There is one issue that seems to be eclipsing all others affecting business and individual recovery from Hurricane Katrina: insurance. All segments of the economy are affected by the affordability and availability of insurance in the state.
“I would cajole legislators, both state and federal, that something needs to be done with insurance coverage because without insurance, the rebuilding process is going to be really stymied as it comes along,” said Mississippi Banking Commissioner John Allison. “Some individuals and companies could self insure, but not enough to make a difference. Rank and file people need insurance and they need it at reasonable rates and coverages. I certainly support the concept that something needs to be done. There is no doubt about that.”
Of growing importance
Allison said while the first concern is South Mississippi and the Gulf Coast, as he goes to meetings around the U.S. where federal and state banking regulators get together, insurance is growing topic of discussion.
“The vast majority of the U.S. lives within 50 miles of the water,” Allison said. “It is not just an issue in the Gulf South, but the East Coast, the West Coast, Alaska and Hawaii. Everyone on the water has some of same concerns about insurance companies not writing new policies or going up on premiums and coming down on the amount of coverage.”
Cheryl Johnson, Mississippi Coast president for Regions Bank, said the lack of affordable insurance negatively impacts the banking industry statewide as multi-million dollar projects are being put on hold until the issue is resolved.
“For example, prior to Katrina, there were 16 condo projects in the planning stages in Biloxi,” Johnson said. “Post Katrina, the only projects you see are the ones that began prior to the storm. There are 10 to 12 waiting on the sidelines in Biloxi alone until the insurance rates subside. Other projects are in a similar situation — multi-family housing units, owner occupied commercial projects, income producing commercial property, etc. — projects that cannot collect enough lease income to compensate for projected insurance costs.”
Johnson said there is no doubt the insurance issue has a major impact on the Coast’s recovery. The availability of affordable insurance heavily impacts the stabilization of existing businesses and the fostering of new businesses locating on the Gulf Coast.
Reaching a ‘critical’ stage
“Without a prompt resolution, any rebuilding effort will be placed in jeopardy and is sure to reach a critical stage,” Johnson said. “In addition, the issue has a far-reaching impact statewide as rates are already rising in the northern part of the state and residents are seeing less available coverage. This is not a Coast issue, but a state issue and all of the GO Zone initiatives will be rendered meaningless unless we get insurance rates to a reasonable level.
For the short-term fix, Johnson said it’s obvious that the Wind Pool absolutely has to have a cash infusion as quickly as possible to provide relief. Recovery on the Coast is hinged to that relief and the timing is critical. The long-term resolution is just as critical in maintaining affordable insurance for individuals and business owners to keep recovery on track and create a normal, healthy business climate conducive to growth.
“There are several proposals that have tremendous merit, including tax credits and incentives for insurance companies and their customers,” Johnson said. “All potential resolutions should be explored and utilized to bring the insurance crisis to an end so that the pace of recovery is not stunted. Tremendous opportunity is visible from the terrible devastation brought by Katrina and everyone in the State of Mississippi wins when recovery can occur full force.”
Chevis Swetman, chairman and CEO of The People’s Bank, Biloxi, said bankers are concerned that insurance problems are slowing the pace of the Coast’s recovery.
“It is starting to slow to a crawl and we definitely need to get more homes and other buildings constructed,” Swetman said. “The two greatest concerns we have right now are affordability and availability. It has to be affordable for residents on the Gulf Coast and it has to be available from the insurance companies.”
Studies have been done estimating that for every 1,000 homes with an average value of $200,000 that don’t get rebuilt, it will cost the state $12 million in lost revenues. If 10,000 homes don’t get built, the state loses $120 million. If 70,000 homes don’t get built, the state loses $840 million.
“We could pay for a lot of needs like education with those tax revenues,” Swetman said. “I think we have done a good job getting this message out to the Legislature.”
In addition to federal appropriations to the Wind Pool of about $50 million, the state Legislature is currently considering a $30-million appropriation to help reduce premium rates that went up 90% for homeowners in the state Wind Pool, and 268% for businesses in the Wind Pool. Swetman called those rates “backbreakers.”
“What we have been trying to work on is something to get this increase for the small business people down,” Swetman said. “If $30 million were injected into Wind Pool for business, it would probably bring rates down to about 134%. We would like to see that get even lower to 90% to 100%.”
Another strategy being promoted is recoupment. Insurance companies could add to the premiums for several years after a future disaster to help recoup losses.
“This would allow insurance companies that write in Mississippi and stay in Mississippi to be able to recoup those losses,” he said.
Higher deductibles for wind storm coverage for lower annual premiums could also be considered. And most people agree there also needs to be federal legislation.
“But no one tends to think that will happen soon,” Swetman said.
Swetman said some federal fix such as anti-trust legislation is a battle that is going to take years to fight when what is needed is an immediate solution for the Gulf Coast to make insurance more affordable.
“We have to get people living back on the Coast,” he said. “Anything that slows down the rebuilding of the Gulf Coast is going to have an adverse effect on the state.”
James Threadgill, BancorpSouth’s vice chairman responsible for insurance, trust and retail investment operations,Tupelo, agrees that the Wind Pool issue is critical.
“When we have a catastrophic event like we had with Katrina, the Wind Pool doesn’t have enough funds in it,” Threadgill said. “It is not actuarially sound. There is a gap between how much actual coverage is available to pay claims and how much coverage is in place. Basically Katrina has broken the Wind Pool. Before Katrina there were 16,000 homes in the Wind Pool. So far this year there are 28,000 homes in the Wind Pool. Carriers aren’t writing wind coverage on the Coast.
The Wind Pool is the only available coverage you can find. All of the sudden, the price of coverage is much higher.
“If this insurance issue is not fixed, it will stop the recovery of the Gulf Coast. It will stop it in its tracks. If a homeowner wants to build his house, and can’t afford or find insurance coverage, a commercial bank is not going to be willing to make him a loan. We have to have that protection. If you can’t borrow money, you can’t build a house. The only construction you will see is people who can pay as they go. It is a critical, critical issue and one the entire state must recognize.”
He adds that because insurance companies are assessed a portion of Wind Pool by the amount of policies they write in the state, they might quit writing in North Mississippi to keep assessments from being so high. They could leave the state altogether.
Market size a problem
The small size of Mississippi’s insurance market is a problem. Threadgill said of all the insurance premiums collected in the U.S., only six-tenths of 1% comes from Mississippi.
“We are insignificant to a carrier,” he said. “They could easily walk away from our state and think nothing of it. What the governor has proposed is when carriers get hit with an assessment, allowing recoupment over a three- to five-year period for policies, charging a surcharge on policyholders all over the state. Yes, it means spreading the pain to North Mississippi. The alternative is not being able to get insurance. It is going to dry up for everyone. It is an issue directly impacting the Coast, but indirectly affecting the entire state of Mississippi. This is a complicated issue. There is no easy solution. It affects us all. But it is a priority this year in the state Legislature. It is one that must be addressed.”
Contact MBJ contributing writer Becky Gillette at firstname.lastname@example.org.