Sup chips in with the evolution of private market wind coverage on the Gulf Coast

I’ve had the pleasure of chatting with Sup offline and the last email he sent me deserved a guest post on its own. Never let it be said we leave out a point of view. Our offer to Mr. Chaney to join former Louisiana Insurance Commissioner Jim Brown authoring guest post here stands as well. – sop
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It is my desire to provide readers of “Slabbed” an unemotional and, hopefully, logical perspective from the industry viewpoint. I recognize the MS Gulf Coast is so different from other coastal areas. In fact, I work on the SC Coast and that is a different world. The MS Coast has always been “blue collar” and the gaming industry must be considered a “blue collar” industry for the great majority of workers. Therein is where the dilemma is.

If you allow me I will try to give you some insight as to how the industry looks at the situation. My first management position was in Underwriting in the early 1970’s. Part of our responsibility was MS and LA. We spent most of our time concerned with the LA coast as at that point the MS Gulf Coast was still trying to recover from Camille. LA was happening because of the oil business. My company began growing like crazy in coastal LA and we had a “worst nightmare” scenario. It was exactly the track Katrina took and we were right over thirty years ago.

At that time insurance companies did not have all the models to monitor exposure. It was a gamble. The industry became greedy and asleep at the wheel form 1969 until 1992 when Andrew hit. At the same time the industry converted the Homeowner policy to a maintenance contract as a competitive tool. It gave away too much coverage, at no charge. If you will recall the USA really had about 20+ years of no major event years. This was the first wake up call and “catastrophe management” entered the insurance dictionary. All of sudden the HO policy was no longer profitable for the industry.

So the industry ends up with too much exposure at inadequate rates. Human nature is what it is. The consumer does not understand they had an under priced product for too many years. This is understandable because the great majority of policyholders have no claims. The basic premise of the product is that many pay for the losses of a few.

Then we had the “prosperity” of the 1990’s and into today. Coastal areas exploded with population and high value homes. A classic example is Gulf Shores. One could take their family there before Frederick. A family could rent a three bedroom home on stilts on the beach for about $600 a week. Then Frederick hits and it changed the whole personality of that area. The values exploded with the growth. This change overwhelmed the insurance industry. Quite frankly, the industry tried to ignore this until the four hurricanes in FL in 2004 and Katrina and Rita in 2005.

Another issue affecting MS is it has one of the lowest profit margins for Auto in the USA. That fact impacts Homeowner availability and cost. Being a small premium volume state also has an effect.

This is where reality set in and the industry had to make very difficult decisions to survive. It did and the resulting pricing changes forced many “locals” from their homes. This is where we are now. What I have stated does not resolve any of challenges you all face. I just wanted to try and give some background from an industry standpoint where we are now. I wish the situation was different, but it is not. Having lived in the great state of MS for 25 gives me sense of being a native. I know what great folks live there.

Sup

32 thoughts on “Sup chips in with the evolution of private market wind coverage on the Gulf Coast”

  1. Thanks, Sup.

    Imagine how different things would be if the industry had approached the policy holders with honesty instead of the ACC.

    Now we’re all stuck with much bigger problems.

    I’ll be interested in comments from Brian Martin – but I can certainly understand the industry position on rates for coverage under Gene’s wind/water plan and the various state wind plans.

  2. I too enjoyed this overview, and it makes sense. But, I don’t think these facts should have any bearing on how miserably countless customers were treated after making Katrina claims. These broad-based claims practices are inexcusable, even if the insurers cannot make as much money in Miss. as they once did.

    And with regard to the ACC, it soon will be making its way north. I had an interesting conversation with an insurance defense lawyer in Syracuse, who apparently has been following some Katrina litigation. We discussed the ACC within the context of roof collapse cases from snow; it’s incredible how much snow these roofs hold for such a long period of time. You can bet the insurers will start applying the ACC to the “rot defense.”

  3. Interesting and your point about Sup’s post is correct. He doesn’t talk about claims handling too much but early on he did express the sentiment that anyone who mistreated policyholders here be identified.

    We’ve been identifying ever since.

