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Cost, availability situations handled differently state to state

States along the Gulf of Mexico share a common concern about the cost and availability of insurance after catastrophic hurricanes in 2004 and 2005. But there are major differences in the way the states are tackling the problem.

Mississippi Attorney General Jim Hood advocates that Mississippi take actions similar to measures in Florida. After State Farm announced it would no longer write new homeowner and commercial policies in Mississippi, Hood proposed legislation to require State Farm to continue writing new homeowners and commercial property policies in Mississippi. Hood also asked Gov. Haley Barbour and Insurance Commissioner George Dale to issue emergency executive orders requiring insurance companies to continue writing homeowners and commercial property insurance policies until the Legislature has had time to address the proposed amendment.

“Republican Florida Governor, and former Attorney General, Charlie Crist recently worked with Florida Commissioner of Insurance Regulation Kevin M. McCarty to use their executive emergency authority to temporarily prohibit the cancellation and non-renewal of homeowners and commercial policies, until the new Florida insurance statute went into effect,” a press release from the AG’s office states. “Hood provided Barbour and Dale with citations to Mississippi law granting them similar authority to that used in Florida.

“The proposed legislation, which was modeled after Florida legislation passed last month by the Republican-controlled Florida Legislature, would require that insurance companies selling automobile insurance in Mississippi to also sell homeowners and commercial property insurance statewide, if they sell these policies in any other state.”

Hood said one of the main reasons he settled state court litigation against State Farm was to keep them writing homeowners policies in Mississippi, to stabilize the insurance markets, and to help Coastal residents and business rebuild.

“Mississippi should not allow State Farm to breach its promise and continue to profit from others in our state,” Hood said.

Commissioner Dale, however, doesn’t think the Florida model is the way to keep insurance available and affordable in the state. Dale said Mississippi should proceed cautiously to prevent jeopardizing an already fragile insurance market.

“Those who point to Florida as a model probably need to do a little more investigation into what has happened insurance-wise in the State of Florida,” Dale said. “We have been told by sources in Florida that rates prior to this recent legislative action were escalating at approximately 1,100% in the wind pool in Florida called Citizens Insurance Company. Very few insurance companies in Florida are writing in what we refer to as the voluntary market. Those that do have issued policies with rate increases in the 300% amount.”

Dale said it has been his contention all along that the free enterprise system will work, and has worked historically, only if government and well meaning individuals don’t tinker with it.

“I also contend if we go a reasonable period of time without another storm, we will see rates begin to level out and, in many cases, rates begin to decrease,” Dale said. “But if government gets too heavily involved, then the end results could be tampered with.”

Joseph Annotti, senior vice president public affairs, Property Casualty Insurers Association of America, called Florida’s actions “a dangerous gamble.”

“Florida has taken drastic actions, a lot of which were forced by some pretty extravagant political promises made during the 2006 election campaigns to pass meaningful and immediate rate decreases,” Annotti said. “The only way they could accomplish that objective was to adopt what we call a ‘Pray Now and Pay Later’ approach. What you are praying for is that the wind doesn’t blow. What they have done is transferred a huge percentage of the future risks from the next hurricane to taxpayers all across the state by expanding the role of government and artificially suppressing what the real cost of insurance for coastal properties is. We think that is a dangerous gamble.”

Mississippi shouldn’t consider itself exactly in the same boat as Florida. Annotti said Florida is very different from any other state both in terms of the amount of property that is exposed to catastrophic storms (80% of the property is considered coastal property with catastrophic exposure) and the value of that property ($2 trillion).

“And one of our fears is that as a result of what Florida just did, by essentially expanding the role of the state as the primary insurer at greatly suppressed rates, you are going to fuel exactly the type of behavior you need to curb, and that is continued over development of the highest risk areas,” Annotti said. “Believe me, we understand consumers in coastal areas from Texas to Massachusetts are upset with rising prices and more limited availability. We want to work with public policy makers to find solutions for those problems. But if you are looking to Florida as a model, we think you are looking in the wrong direction. Florida is unique in terms of its risk and other states don’t have that type of overabundance of coastal exposures.”

Mississippi, with just six coastal counties, is less at risk and hence the risk may be more manageable. Annotti said the state should consider whether further government invention is the best route.

“Our preference for the solution ladder is let’s exhaust all free market approaches first,” he said. “If that is not solving the problem of making insurance available to coastal residents without unfairly burdening residents of the state who don’t live in coastal areas, then let’s come up with some creative ways to address the problem. That could take many forms including a market assistance program such as voluntary assigned risk pools that agree to take a certain percentage of risk, but don’t involve government bureaucracy. If that doesn’t work, the government may need to take an expanded role either with a mandatory wind pool required to write a certain amount in risk areas based on market share or a state catastrophic risk fund which Florida has in place and we think works well.”

With the catastrophic risk fund, companies pay to the state, and when claim amounts exceed a certain threshold, the state reinsurance pool kicks in. Annotti said that moderates rapid swings in reinsurance, which has really been a factor in a last few years.

“Reinsurance rates have gone through the roof,” Annotti said. “If the state comes in, the profit incentive is eliminated and you can focus just in that state rather than the global insurance market that these other giants compete in. These are smaller, more measured approaches to address state specific problems rather than this drastic overhaul and making the state essentially the primary insurer for more Floridians that the Florida Legislature passed.”

Annotti and other insurance leaders more favor the approach of Louisiana, which is encouraging private companies to come back into the market by touting plans to rebuild wetlands that protect against storms and to rebuild with stronger codes.

Lawmakers from Texas to New Jersey along the Gulf and Atlantic coast are paying a lot of attention to what is happening in Louisiana, Mississippi and Florida.

The Florida situation has increased awareness of the issues among state legislatures. But Annotti said most states are taking a step back and saying: “Let’s look at what Florida did. Do we really want to put taxpayers on the hook for the next storm? Or is there a better way to develop a private-public approach with an emphasis on private solutions to market disruptions?”

There is no universal agreement even within the insurance industry about another big issue regarding insurance. Some are arguing that it makes no sense to have markets broken up into 50 different categories with each state having different regulations and rates. Annotti said his organization’s position is that there is enough difference in state markets that state regulators better adapt state market conditions. But he said state regulators need to get their act together and make the system more uniform to eliminate some of the bureaucratic problems.

“Streamline, make it more uniform, and we think it could work a lot better,” he said.

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


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