Wind insurance costly, scarce on Gulf Coast

A study recently issued by the RAND Corporation recognizes what many businesses along the Gulf of Mexico coast have known for a couple of years now: They have had a difficult time obtaining wind insurance coverage since Hurricanes Katrina, Rita, and Wilma hit in 2005. Plus, they are often paying more than twice as much for the insurance as they did before those hurricanes hit.

With higher wind insurance deductibles and lower limits on policy coverage, businesses are spending more for less protection from hurricanes, tornadoes and other major wind storms the study by the nonprofit research organization found. They are also having to turn more frequently to the state-run “residual” insurance markets, which provide limited insurance to businesses unable to find insurance elsewhere as the admitted markets lose their appetite for writing coverage along the Gulf Coast.

The study was conducted for the RAND Gulf States Policy Institute by the RAND Institute for Civil Justice. The report, “Commercial Wind Insurance in the Gulf States: Developments Since Hurricane Katrina and Challenges Moving Forward,” says the scarcity and high cost of wind insurance has delayed some business investments in the Gulf States region since the 2005 hurricanes, but that the overall effect on the region is hard to assess because higher insurance premiums may have in part redirected economic activity to lower risk areas. Half the lenders interviewed for the study said they were aware of delayed or canceled business projects in 2006 because of high insurance prices or the unavailability of insurance.

“The plight of homeowners after Hurricane Katrina has received most of the attention,” said Lloyd Dixon, a RAND researcher and lead author of the study. “But business owners — especially small businesses in the hardest-hit areas — had a difficult time finding wind insurance despite steep price increases, and some couldn’t get insurance at any price.”

Researchers interviewed commercial insurance policyholders, insurance agents and brokers, insurers and reinsurers, commercial lenders, firms that model wind and other losses for the insurance industry, and companies that provide credit ratings for insurers and other firms. The sample included large, medium and small companies. Interviews were conducted in late August and early September 2006, with follow-up interviews continuing through April of this year.

The study found that in the first three quarters of 2006 the cost of insurance for commercial property skyrocketed, and coverage became less available in areas most exposed to substantial wind risk.

“Many firms are bearing more of the risk than they did before the recent hurricanes, so they are less protected against the next big windstorm,” Dixon said.

Researchers also found that small businesses in high-risk areas are less attractive to insurance underwriters, in part because they are typically less geographically diverse than large firms. Such companies are also more likely to be in a weaker bargaining position when negotiating insurance rates and often lack the leverage with lenders to negotiate insurance coverage requirements lower than their loan balance.

The study identified several reasons behind the large premium increases:

• Insurers and modeling firms increased estimates of the number of hurricanes expected to hit the region and the damage caused by hurricanes when they do occur.
• Financial rating agencies tightened capital adequacy requirements for insurers.
• Litigation and government actions following the 2005 hurricane season led to uncertainty about how insurance contracts will be enforced by courts in the region.
• The threat of large assessments on insurers after future hurricanes that cause deficits in residual markets.

“While some of the factors that caused price increases may be transitory, the expectation of more frequent hurricanes and higher repair costs will likely prevent wind insurance prices from returning to pre-Katrina levels,” Dixon said.

The study is available at www.rand.org. Other authors include James Macdonald of Navigant Consulting and Julie Zissimopoulos of RAND.