I enjoyed, and then was mildly shocked by, the article “More details revealed in homeowner insurance reform plans” (Lagniappe, Nov. 5).
What shocked me was the obviously “pristine ignorance” displayed by the Coastal Insurance Working Group, the Alabama Insurance Underwriters Association and the Alabama Department of Insurance regarding the basic principles of insurance and their obvious distrust of for-profit insurance companies in the coastal property insurance market, in favor of a quasi-governmental, nonprofit insurance company/entity.
My own background is as a licensed life and property/casualty insurance agent since the early 1970s and founder and president of a casualty insurance company from 1988 until 2006. Currently, I and some other investors are working to start a new insurance company.
Assuming that the monetary figures quoted in the article are correct, it appears that the AIUA is currently insolvent. The current basic standard for risk versus capital and surplus is 3 or 4 to 1. This means that if a company has $1 million in capital and surplus, the company can write $3 million to $4 million in business.
The article indicates AIUA has $87.5 million in capital and surplus but is writing $5.6 billion in total insured value; $5.6 billion in business suggests an approximate $1.9 billion in capital and surplus. I do realize that some of the risk is “laid-off” to reinsurers, but I am confident that the reinsured volume is nowhere near the $1.9 billion standard required.
In the past, AIUA has reported that it uses a “band reinsurance” program to “lay-off risk.” Band reinsurance is the cheapest type of reinsurance and I believe that it cannot come close to making the AIUA solvent in case of a Katrina-type claim, which exceeded $41 billion for more than 1.7 million claims across six states.
The fundamental problem with the CIWG, the AIUA and the ALDOI is that under their proposals/options, insurance ceases to be insurance, and becomes something else, namely a very badly constructed cost-sharing program akin to Obamacare.
President, Gulf Administrators LLC, Mobile
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