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Coastal Property Residual Markets: Challenges and Potential Solutions


Source: Insurance Information Institute and AIR Worldwide June 11, 2008 release, at ... to replace structures and their contents, including additional living expenses ... – PowerPoint PPT presentation

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Title: Coastal Property Residual Markets: Challenges and Potential Solutions

Coastal Property Residual Markets Challenges and
Potential Solutions
  • Prepared by David C. Marlett, PhD, CPCU
  • Appalachian State University
  • The Brantley Risk and Insurance Center
  • Prepared for 2008 Out of the Storm Hilton Head,

Estimated Insured Value of Coastal Exposure
(2007, Billions)
Over the last three years (2005-2007), the
insured value of properties in coastal areas grew
at a 7.3/year compound rate. If this growth rate
persists, the insured value will double by 2017.
Source AIR Worldwide at http//www.air-worldwide.
In Some States, Coastal Exposure is a High
Percent of the States Insured Value
Insured value is an estimate of the cost to
replace structures and their contents, including
additional living expenses and business
interruption coverage, for all residential and
commercial property in a state that is or can be
Source Insurance Information Institute and AIR
Worldwide June 11, 2008 release,
at http//
  • Standard market
  • ES market
  • Residual market
  • Market of last resort
  • Beach plan
  • Wind pool
  • Citizens
  • FAIR

Why Have Residual Markets
  • Economic Development
  • Lenders, Construction, Real Estate Agents,
  • market of last resort

Major Issues
  • Subsidization and Risk Seeking Behavior
  • Measuring the Risk
  • Catastrophe Loss Financing Arrangements
  • Political Pressures and Rate Suppression
  • Transparency
  • Leadership and Board Composition
  • Accountability
  • Role of Excess and Surplus Lines Insurers

Residual Market Mechanisms
  • FAIR Plan
  • Urban Protection and Reinsurance Act of 1968
  • Roughly half the states still have a FAIR Plan
  • Beach Plans / Wind Pools
  • Alabama, Florida, Louisiana, Mississippi, North
    Carolina, South Carolina, and Texas. Virginia
    coastal property owners are insured through a
    FAIR plan.

State Wind or Beach Pools Source Daniel Sutter
University of Texas Pan American Presentation
at ALEC, 7/30/08
State Current Name Year Established Policies in Force Total Liability
Alabama Alabama Insurance Underwriting Association 1970 9,699 (6/08) 1.682 Billion
Florida Citizens Property Insurance Corporation 1970 1,216,960 (5/31/08) 441.9 Billion
Louisiana Louisiana Citizens 1968 129,203 (3/07) 21.13 Billion
Mississippi Mississippi Underwriting Association 1987 39,340 (11/07) 5.709 Billion
North Carolina NC Insurance Underwriting Association 1969 163,527 (3/31/08) 67.80 Billion
South Carolina SC Wind and Hail Underwriting Association 1970 42,663 (4/30/08) 16.80 Billion
Texas Texas Windstorm Insurance Association 1971 216,008 (12/31/07) 58.64 Billion
Residual Market Penetration

Residual Market Penetration
  • Statewide Market Penetration doesnt tell whole
    story because the it is the coastal property
    presents the greatest exposure due to location
    and value

The Coastal Insurance Market in North Carolina
  • North Carolina as a case study
  • Raise issues to encourage discussion

(No Transcript)
NCRB Rating Territories
Homeowners Insurance DWP and Market Share in
North Carolina (2007)
State Farm Fire 314,171,122 19
North Carolina Farm Bureau 213,326,084 13
Nationwide Mutual Fire Ins Co 172,200,108 10
Allstate Ins Co 96,455,898 6
Nationwide Mutual Ins Co 85,288,950 5
Allstate Indemnity Co 70,297,549 4
Erie 63,021,060 4
USAA 54,218,394 3
Unitrin Auto Home Ins Co 42,211,019 3
Auto Owners Ins Co 32,945,885 2
Liberty Mutual Fire Ins Co 30,618,782 2
Phoenix Ins Co 29,086,002 2
USAA Casualty Ins Co 25,451,905 2
Peerless Ins Co 24,544,825 1
Standard Fire Ins Co 23,315,478 1
Farmers Insurance 21,621,787 1
Homeowners Insurance Loss Experience in North
Year Loss Ratio
1996 206
1997 56
1998 76
1999 91
2000 62
2001 50
2002 61
2003 67
2004 44
2005 39
2006 42
2007 45
average 70
Source NC Department of Insurance Source NC Department of Insurance

ROE for Homeowners Insurance in North Carolina,
1997 - 2006
Average HO ROE in NC from 1997 through 2006 was
10.2 -- well below the Fortune 500 All-Industry
Source NAIC and the Insurance Information
NC Homeowners Insurance Loss Ratio, 1986-2005
Excludes expenses, taxes, commissions and
dividends. Source NAIC Insurance Information
North Carolina Rate Bureau
  • Statute 58-36-1  North Carolina Rate Bureau
  • Essential lines (residential property, personal
    auto and workers compensation)
  • The Governing Committee is composed of 12
    representatives of member companies and two
    non-voting members appointed by the Governor
  • Annual Filing with DOI for Homeowners is not