    I’ll go on record and predict there are only a few policyholder attorneys who can make the identification stick. Our own Rick Trahant is one of them.

    Check this out Rick. You ever let unfavorable rulings not based in the law stop you? Don’t answer that, Grilletta answers for you.

    The tide has finally turned.

    sop

  4. Sop:

    I have to admit that certain clients and I have been forced into settling cases we otherwise would have tried because of unfavorable rulings. Of course, I don’t beieve these rulings are always “based in the law.” Plus, we had an extremely fair trial judge in Grilletta.

    Here’s my favorite:

  5. I don’t disagree with anything Sup said, but I think there are additional points to add.
    The market at the time of Katrina was the market the insurance industry created. The state never said no to anything they ever requested.
    90% or so of companies in Mississippi stopped writing coastal wind coverage years ago. The wind pool was designed by the industry as a way to pool the coastal wind risk to allow those companies to stay in the market for windless homeowners and auto coverage. The wind pool board had majority control by representatives of the industry.
    The big carriers undercut the wind pool by cherry-picking policies, covering the more expensive and better built homes while leaving the others to the pool, and then by persuading the state to give them generous credits for their own exposure to reduce their liability for assessments to the wind pool. The companies that were stuck with wind pool assessments after Katrina ended up paying much more than their market share. I cannot think of any reason that those companies would want to maintain the current system. The federal wind/water option would relieve them of hurricane exposure and allowing them to write more fire, theft, liability, auto, etc. without worrying about wind pool assessments. The state wind pool can never give them that relief.

  6. Richard and Brian raise some questions that are fair and deserve an answer. Sop mentioned I did not mention claims which is correct as my original post was designed to provide background to the current situation.

    I truly believe every insured is entitled to the full benefits of the policy. The issue with Katrina is a debate of what is wind and what is water. We all understand that debate. The policy as written does not include water and surge. So let’s try to move beyond that and look at the situation in 2005.

    I think the manipulation of engineering reports is inexcusable! I have competed with SF for over forty years and I have never regarded that carrier as unethical. My personal view is this situation was work of some mid-level managers trying to make a name for themselves. That situation is a black mark against the entire industry.

    I have stated before and reiterate that SF and ALL have not been numbers one and two in Personal Lines for sixty years by accident. They could not maintain this status by NOT paying claims for their customers.. They pay what the policy contract says it will pay. If the policy language is changed then different perils will be covered. However, keep in mind, if there is more coverage the cost to the consumer will be higher. Prices are based upon what the actuaries know what is covered in the policy language.

    Now to address the wind pool issue. “Pools” are initially set up to be an insurer of last resort. That purpose does not lend itself to attracting preferred risks as the pool is supposed to have higher rates than the voluntary market. The private sector will “cherry pick” as those risks are not high risks. This allows the private sector to charge lower premiums. to the majority of policyholders as the business is very competitive. I refer back to my original post that this the current situation. Lower valued and older homes are not preferred business and will have higher rates.

    The last thing we would want in MS is to create an artificial market by underpricing the “market of last resort”. FL is in a terrible situation with Citizens Insurance and now the politicians and regulators are scrambling to cover their —with what they created. If FL can’t afford that scenario, then MS certainly cannot.

    Let me conclude by saying I have no resolution. I am just trying give some background as to why it is what it is. I appreciate your comments.

  7. Sup, I made the correction in the text of your comment. However, it was my understanding that flooding and surge were excluded but water damage from a leaking roof and similar non-flood or surge sources was covered.

  8. Nowdy, you are correct my remarks were intended to be in the contect of a hurricane. However, one must review their policy to determine if water “backup” is included in the basic policy. These losses can be substantial if not caught in early stages. If it is not covered in the basic policy it can be added for a nominal charge by most carriers.

  9. ” At the same time the industry converted the Homeowner policy to a maintenance contract as a competitive tool.”

    Could you please elaborate on this sentence. I’m not sure what you mean by maintenance contact.

