Mass. needs new insurance capital to weather big storm
The Massachusetts economy could be battered if a major storm were to hit the metropolitan Boston area because the state’s homeowners insurance market is undercapitalized, the state’s insurance regulator is warning.
A major storm hitting the metropolitan Boston area would not only put a serious strain on the insurance system as it is now funded but would also have ramifications for banks and other businesses, according to Insurance Commissioner Julianne Bowler.
According to the Division of Insurance, there is only about $32 billion in surplus supporting $980 million in direct written premiums in the state’s homeowners market, far less than in neighboring states. The figures are for the carriers writing 80 percent of the market.
According to these calculations, every dollar of homeowners insurance premium in Massachusetts is supported by about $33 in surplus funds. In Connecticut, the market has $86 surplus for every dollar in premium; in New Hampshire, $229; and in Rhode Island, $221.
Storm warnings
But hurricane forecasters have warned that if a storm like the one that began in Long Island in 1938 were to again land in the metropolitan Boston area, this one storm alone would cause as much as $18 billion in damage, without even taking into account increased population and building since 1938.
“So we do have a significant capital problem and that capital problem is going to have an impact not only on the insurance industry but also on the banking industry and ultimately on the entire state economy,” Bowler says.
Bowler said the system could probably withstand a major storm on Cape Cod, but if a major storm were to travel north near Boston and west to Route 128, the state could take a serious financial hit.
“If it hits the Cape, we’ll probably have to shut the lights of a few insurance companies but pay every claim,” she predicted. “But if it travels more inward, we’ll have to shut the lights of a number of insurance companies and a few banks and not pay all the claims.”
Linked to auto reform
Bowler maintains that the state’s homeowners’ woes and long-sought reform of the auto system are linked. “We have historically thought of auto and the Cape problem as isolated events but we need to start thinking about the impact on our general economy not if, but when, we have a bad storm,” she said.
Large insurers are not interested in entering the state for the homeowners market alone, she argues. “The goal of auto insurance reform is not to fix auto for the sake of fixing auto. It’s to increase the personal lines market capital base,” she said. “Massachusetts is a good market, if we open it up.”
Bowler assailed the growth in the state’s residual homeowners market, the Fair Plan, which has become the leading writer of homes on Cape Cod and the third largest writer statewide. And it is still growing as private insurers retreat from the coastal area. (See Vermont Mutual story.) Insurers will nonrenew an estimated 20,000 Cape policies in 2006.
“If you look at the escalation of risks going into the Fair Plan, it’s really frightening,” she remarked.
The Fair Plan’s growth has been absorbed “without adequate pricing,” in Bowler’s view.
She criticized the Fair Plan for not purchasing its own reinsurance. “I think they are playing with a loaded gun,” she said. Bowler maintained that insurers that pull away from the Cape might think they are off the risks but they must still cover a share of Fair Plan’s losses and pay any guaranty fund levies.
Bowler issued her analysis at a Waltham meeting of insurance executives jointly sponsored by the Boston chapter of the Chartered Property Casualty Underwriters Society and the Mass. chapter of Risk and Insurance Management Society.