History of Homeowners Insurance Rate
Changes source NC Department of Insurance
Filed Date Overall Filed/Proposed Rate Change Effective Date COI Ordered Rate Change RB Implemented Rate Change
18-Jun-1993 13.5 01-Oct-1994 2.0 2.0
03-Dec-1998 15.6 01-Jun-1999 4.3 4.3
22-Mar-2002 20.0 15-Aug-2002 5.0 5.0
 25-Feb-2005 12.1   01-Aug-2005 2.2   2.2  
29-Dec-2006  21.9  01-May-2007   5.4 
North Carolinas Residual Markets
  • North Carolina Joint Underwriting Association
  • FAIR Plan
  • North Carolina Insurance Underwriting Association
  • Beach Plan (Beach and Coastal)

The North Carolina Beach Plan
  • The Beach Plan was created in 1969 to cover only
    those barrier islands adjacent to the Atlantic
  • In 1998, the Beach Plan was expanded by the NC
    General Assembly to include the eighteen (18)
    coastal counties (called the Coastal Area) for
    Windstorm and Hail Insurance Only coverage.
  • The plan was authorized to begin offering
    Homeowners Insurance Policies for principle
    residences effective July 1, 2003 for all 18
    coastal counties.

Operation of Beach and Fair Plans
  • 14 member Board of Directors
  • 7 representatives from the insurance industry
  • 4 licensed agents
  • 3 members of the general public
  • The 2006 budget for the operation of the Beach
    plan provides estimated annual expenses of 8.4
    million dollars. FAIR plan 2006 budget estimate
    is 5.6 million.
  • (Accounting and Fiscal Affairs Committee, Annual
    Board Meeting)

Summary of Combined Exposure for NC Beach and
FAIR Plan Premium, Exposure and Loss Potential
Source http//
2004 2005 2006 2007 2008

Written Premium 99 mil. 130 mil. 180 mil. 196 mil 269 mil.

Total Insured Value 28 bil. 39 bil. 51 bil. 54 bil. 68 bil.

Ave. Annual Loss 110 mil. 146 mil. 230 mil. 235 mil. 270 mil.

100 Year PML 1.8 bil. 2.4 bil. 2.9 bil. 3.3 bil. 3.8 bil.
The North Carolina Beach Plan Catastrophe Loss
  • Most beach plans include a combination of
    accumulating a reserve, assessments, and
  • North Carolina is unique in that it has only
    recently purchased reinsurance and relies
    primarily on assessments
  • Dangerous to rely on Assessments (especially a
    modified form)

Reasons for Buying Reinsurance
  • Liquidity improves since payment from reinsurer
    should be faster and more reliable than
  • Rely less on assessments which should stabilize
    market due to fewer potential insolvencies from
  • Can define the cost of risk (reinsurance premium)
  • Establish relationship with reinsurer and broker
    which may be valuable during rough times. Gain
    expertise and trust.

Reasons for Buying Reinsurance
  • The reinsurance questionnaire was sent out to
    200 member companies and 113 responded.  The
    first question asked whether or not the
    respondents felt that their company had adequate
    capacity to absorb potential beach plan losses
    and 89 said yes. 
  • The President of the Independent Insurance Agents
    of North Carolina submitted a letter to the
    General Manager of the Beach Plan expressing a
    desire for the Beach Plan to consider buying

Reasons against Buying Reinsurance
  • Takes large chunk of retained earnings and will
    slow ability to grow surplus
  • Odds are high that it will not be needed
  • Tax implications (could lose tax exempt status)
  • Insurers can buy their own reinsurance and manage
    their assessment exposure

Reasons Against Buying Reinsurance
  • Less incentive for insurers to try and avoid the
    assessments by writing voluntarily along the
  • Lessens overall capacity for standard market
    regarding NC coastal exposure
  • It is expensive and the cost can change for many
    reasons (worldwide market)

  • Initially based upon market share
  • Ability to reduce obligations through voluntary
  • Are they reliable?
  • Will they destabilize insurers and market?

  • Can insurers pass the cost along or are they
    supposed to absorb?
  • What happens when insurers become insolvent and
    cannot pay?
  • What is the role of the Guaranty Fund?
  • Results in massive subsidy to property owners
    along coastline

Preliminary Recommendations
  • 1. The Beach Plan should once again truly act as
    the market of last resort and not be the
    market of choice
  • Allow rate levels to be influenced more by market
    competition than regulatory authorities.
  • Streamline the rate approval process
  • Ensure that coverage from the Beach Plan is not
    superior to that offered in the standard market.
  • Review the 15 differential develop a figure with
    a sound actuarial basis

Preliminary Recommendations
  • 2. Verify that the Beach plan is prepared to meet
    financial obligations that may result following a
    catastrophic event.
  • The Beach Plan should purchase reinsurance that
    is adequate to pay claims following the 100 year
    probable maximum loss
  • Verify the reliability of assessments. The Beach
    Plan administration should conduct loss
    simulations to estimate impact of assessments on
    insurers (particularly smaller ones)

Preliminary Recommendations
  • 3. Decrease the reliance on assessments that
    would result in non-coastal regions subsidizing
    the coastal region.
  • Purchase adequate reinsurance
  • The disbursement of retained earnings to insurers
    should also be suspended. The Beach Plan should
    not disperse funds to insurers until there are
    funds in place (or reinsurance coverage) that are
    adequate to pay claims resulting from the
    probable maximum loss

Preliminary Recommendations
  • Make operation of Beach Plan transparent
  • Hold meetings in major cities and invite the
  • Post catastrophe loss financing plans on their
    website. This should include specific
    information on reserve funds, assessments and
  • Revise board membership to include non-coastal
  • Clarify leadership structure and decision making