cash on hand and reinsurance of $50 million in excess of a $20 million retention, and insurance regulators expect to make a statutory maximum assessment. AIUA's reinsurance report on their website uses the same figures and shows a $377 million Total Insured Value (TIV). AIUA 2005 Reinsurance Review This TIV is confirmed in 10/04 figures in an AIUA Exposure Table, showing its distribution among seven categories and that 99% of it is in about 3,000 residential policies, the remainder in 44 commercial policies. This suggests an average value per policy of about $125 thousand.
According to the AIUA Plan of Operation effective 2002, the pool will issue a syndicate policy to eligible applicants, on which member insurers will participate on a several and not joint basis. At the Alabama Beach Pool's website, the basic coverage description states: "If the property is located in an area which is classified as Zone "A" or "V" according to the National Flood Insurance Program, a flood insurance policy is required to be in place before an AIUA policy is issued. Flood coverage must be at least equal to or greater than the AIUA amount of coverage." October 31, 2004 financial statements there suggest the Alabama pool then had about $9.0 million in Members' Equity, about $3.5 million in earned premium, and about $1.4 million negative cash flow for the twelve months preceding that date
BestWire also reported that the Mississippi Windstorm Underwriting Association (MWUA) has $2.1 million in cash on hand and reinsurance of $175 million excess of a $10 million retention. A $20 million early assessment of members was expected. KnowledgePlex: Article: GULF HIGH-RISK POOLS MAY ASSESS INSURERS (BestWire Sep. 1, 2005).
On the Association's website is found the MWUA Accounting Report for Year Ended December 31, 2004 which suggests that the MWUA then had negative $2.1 million (a deficit) in Members' Equity, about $11.6 million earned premium and less than one million in cash flow for 2004. Exhibit 5 to that same report shows Insurance In-Force of $1,632 million in 14,796 policies with 90% of values in Hancock, Harrison and Jackson counties. This suggests an average value per policy of about $110 thousand.
The MWUA operates as a reinsurance program using Servicing Carriers, commercial insurers that accept a fee to issue and adjust claims on behalf of the MWUA, to which 100% of the liability is ceded. See: MWUA Rules & Procedures See also: MWUA - Plan of Operation. The underwriting rules include a provision that "Applications for wind and hail coverages for property located on any of the barrier islands must provide evidence of flood coverage if the property is located in an area where flood coverage is available."
Effective Jan. 1, 2004, the Louisiana Joint Reinsurance Plan (FAIR Plan) and the Louisiana Insurance Underwriting Plan (Beach Plan) were combined into Louisiana Citizens Property Insurance Corporation (LCPIC). According to BestWire as of 9/1/05, its executive officer, Terry M. Lisotta, was expecting 60,000 homeowners claims, but adjusting had been delayed by the flood waters. This figure echoes III reports that about half of its 135,000 policyholders are expected to file Katrina claims. III - Residual Markets. According to Best Wire, LCPIC presently has $100 million in cash on hand and reinsurance of $340 million in excess of a $35 million retention. BestWire, 9/1/05, supra.
Year-end 2004 financial statements accessible at the LCPIC's website suggest that the FAIR Plan then had about $5 million in surplus, about $51 million in earned premium and about $62 million in net cash flow for 2004. Invested income was not significant ($141 thousand). The Beach or Coastal Plan reported $772 thousand in surplus, about $4.3 million in earned premium for 2004, and about $4.7 million net cash flow, with negligible investment income. Together, they had about $65 million in cash and investments at that time. Another 9 months of cash flow at $65 million per year would add up to $100 million figure cited by Mr. Lisotta.
I could not find Total insured values (TIV) data on the LCIC website, but if one uses the $110 thousand average value per policy figure calculated above for Mississippi, 135,000 policies would suggest total insured value around $14,850 million.
In September 2004, Louisiana Insurance Commissioner Robert Wooley said that if a major storm like Hurricane Andrew hit his state, "we would have to go to our line of credit because we wouldn't have sufficient reserves to pay all of the losses. We would have to issue tax-free bonds to pay for the losses and we would allow the companies to recoup those losses and pay their portion of the losses over an extended period of time." Ibid "Recoup losses" likely means member insurers would be able to load those losses into the rate base and recover them from policyholders. How "extended" the time would be depends on the ratio of loss to the rate base. Adding unexpected flood losses to the covered windstorm losses would increase the load on the rate base, by an amount to be determined.
According to the Times-Picayune on September 8, 2005, Louisiana homeowners will be hit with a 20% surcharge and continuing surcharges for years to pay for the hit on the LCPIC. The article describes the process by which the fund will get immediate cash and then spread the burden upon ratepayers throughout the state over coming years. This process was necessary because of reluctance of commercial insurers to write coverage in the state without such a protection. The article states that: "The coverage does not include flood damage, which is handled by a federal insurance program.". NOLA.com: Insurance Rates to Rise (Times-Picayune, September 8, 2005).Posted by dougsimpson at September 17, 2005 10:55 PM