From the Wall Street Journal:
HURRICANE WARNINGS
As Insurers Flee Coast, States Face New Threat ‘Last Resort’ Carriers Could Shift Liability To the Broader Public
By LIAM PLEVEN
June 7, 2007; Page A1
As hurricane season gets under way, a dramatic shift in the way homeowners insure against disasters could pose a big financial risk in several coastal states.
Private insurers have been fleeing the shoreline, wary of costly storms and often fed up with government regulations that prevent them from pushing rates higher. In more than a dozen states — from Texas along the Gulf of Mexico and up the East Coast to Massachusetts — an odd breed of carriers known as “insurers of last resort” is filling the void.
These last-resort insurers, which cover people the private sector won’t, issued more than two million policies to homeowners and businesses in hurricane-prone states last year, about twice as many as in 2001. Over that same five-year period, their total liability for potential claims has increased roughly threefold, topping $650 billion. Meanwhile, a separate federal flood-insurance program has seen its liability jump by two-thirds since 2001 to just over $1 trillion.
…
Last-resort insurers are created by state governments, although they operate much like other insurance companies. Many of them are set up as associations, which actually write policies that cover hurricane damage from wind, among other standard threats. Any insurer that sells property insurance in the state must also be a member of the association.But these insurers also differ in significant ways. They often don’t have deep financial reserves, leaving other private insurers, and sometimes taxpayers, to help foot the bill for huge claims.
…
The system “shifts the risk literally from those who are most at risk…to individuals who are at less risk or even at no risk,” says Robert Hartwig, president of the Insurance Information Institute, an industry trade group that plans to release a report detailing the growth of last-resort insurers.
…
The current situation represents a reckoning for years when states saw extensive waterfront growth, due in part to low insurance premiums. For a three-decade stretch starting in the early 1970s, private insurers were writing policies more or less freely along the water and relatively few major storms hit. Coastal development boomed.Florida offers a glimpse into what could happen down the road. In the wake of recent storms that prompted many insurers to limit their exposure, the state’s last-resort insurer is growing — and assuming more risk.
When the 2004 and 2005 hurricanes slammed its coast, the state’s insurer of last resort, Citizens Property Insurance Corp., suffered heavy losses. It hit its own policyholders — and eventually even those insured by other companies in the state — with $2.7 billion in premium surcharges. Florida legislators also allocated $715 million to hold down fees.
Since last year, Citizens has continued its massive expansion, writing roughly 15,000 to 20,000 new policies a week. As a result, it could be on the hook for significant losses if major storms roll in. A direct hit on Miami could cost tens of billions of dollars, much of which would be borne by Citizens — now the largest property insurer in the state.