Study: Wind coverage hard to find for Gulf Coast businesses

As a key House committee voted to add wind coverage to the federal flood insurance program over insurers’ objections, a new study reported that many businesses along the Gulf of Mexico coast have had a difficult time obtaining wind insurance coverage since Hurricanes Katrina, Rita, and Wilma hit in 2005 and have often ended up paying more than twice as much for the insurance as they did previously.

Gulf Coast businesses are also paying higher wind deductibles while getting lower limits, the study by the nonprofit RAND Corp. found. That means businesses are spending more for less protection from hurricanes, tornadoes and other windstorms.

Because they have been increasingly unable to purchase coverage in the private market, business have often turned to state-run residual insurance markets that provide limited insurance to businesses unable to find insurance elsewhere, according to the study conducted for the RAND Gulf States Policy Institute by the RAND Institute for Civil Justice.

Researchers found that as wind limits have declined and deductibles have increased, while the use of residual markets has risen, wind risk has shifted in part from insurers to policyholders and taxpayers — including those not living in high-risk areas along the Gulf Coast.

The report says that 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 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 cancelled 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 policyholders, agents and brokers, insurers and reinsurers, commercial lenders, firms that model wind and other losses, and companies that provide credit ratings for insurers and other firms.

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 wind risk.

One large insurance broker pointed to one client whose premiums increased 80 percent on average from the time Katrina struck in August 2005 to July 2006. And, while coverage limits for overall policies rose slightly, coverage limits for losses caused by wind fell by approximately 30 percent.

“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.

One small business owner in Florida purchased $38 million in property coverage for $250,000 in 2005. In 2006, after his insurer declined to renew his policy, the business owner was able to buy only $5 million in coverage for $940,000 — a nearly four-fold increase in cost for about one-eighth the coverage.

The study does offer some good news: wind insurance premiums for firms with operations concentrated in hurricane-exposed areas remained flat or showed only modest increases in the first quarter of 2007. Large firms with geographically diverse operations saw price declines, in part because there were fewer storms than expected in 2006.

The study identified several reasons for the large premium increases. For one, insurers’ modeling firms increased estimates of the number of hurricanes and damages. Also, financial rating agencies tightened capital adequacy requirements for insurers. In addition, litigation and government actions following the 2005 hurricane season led to uncertainty about how insurance contracts will be enforced by courts. Insurers have also been concerned about potentially large assessments by 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 advises policymakers not to put blind faith in either the private market or government programs to create a well-functioning insurance system.