MIM-O

Where Do We Go From Here?

The Problem

Commissioner Dale, by approving a 90% rate increase for personal lines, rather than the almost 400% recommended by the actuaries, did all he could do given the circumstances. The Commissioner did approve the 268% commercial property increases and the mobile home increases 60.4%, as recommended by the actuaries. These new rates are effective October 1, 2006.

The Gulf Coast residents will not be asked to support their own catastrophic exposures with actuarially sound rates. Commissioner Dale really only had two choices: he could ask those who are subject to the exposure to fund the exposure with adequate insurance rates or require subsidies from multiple sources such as gaming tax, FEMA grants, insurance company assessments and statewide policyholder contributions. The depressed rates for personal lines are the biggest part of the pool, 80%. Adequate rates for 20% of the pool, commercial lines, will not make the pool solvent. Without benefit of the new rate structure, commercial creates 40% of premium with 20% of exposure.

The solutions for the future insurability of the Gulf Coast and perhaps all of Mississippi are far more complicated than the general public would realize. Here is why. When Katrina hit there was 1.7 billion dollars of insured value in our Wind Storm Pool. Forty-four percent of the total insured value has or will be paid out by the Wind Storm Pool amounting to over $750,000,000. If that same storm hit today as of 10/31/2006, the total insured values are approaching 5 billion dollars, 23 times the values of last year. Thus, the assessments would be 2 ½ times greater. Forty-four percent of current insured value now approaches 1.8 billion dollars in company assessments. October 31, 2006 premium is $41,329,000.

There are those who believe that by this time next year, with new and more expensive construction, the insured value within the Windstorm Pool will be over 6 billion dollars, a more than 350% increase over Katrina’s values.

The depressed rating structure, especially in personal lines, will only increase the potentials for greater catastrophes and reduce the abilities of all personal lines carriers to voluntarily provide wind coverage.

Further complicating the issue is the cost of reinsurance for the Wind Storm Pool. At the time of Katrina the pool carried $175,000,000 of reinsurance. Today they carry $350,000,000 of reinsurance. This $350,000,000 of reinsurance costs approximately $45,000,000. Keep in mind that the reinsurance is based on total insured value of 1.8 million that has now risen to almost 4 billion. It is expected that the real cost of reinsurance for this policy year, April 1, 2006-2007, will ultimately cost up to $70,000,000 plus (could be negotiated). A ninety percent rate increase on personal lines effective October 1, 2006 will not generate sufficient premium dollars to pay this expected $70,000,000 plus bill. Even with federal grants, $30,000,000 this year and $20,000,000 next year, there will certainly be a short fall of dollars available to pay these reinsurance premiums. That shortfall, most probably, will have to be paid for by further borrowing, or even through more assessments.

The current reinsurance, $350,000,000, $21,000,000 deductible, is a smaller percentage of coverage as it relates to TIV of $5,000,000,000 for 2006. The Katrina reinsurance was $175,000,000, $10,000,000 deductible, of a TIV $1,800,000,000. Current day ratio is .070 versus .097.

Solution – Insurance, Long Term

What are the potential solutions now that we know the charted course? Any solution is going to be legislative. Currently the Mississippi Windstorm Underwriting Association is managed as a subdivision of the Mississippi State Rating Bureau. At this time there are no underwriting standards. The MWUA should be allowed to impose underwriting standards, such as the requirement of flood insurance. The MWUA also should be authorized and ultimately be empowered to manage a statewide recoupment facility. Legislation should consider the operation independently with an executive director and a board of directors made up principally of participating insurance carriers. Consideration should be given to allow accumulation of reserves and surplus to help finance future contingencies. This organization should be able to help determine rating methodology, mandating, over time, a more actuarially sound structure.

If the MWUA cannot buy reinsurance for a 250 year storm using paid premiums, then the next legislative action would be to allow insurance carriers to recoup windstorm assessments over a period of time throughout the balance of the state. This recoupment would be managed by the new authority given the Mississippi Windstorm Underwriting Association.

The benefits of a recoupment are two fold. First, assessments would not jeopardize the solvency of a carrier. Second, recoupment of assessments over a period of time, three years, would keep the companies writing in the state. The insurance companies will stay in the marketplace after a storm in order to recover their assessment costs.

In conclusion, we must agree that there has been created an unlimited liability for the insurance carriers, for future assessments of a growing windstorm liability. The carriers will have to seek some remedy to limit their liability and properly secure and price their own reinsurance.

The Excess & Surplus lines of insurance should not be exempt from participation in funding the MWUA. An upfront fee might be a future consideration.

Without responsible Legislative action, the industry cannot sustain another Katrina.

Where do we go from here? Do we wait for a Federal Catastrophe Program? No.

Summary of Legislative Action

A. Pre-storm Insurance

1. Reconstitute Mississippi Windstorm Underwriting   Association (MWUA) to allow accumulation of surplus and maintain certain underwriting standards
2. Levy a reinsurance fee on non-admitted carriers to mitigate dramatic increases in after-storm re-insurance rates

B. Post-storm Insurance

Allow all carriers in the state to re-coup up to 100% of their assessed involuntary payments, equally dispersed among all carriers.

 

- Thomas G. Quaka, CPCU