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Long-term Wind Pool solution? State at beginning of process

Now that Mississippi Insurance Commissioner George Dale has made his decision with the Mississippi Windstorm Underwriting Association requested rate increase, where does the state go from here?

That’s a question with tough answers that will require cooperation and coordination among a variety of entities, said Dale.

On July 28, Dale granted a rate increase of 90% in the homeowner’s program for the Wind Pool fund, which was 308% less than what had been requested to cover losses from Hurricane Katrina.

A requested rate hike of 268% for commercial property and 60.4% for mobile homes was also approved by Dale, which was the amount requested by the Wind Pool Association.

The state’s Wind Pool fund sustained about $603 million in losses from Hurricane Katrina, which was nearly one-third of the pool’s insured value. And with only $175 million in reinsurance in the fund at the time of Katrina, insurance companies that write policies in the state were assessed the remainder of the costs.

State law doesn’t allow the Wind Pool fund to operate at a deficit. Therefore it needed another $350 million in reinsurance to cover losses.

Now with the rate increase approved, all eyes have now shifted to what this hurricane season could bring to the state.

But more importantly are the behind-the-scenes efforts to find a more equitable and permanent solution for financing the Wind Pool fund.

Already over $700 million in claims have been filed with insurance companies in the state with most of those being paid out.
With years of experience as Mississippi’s insurance commissioner, Dale has some ideas on what could be done to improve the current situation.

Three possible solutions Dale offers include:

• Providing tax credits to insurance companies.
“There needs to be some serious consideration for tax credits to insurance companies to increase their amount of reserve in order to better handle natural disasters,” said Dale. “With the current tax structure, the money a company has in reserves for such natural disasters, the more it’s affected negatively by the government. There’s no incentive to have more money in reserves. That needs to change.

• Spreading the risk around.
“Insurance is the law of large numbers. We need to spread the risk around including earthquakes and flooding,” Dale said. “People on the Coast need to be offered flood insurance in their insurance policy but in order to do that at an affordable rate, we have to spread the risk around the country.”

“But it’s a hard sell in Iowa and Montana where those residents don’t want to be assessed for something on the Mississippi Gulf Coast because in Iowa and Montana they don’t have floods,” he added.

• Federal backing and support as backstop measure.

“We need to have the federal government be the backdrop for the insurance industry as a last resort for insurance companies. Without federal assistance as a last resort, many insurance companies could go bankrupt, and then we all would be in a world of hurt,” said Dale.

“Federal involvement is essential when it comes to natural disasters. Even with good reserves, another Hurricane Katrina in such a short period of time could wreak havoc in the insurance industry and ultimately would devastate policyholders,” said the commissioner.

How likely is it that these options could find sunlight and acceptance?

“Pretty good, I’d say,” said Dale. “They’re being looked at all over the country in one way or another. Now we have to build consensus and support and go from there. But something has to change from the way things are being done now,” Dale said.

David Treutel Jr., president of Treutel Insurance Agency Inc. in Bay St. Louis, recently testified before a Congressional Committee that held hearings on whether the U.S. housing market is ready for another major natural disaster.

He offered another suggestion for consideration whereby homeowners should be offered the opportunity to purchase an “all-risk” insurance policy that would cover all of their personal property against any natural disaster including flooding and wind.

In Treutel’s testimony before the committee, he recounted how many of his policyholders “were confused and frustrated” following Hurricane Katrina due to multiple policies, which covered a variety of items from damage such as their homes and automobiles along with insurance against flooding and wind.

The “all-risk” policy would provide those affected by natural disasters a method of avoiding another major post-Katrina headache, and that is dealing with multiple adjusters.

“Only one adjuster would deal with a (policyholder) who would be covered for all risks, which could avoid the wind versus water debate and costly litigation and excess costs for engineering studies,” Treutel told the committee.

Treutel is also in agreement with Dale on federal involvement with this issue.

In the same hearing, he told lawmakers that natural disaster legislation similar to terrorism insurance laws created after the September 11 attacks needed to be created as a federal backstop to state and federal catastrophe pools.

“This is really essential. I don’t know how we can get around the discussion and come up with meaningful solutions,” said Treutel.

Tom Quaka, president of Mississippi Insurance Managers of Jackson, also believes that some federal intervention is inevitable.

“I don’t know how they can avoid it if they want to keep the insurance industry solvent following these major disasters. If another Hurricane Katrina happened this hurricane season, it’s anyone’s guess what would happen to the insurance industry —especially in Mississippi,” said Quaka.
“There is a good deal of discussion about alternatives and I know Commissioner Dale has some ideas on this. We need to start talking now and making decision rather than waiting until another natural disaster strikes before coming to any agreement as to how best to deal with the long term Wind Pool funding issue,” Quaka said.

“Adding to the problem and concern in this area is that there is not a cap in Mississippi on Wind Pool assessments. The insurance industry could literally go broke if another Hurricane Katrina were to hit this season,” he added.
“With $700 million paid out in claims and only $175 million in reinsurance in the fund, these are very, very large numbers for a small state like Mississippi,” Quaka said.

“We write policies in the six coastal counties, and without the Wind Pool, it would be extremely difficult, if not impossible, to provide this coverage,” said Charles F. Porter, president of Barksdale Bonding and Insurance Inc. in Jackson.

As Dale and others seek a more equitable and permanent solution to the Wind Pool funding issue, Dale is also watching what is happening in other states with coastlines such as Louisiana, Alabama and Florida.

“We should be looking at what is working in those places and what isn’t. But ultimately Mississippi will have to come up with something for our state, while we also look at a national solution,” said Dale.

“As we face a heightened cycle of natural disasters, the likes of which we have not seen in recent decades, an opportunity exists to dramatically improve what is already in place,” Treutel said in his testimony. “Failure to act effectively now will continue to cost consumers and taxpayers more than it should.”

So until a long-term solution is settled on Dale suggests that those looking for insurance need to “shop early for insurance. Find a company that will write you out of and not into the Wind Pool fund.”

Contact MBJ contributing writer David Lush at mbj@msbusiness.com.

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