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Businesses ponder future profitability as premiums climb

With the dramatic increase in Wind Pool rates for businesses that can’t obtain insurance on the open market, there is concern that the increased cost of insurance could put some Coast companies out of business. There is also increasing talk about businesses dropping insurance and becoming self insured.

Blake A. Wilson, president of the Mississippi Economic Council, said he hasn’t heard of anyone dropping insurance because it is hard to operate a business without it.

“But it is a topic of discussion,” Wilson said. “It is a tough nut to crack. This is not uncommon, unfortunately. When I lived in Florida, we went through the same thing in 1993 and 1994 after Hurricane Andrew. When you have something like this, it is going to take some time for the market to settle out. It is unfortunately a negative residual effect, a secondary hit after a hurricane. The Legislature has held a couple of hearings to talk about how to address it. It is a step-by-step challenge. The answer doesn’t come all at once.”

Could the cost of business insurance impact the decision of new businesses to locate on the Mississippi Gulf Coast? Wilson said it is important to remember that there are significant incentives available through the Gulf Opportunity (GO) Zone Act that make it particularly attractive to locate in the area.

“For certain businesses, the increased cost of insurance might be a negative,” Wilson said. “For others, there may be so many positives that it may outweigh this negative. I think the fact the Coast is going to come back even stronger for tourism as a result of the GO Zone is going to make it very attractive for certain businesses from the market point of view. Market forces could overcome the problems with insurance.”

Wilson’s advice is for business owners to keep a strong discussion going with their insurance agent, particularly as there are changing dynamics in the market.

Some businesses will probably end up dropping their insurance, and hope that nothing happens, said National Federation of Independent Business state director Ron Aldridge.

“They can’t do without lights and the air conditioning for their customers and employees, but insurance may be the one thing they are dropping,” Aldridge said. “In situations where a business owner has a mortgage against the property, they can’t reduce their coverage below the amount of the mortgage. But I think they are going to find every way they can to reduce their rates short of just dropping the insurance, to include raising their deductible and checking other insurance company rates. Even if the savings are just a little bit, it is important.”

Aldridge said insurance isn’t the only issue. Utility costs are up, and the increased cost of fuel has affected the cost of their goods. Also, the limited worker market is forcing wages up. When squeezed too much by rising costs, business owners may have to choose between having insurance or an employee. The employee may have to be let go, particularly if the business hasn’t completely recovered from the storm.

“You get into a situation, particularly in hurricane-ravaged areas, where the growth hasn’t come back,” Aldridge said. “The Hattiesburg and Picayune areas have super growth. But on the Coast itself, small business has a tough time finding customers on a regular basis and finding employees to keep manning the place. The insurance cost continues to just compound the problem.”

While there has been a big focus on getting casinos back open, Aldridge said many small businesses still haven’t reopened.

“They are gone,” he said. “They aren’t recovering so well. Some people lost their home and their business.”

Aldridge said some businesses may consider relocating farther north or in another state, or just not reopen.

Insurance Commissioner George Dale says businesses are looking at a number of options, including self insurance.

“Unfortunately, that is difficult for a small business owner,” Dale said. “Some of your large companies are self insuring. For example, some of your casinos are self insured, and that was true even before Katrina. Self insurance is an alternative. What you do is basically pay for losses up to a certain amount and then purchase a catastrophic policy that kicks in after ‘x’ thousands of dollars. It is pretty well the same thing as a high deductible. What you know is you are going to pay smaller claims.”

While options for business owners to address the problem are limited, Dale strongly advises business owners to start shopping early when their premium comes up for renewal.

Business owners can also check into discounts for more hurricane proof construction and other safety measures. And some businesses have been able to find what the Mississippi Insurance Department (MID) refers to as “non-admitted carriers”, which are companies that are not licensed here but are registered in the state.

“The danger there is the financial solvency of the company is not regulated by the MID,” Dale said. “But we have found non-admitted carriers for the most part to be good citizens.”

He advises people to do everything they can to stay out of the Wind Pool.

While the increased rates in Mississippi are causing alarm, it isn’t anything new after a hurricane. Dale said the rates and problems with markets in the state of Florida are four or five years ahead of Mississippi.

“Unless we find some way to deal with the Wind Pool, four or five years from now we will be in the same shape as Florida,” Dale said. “In a big portion of Florida, the only insurance available is from Citizens Insurance Co., which is Florida’s Wind Pool that is basically owned by the taxpayers of the State of Florida. This spring the Florida Legislature pumped $745 million into Citizens Insurance, and it is still over $1 billion in the red. So we have to find a way in Mississippi to address the Wind Pool because the Wind Pool in Mississippi is driving the cost of insurance statewide.”

All companies that write policies in Mississippi are accessed a certain amount to pay for losses in the Wind Pool. Dale said while that is the law, he encounters resistance for that from people living elsewhere in the state who don’t feel they should have to subsidize people living on the hurricane-prone Gulf Coast.

“When the Wind Pool uses up reinsurance, then all insurance companies that write property insurance are accessed their proportion to pay those claims,” Dale said. “Companies like Shelter and Alpha that did not write a policy in the three Coast counties are being accessed several thousands of dollars for their proportionate share of losses from Katrina. So, the Wind Pool is driving the cost of insurance statewide.

“But if the people on the Coast do not have an opportunity to purchase insurance, and in this case the only insurance available is through the Wind Pool, who is going to provide us with shrimp? Who is going to work at the casinos that provide millions in tax revenues? Who is going to work in the blue collar jobs on the Coast? We’re not talking about a group of condo owners on the Coast, but middle-income people who have to live near their work and have to be able to purchase insurance to live there.”

Dale said not just business owners, but political subdivisions such as schools and cities say they can’t afford the new insurance rates. The public entities didn’t have any idea they would have to pay so much for property insurance when drawing up their budgets. Rates are also going up for homeowners, especially those on the water.

“It has created a tremendous hardship for people on the Coast, but what is the alternative?” Dale asks. “One of the largest cities down there called me and said it put out for bids for property insurance, and contacted 22 companies.

They have one bid and it is extremely high. My answer was, ‘Hold your nose and take it, and hope we don’t have a hurricane this year.’ I predict rates may level out or even decrease if we get some time going forward from Katrina.”

Contact MBJ contributing writer Becky Gillette at bgillette@bellsouth.net.

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