  10. I am not suggesting that the wind pool should be underfunded. I am saying that the wind pool was designed as a risk pool but the pressure now is to relieve the insurance companies from any of the risk.
    Wind pool policyholders are paying excessive rates, but not to build up funding in the pool. Policyholders are paying reinsurance rates that no insurer would ever pay in order to make it a no-risk pool for the industry.

  11. I have seen cases where the plaintiff, or more likely his attonrey, has requested a confidentiality provision in the settlement. In a very few it was due to the type of case/injury and to avoid embarrasment, notoriety to plaintiff. The vast majority, I believe, were because the outcome wasn’t very favorable to the plaintiff’s side and they (their atty) didn’t want that to become public knowledge.

  12. Hopefully, plaintiffs learned from State Farm’s “settlement “/ treatment of the McIntosh claim/family and isare taking appropriate protective/preventive action.

  13. Steve, prior to the 1970’s the Homeowner policy covered some basic perils. Keep in mind it was only introduced in the 1950’s as a “package” type policy. The Homeowner line was the profit line for Perosnal Lines carriers as Auto was the line of concern at the time. The policy was labeled as “All Risk” which has now been removed form the vocabulary of policies.

    In order to gain market share carriers started throwing in extras such as “guaranteed replacement cost” on the dwelling, golf cart liability, and replacement cost on contents with no charge or underpriced charges.These “freebies” started catching up with the industry and then “big ones” began to hit.

    Hopefully, this answers your question.

  14. Sup

    Do you think the hurricane insurance model was “broken” when the Federal government took over flood coverage and the private market retained coverage for wind damage?

  15. Keep in mind the NFIP was created in the 1960.s. I have no idea what the thought process was for this program. I have tendency to think it was designed more for inland floods than what we have now.

    Let’s go back forty years and look at most of the coast of the southeast USA. Hilton Head and those type communities were just beginning to develop and most of the dwellings on the coast were totally different from what we have today. They were frame, built on stilts and furnished with furniture no longer fir for the primary home. We all remember those.

    I don;t think the federal government had a model or a clue as to what they were getting into. The premiums were not actuarily sound, but the NFIP operated below the radar screen. The insurance industry, being somewhat more astute than government bureaucrats, took this opportunity to remove “Flood” from the Homeowner policy since a Flood policy was now available.

    The policticians and bureaucrats knew what was going on as far as actuarily sound rates were concerned. However, they did not have the courage to level with the citizens as it was easier to subsidize the rates with OUR money.

    That is my view.

  16. From my readings private market carriers no longer were writing flood coverage so the fed’s entered the breach of coverage to ensure a fluid private home market would be retained. The industry seems to have learned via experience (IE hurricane Andrew) that sharing risk between two parties for a hurricane is not efficient.

    The issues of causation of damages makes it impossible to fairly develop a protocol for payment. Without a proper or clear method to distribute damage assessments underwriting is impossible is it not? For example if we had the current political leadership in Washington post Katrina I would imagine the industry would have shared ALOT more of the payment burden for damages.

    So how do you figure political climate or judicial climate into a policy pricing model? To me the model was broken for CAT hurricane coverage when water and wind damage protection was seperated between the powerfull federal government and the private sector. The private sector can be powerfull but it can also be VERY weak. Right now the private sector is very weak in my opinion. People are angry at big business and big insurance in particular. So if Katrina happened right now the political atmosphere would be very hostile for the industry. I don’t think a company should desire to have its very existance dependant upon political climate. But when you share a risk with the fed’s that is what happens. Just my opinion.

    There are alot of positives to having a single payers for water/wind but most of those are consumer and tax payer benefits.

  17. As I recall, Steve, there was a gap period when flood insurance was not available (or available in all states) and the passage of NFIP.

    Rather than dig through my files, I found another source;

    However, it only suggests a gap period ; but, it does include links to other sources such as this one where I learned that Metairie, La and Fairbanks, Al were the only two communities in the nation enrolled in the program in 1972 (don’t hold me to the date but it was several years after the Act passed in 1968 and prior to major changes in 1973).

    The statement I found most interesting in this new article pretty much sums up where we are today with wind:

    “During the 1920s, the insurance industry concluded that flood insurance could not be a profitable venture because the only people who would want flood coverage would be those who lived in floodplains.”

