Mass. Eyes Fla.-style Hurricane Fund to Ease Coastal Homeowners Crisis

Massachusetts officials, searching for ways to ease a homeowners insurance availability crisis on Cape Cod and other coastal areas, are researching how Florida dealt with its insurance difficulties 10 years ago when it set up a tax-exempt reinsurance fund after Hurricane Andrew.

“We are investigating how it works and whether it would work here,” Kevin Beagan, director of the State Rating Bureau within the Massachusetts Division of Insurance (DOI), told Insurance Journal.

He said the DOI is “really trying to move quickly” to identify possible longer term solutions to what it sees as a volatile private reinsurance market, while touting the FAIR Plan as the short-term answer for agents and homeowners.

He said Cape Cod is a market insurers “want to be in” but can’t right now due to the high cost, unpredictability and unavailability of reinsurance. The reinsurance woes have been tied to the use of computer forecasts showing that losses would be higher than previously thought if a major storm were to hit the area.

The Florida fund model might help stabilize pricing and availability of reinsurance for property insurers in the state, Beagan said, thereby opening markets to agents and consumers.

In 1992, after the shock of Hurricane Andrew and its more than $16 billion in losses, Florida lawmakers imposed a moratorium on property insurance cancellations and then set about crafting a longer term solution. In 1993, the Florida Hurricane Catastrophe Fund (FHCF) was created during a special session.

According to Jack Nicholson, senior FHCF officer, Hurricane Andrew ushered in a “new reality” for insurers, reinsurers and homeowners after it wiped out thousands of homes and years of insurer profits. Insurers faced skyrocketing costs for reinsurance if they could even find it. Today, the situation has stabilized.
“We provide a solid, reliable layer of reinsurance,” Nicholson says of the FHCF.

FHCF not only makes reinsurance available, it also makes it more affordable. Its premium can be from a fourth to a third less than what private reinsurers charge. FHCF can charge less because its expenses are lower. Since it is mandatory, it has no underwriting expenses; its pricing is simplified; it pays no brokerage commissions, and it is tax-exempt and non-profit.

FHCF collects data on exposures from each residential property insurer in the state to help it calculate one price for a large layer of reinsurance to cover all of its projected losses. Individual insurers are charged a premium as a percentage of this according to market share.

According to Nicholson, drafters of the original legislation made it a point to establish the fund separate from the insurance department so that adequate pricing would be assured. FHCF must use independent actuaries and the fund employs some of the same computer forecasting models now used by private reinsurers to set rates. FHCF has built up $11 billion in capacity for each of the next two seasons.

The most controversial part of the FHCF is its ability to issue revenue bonds paid for by all property casualty insurers, not just residential property insurers. This is only triggered when its funds fall short. Its assessment authority is capped but this concept of all property casualty writers being assesses when one segment falters faced some opposition.

Nicholson defend the practice as a way to “protect the entire economy of the state” in the event of a catastrophe. He suggested that Massachusetts could face a tougher political obstacle in this area since the entire state would be asked to subsidize the needs of the Cape and coastal regions. In Florida, the problem was recognized as being statewide.

Overall, Nicholson says the FHCF has won over most doubters and critics. “Yes, it’s absolutely worked. Florida has other problems but one thing everyone agrees on is that the cat fund works. More and more companies are recognizing its value and it’s getting stronger. We have been able to exceed expectations,” he said. FHCF even supplies reinsurance to the state’s windstorm and high risk pools.

Starting a cat fund like Florida’s in Massachusetts would require legislation in part because it requires insurers to participate. It would also entail Internal Revenue Service approval to obtain tax-exempt status.
While some in the state pursue the hurricane fund idea, Massachusetts insurance agents are pressuring lawmakers to increase the coverages and rating flexibility of the high risk pool, known as the FAIR Plan, which has become the only remaining insurer for many agents and homeowners on Cape Cod.

Daniel J. Foley Jr., vice president of government affairs for the Massachusetts Association of Insurance Agents, said the FAIR Plan should be required to write broader property and personal liability coverages.
But he cautioned attendees at a recent Cape Cod meeting held by the Massachusetts Association of Insurance Women, that MAIA’s FAIR Plan legislation faces an uphill battle since lawmakers are busy with the state budget and other issues.

“They listen to you more intently than they do to us. They pay attention,” Foley said in urging members to contact their elected representatives.

The availability crisis came to a head last month when one of the region’s largest homeowners carriers, Andover Companies, announced it would not renew about 14,000 Cape home policies. Within days, Vermont Mutual Insurance Co. and the Norfolk & Dedham Group imposed a moratorium on new Cape home insurance premiums. Other insurers, including OneBeacon, Commerce and Safety have also cut back, according to agents.

According to some observers, the coastal homeowners crisis is a byproduct of the state’s difficult auto insurance market and the difficulties in both of these markets could spill over into other lines if more and bigger companies are not attracted to the state.

Frederick Eppinger, chief executive officer of Allmerica and its subsidiary, Hanover, told a joint meeting of the MAIW and the Massachusetts Society of Licensed Insurance Advisors in Framingham, that the state’s auto market has scared away most of the large national carriers such as Allstate, State Farm and Progressive—companies that also write commercial auto, business owners and other lines—and he warned that the current lack of capacity in personal lines could soon be felt in these business lines as well.

“Massachusetts has to get some companies to increase the capacity,” Eppinger said.