The Coastal Insurance Working Group (CIWG) charged with finding solutions to apparent “skyrocketing” wind insurance premiums paid over the past decade by coastal Alabama homeowners, is reviewing a handful of options it believes could lower the high costs associated with insuring homes against the risks of hurricane damage.
The CIWG, comprising representatives of Fairhope-based Homeowners Hurricane Insurance Initiative (HHII), local legislators, insurance industry representatives and the Alabama Department of Insurance (DOI), has met twice a week since August and aims to deliver recommendations to Gov. Robert Bentley by Dec. 31.
Part of what makes wind insurance premiums more expensive for coastal homeowners is the cost of reinsurance, what insurance companies buy to protect themselves against losses. The DOI does not regulate reinsurance companies and allows insurers to include the cost of reinsurance in the premiums their customers pay.
The CIWG’s “initial stipulations document” includes more than 65 statements considered “true” by all members of the group. Among the stipulations, the document states as fact that the DOI approved changes in rate-making structures that resulted in dramatic differences in premiums and deductibles in both Mobile and Baldwin counties starting in 2006. Those changes resulted in more than 70,000 policyholders being dropped from coverage in the two counties between 2006 and 2011.
The stipulations also confirm the DOI did not require total admitted companies’ premiums and losses collected per county when it approved changes in 2006. It did not have that data until the state legislature in 2013 passed the Clarity Law, findings from which included total homeowners’ premiums, claims and policies from all admitted companies for all the state’s ZIP codes from the years 2007-2013.
The group’s early discussions have been largely hypothetical, but in September, members discussed potential insurance entities that could serve Mobile and Baldwin counties only, Alabama only or all Gulf Coast states.
HHII liaison Michelle Kurtz said any insurance entity created from the recommendations would need enough financial backing to be able to pay claims related to an event on the scale of Hurricane Katrina, which remains the most costly natural disaster in U.S. history. According to the Insurance Information Institute, the insurance industry paid more than $41 billion for more than 1.7 million claims related to Katrina damages across six states.
A “once in 100 years event” is estimated to cost $1.3 billion. According to data from Louisiana’s Property Insurance Clarity Law, Katrina cost insurers $12 billion in the coastal band, defined as a swath extending 50 miles inland from Texas to Florida.
“We have to be able to handle armageddon,” Kurtz said. “We have to be able to handle what the private sector can handle. We need to plan to handle a Katrina.”
HHII believes the creation of a coastal insurance band, where multiple Gulf Coast states create their own reinsurance market, would lower risks and costs associated with wind insurance. Such a market has been endorsed by State Sen. Bill Hightower, who recently promoted a resolution asking the governor’s office and the DOI to consider the idea.
According to HHII representative Dan Hanson, the coastal band insurance entity could be a reinsurer or it could be a hurricane insurance policy provider for homeowners.
But Lars Powell, the Whitbeck-Beyer Chair of Insurance and Financial Services at the University of Arkansas-Little Rock and CIWG member, warned the coastal band would create a political problem if large scale storms don’t hit multiple states within the first few years of its existence. He said it is important that the coastal band be allowed to bank premiums in non-storm years.
“If they see their money going to a specifically Alabama hurricane, it will be an unpleasant response,” Powell said. “You won’t have the same kind of political backlash with a big storm.”
Some solutions would require legislation, like a restructuring of the Foley-based Alabama Insurance Underwriters Association (AIUA), which provides insurance for Baldwin and Mobile county homeowners who were previously unable to obtain coverage in the private insurance market.
An AIUA restructuring plan would require $25 million to $50 million in seed money and legislation would be needed to convert the AIUA to be a federally tax exempt entity. Hanson said the new AIUA would sell policies at a low, fixed rate that does not include prices based on hurricane predictions.
Regulations would ensure policyholders would pay a fixed rate between $1,000 to $1,600 per year for wind premiums. In the event of a large scale storm, homeowners could be assessed for damages after the storm.
“We are here because the risk of hurricanes is huge and it makes insurance very expensive,” Powell said. “The choice we have is to pay the global market to take the risk, or to ask homeowners to do it on the back end.”
The entity would still have to purchase reinsurance in the early stages, but if it’s allowed to accumulate premiums in non-storm years, the amount of reinsurance it would have to purchase would decrease each year a hurricane did not hit.
DOI Deputy Commissioner Charles Angell said the AIUA would need to be able to accumulate earnings in non-storm years so it would be less reliant on reinsurance.
“We wouldn’t want the new AIUA to be dependent on the state for a financial backdrop,” Angell said. “Clearly a bill would be needed to fulfill the steps needed to become tax exempt through the IRS.”
Currently, the AIUA is only sanctioned to provide insurance in Mobile and Baldwin counties in areas south of the 31st parallel, near the Stockton area in Baldwin County or the Barry Steam Plant in Mobile County.
In 2013, more than 118,798 policies were written in Mobile County and more than 68,000 in Baldwin County, which includes some double counting from policyholders with separate wind and non-wind policies. In total, Mobile and Baldwin county policies accounted for more than $336 million in premiums in 2013.