    You lost me when you got point of figuring political or judicial climate into policy pricing model.

    If we had Katrina happening now, the only difference I would expect to see would be in the DOJ response. I suppose the positive side of that picture is that it’s only a matter of days before Congressman Taylor can ask a straight question and get a straight answer.

  18. Steve, you are correct, most polices had “water” removed previously and I am sure this was part of the motivation to create the NFIP. Your point is well made it is best having one adjuster to handle the entire claim. Wherein the “Write Your Own” programs came into play. Here is where the political side comes onto the scene.

    Now we have one adjuster handling the claim and paying the insured and then allocating the payment to wind (private carrier) and water (NFIP). This arrangement brought charges the private insurer was allocating wind losses to water where the Flood policy would pay.

    As to insurers, you are correct the political climate is a consideration. I am not sure how you can price for the climate as prices are regulated by the entities that creat the climate. Carriers have to make a decision as to whether they feel they can operate profitably in a market. CA is a great example. The DOI is difficult from a carrier perspective, but carriers continue to do business there. Why. $$$$$. If the MS DOI acted like the CA DOI there would be a great shortage of carriers in MS.

    I agree also there will be different expectations from carriers when the next “big one” hits. My theory, and I hope we don’t test it soon, is the industry will respond very differently. The industry realizes it did not get good marks for Katrina. I believe the response will be much better.

  19. I hope your right about not having a “big one” anytime soon. One thing I like about a combined wind/water policy is it would eliminate alot of problems. It would create alot of new ones.

    If we keep the current model having a higher dollar level of flood coverage might work as well. If people had higher dollar limits on their flood policies most would have been happy. It would not be fair to taxpayers but it would result in consumer protection.

    By way of example, if someone had a million dollar home and a million dollar policy for flood–they would be tickled pink to be paid a million dollars by the flood policy. Right now they can’t insure their home for the proper amount of flood risk and that is one reason the industry should fear having to pay for flood damage. People want to get paid by someone so the low flood policy limits is dangerous to wind carriers.

  20. Steve, I think you made a very astute observation. The NFIP limits are certainly not adequate for many homes, coastal or otherwise. I am not an expert on excess Flood coverage, but I do know it can be pricey.

    I don’t think there is a solution on the horizon. If the NFIP raises their limits I can gurantee you the rates will not be adequate and the costs will come back to the taxpayers.

  21. NFIP served two public purposes.
    It provided for availability of flood insurance in flood prone areas where it was not available privately and taxpayers generally were on the hook after the fact for disaster assistance.
    It smuggled in federal requirements for local governments to restrict building in flood prone areas. Politically, Congress had to grandfather existing structures at subsidized rates in order to get communities to join the program and regulate future building. Only the existing buildings are subsidized and they are subsidized only for the first $50,000 of coverage. There is a widespread mistaken idea that NFIP subsidizes new construction in flood risk areas. It does not, unless the maps are wrong. Unfortunately, the coastal maps tend to underestimate storm surge.
    The fact is that the great majority of NFIP claims are less than $50,000. Only major hurricanes and massive levee failures cause significant numbers of total losses.

  22. Brian, thanks to comment from members of the legal profession both on blog and off, I’m beginning to understand and appreciate “settlement” as a desirable end to disputed claims. However, with that growing understanding of the value lawyers and judges alike place on settlement versus a resolution decided by judge or jury comes two questions:

    (1) how can the settlement of any claim where public funds were paid at any point be sealed? It would seem contrary to all rules on the use of federal funds.

    (2) Aren’t all claims settled following Hurricane Ike – regardless of what storm caused the damage claim – subject to the FEMA/NFIP directive for insurers to specifically state the % of damage attributed to NFIP and the % attributable to wind? And, if so, would that not be required in any settlement agreement related to disputed claims?

    Sorry, that’s really 3 questions, not 2, but the more I’m able to accept settlement as desirable, the less able I am to understand how any can be sealed regardless of whether the final determination was 100% wind.

