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I.I.I.: Insurers of Last Resort Had Record Number Of In-Force Policies In 2010

Posted on 17 Jul 11

Nearly 3 million residential and commercial policies were in-force last year in the U.S. because of coverage offered through state-run property insurers, according to the Insurance Information Institute’s (I.I.I.) just updated Residual Market Property Plans: From Markets of Last Resort to Markets of First Choice. Property owners migrate to the residual market when they’re unable to acquire an insurance policy in the standard market.

“The I.I.I.’s latest analysis adds to what is now a well-documented body of research among industry experts and government agencies that many state-run residual property insurers have morphed from markets of last resort to become major insurance providers in their states,” write the report’s co-authors, Dr. Robert Hartwig, president of the I.I.I. and an economist, and Claire Wilkinson, author of the I.I.I.’s award-winning Terms + Conditions blog. “Annual growth in the U.S. residual market exposures averages close to 18 percent, according to the Insurance Research Council (IRC). The latest data show that the total exposure value and number of policies in the residual property market are on the rise, despite the fact that no hurricanes struck the U.S. coastline in 2010. It is important to recognize that because most of these plans do not charge rates that reflect the true cost of risk, demand for the coverage they provide remains high.”

Many residual property market plans have shifted away from their original mission as insurers of urban properties into major providers of insurance in high-risk coastal areas. Moreover, many of these plans operate at deficits, or from slim positions of surplus, even in years with little or no catastrophe losses, the paper adds.

The 2.84 million U.S. residential and commercial property insurance policies in-force in 2010 were primarily acquired from one of 30-plus Fair Access to Insurance (FAIR) Plans or six Beach or Windstorm Plans, the report states. The 2.841 million residual market policies in-force last year was a slight uptick from the previous record of 2.840 million, set in 2007. The cumulative exposure to loss in the U.S. residual property insurance market totaled $757.9 billion in 2010, down from 2007’s record-high of $771.9 billion, the I.I.I.’s white paper states.

The claims-paying capacity of FAIR, Beach and Windstorm Plans are relatively limited and often exhausted quickly in the event of a severe storm. The appeal of state-subsidized property insurance premium rates, however, has had an adverse impact on private-sector insurers in the U.S., the co-authors contend.

“In 2010, the property/casualty industry recorded sluggish premium growth of 0.9 percent—the first gain on an annual basis since 2006. It followed three consecutive years of negative premium growth (-3.7 percent in 2009, -1.3 percent in 2008 and -0.6 percent in 2007),” Dr. Hartwig and Ms. Wilkinson write. “While this is a result of a combination of different factors, one reason is the leakage of premium to residual market mechanisms. This has the ultimate effect of reducing options in the private marketplace, another negative for insurance buyers.”

Besides giving an overview of the claims-paying capacity and latest legislative developments governing the operation of Florida Citizens Property Insurance Corporation, the nation’s largest property insurer of last resort in terms of policy count (1.4 million, as of May 31, 2011) and exposure ($460.7 billion, as of year-end 2010), the I.I.I.’s updated residual market white paper also assesses the finances of the state-run property insurers of last resort in Alabama, Louisiana, Massachusetts, Mississippi, North Carolina, South Carolina and Texas.

“When [Florida] Citizens incurs a deficit following a storm, it is required to impose assessments on insurers doing business in the state that are then passed on to their policyholders in the form of a surcharge,” the I.I.I.’s white paper states. “Following legislative reforms enacted in 2007 the base for assessments to pay for Citizens deficits expanded from property insurance to auto, liability and other lines of insurance, with the exception of medical malpractice and workers compensation, thus placing the burden of paying for the next big storm on all Floridians, even those with no exposure at all to hurricane losses.”

The 52-page report includes a summary of the major natural catastrophe legislative proposals pending in Congress.