    Yikes, now I’ve got another, although it’s not entirely new as I made mention in my last post – is there anything in the federal regulations to support the ruling that accepting an NFIP payment means the recipient can not later claim wind caused the damage once evidence of same is available?

    The logic of the decision by Judge Senter and Ozerden (maybe others, too) seems to fly in the face of the federal regulations that detail the process for correcting overpayment.

    It certainly would be helpful to have an official legal opinion from DOJ on this aspect of the NFIP and, if there is no restriction, a suggested remedy for any claim affected by court decision or terms of settlement.

    Thanks for your helpful comment above – “widespread mistaken ideas” seems to be a widespread situation.

  23. I think one more point is worth pondering upon when considering the history of HO insurance as it relates to CAT hurricane insurance. —

    When the federal government developed the NFIP program it was meet with a private insurance market which was inclusive to the entire hurricane risk. There was no concurrent clause for the wind portion of the risk. The concurrent clause made the NFIP program the lone ranger of hurricane insurance vehicles for flood impacted homeowners. What was once a private/public partnership evolved into a purely public program.

    This of course occured when the industry was “shocked” into the realization that flood damage could be transfered to the wind policy by improper claims management. As evidence of this, notice how the industry prefers to process both claims by the same entity but I am sure they will not accept that entity being the NFIP. If NFIP processed its own and the private sector claims I am sure the private sector would retreat from the market.

    It is also evidenced by the development of the concurrent clause itself which in effect removes the private sector from any possiblity of being responsible for paying damage for which the government has written a flood policy.

    In essence the industry has taken great measures to ensure it will not be forced by the fed’s to assume flood damage, even going so far as to abandon its own customers needs inorder to ensure the issue is a settled matter prior to the event. It also gives the industry some power in terms of dealing with political types in that it can pay some wind claims of damage caused by wind which involve flooded homes right of the bat if it chooses or it can make the claimant take it to the supreme court to get paid. This is powerfull stuff and can be used to manipulate regulators and political big wigs.

    The concurrent clause is as much a poltical tool as it is a claims tool in my book. Its interpretation can be used as a political whip to keep those who oppose industry efforts inline. Oppose the industry and your VOTERS will get the strict version of the concurrent clause, cooperate and you get the more liberal version. IE oppose us and we pay not one penny on wind damaged homes which have water damage / cooperate and we will pay some of the legit wind damage to homes with water damage.

    Of course all along the NFIP’s money was doled out post-katrina at a rate of 100 percent of policy limit. If the NFIP had processed claims and written checks on the spot for 100 percent of policy limits I am 100 percent sure many carriers would have been put into BK and the NFIP would be in Court defending its claims processing practises. Imagine if the NFIP didn’t write any checks for flood damage and just blamed the entire damage on wind. Telling the homeowner to take the government to Court if they disputed the claim and telling the private carriers that the NFIP really didn’t keep records to well of the process so they would just have to take their word for the claim so to say. Would the industry let the NFIP process wind and wate claims and do so in a manner inwhich the water policies were consistently not paid and the wind policies were routinely paid to max without any supporting claims processing data?

    I might be wrong but I think this is the history to date.

    More later but I would be curious if anyone disagrees?

  24. Are you asking if anyone disagrees with your opinion that private carriers won’t let NFIP process their policyholders’ claims?

  25. I certainly do not disagree. I don’t believe the industry would ever open their bank accounts to outside agencies. That is the nature of being “private”. I will not belabor that point.

    This does reopen the discussion of including water and wind in the “private” policy. In theory the industry would probably embrace this, BUT, they would require adequate rates and in the long run the regulators would not grant those. That places us exactly where we are today.

  26. Not exactly nowdy. I was just making the point of the efforts of how the private sector has taken measures to protect itself from having to pay for damage it did not cover. It seems like the current model of claims management is one which the industry would not agree to if the roles were reversed. IE if the NFIP processed the claims and the private carriers ended up paying their policy limits on every claim. I have not heard of one person complaining about the NFIP in terms of payment down here. Possibly someone has complained to Gene Taylor but I doubt it. As far as I can tell everyone got paid the policy limits.

    First thanks for your honest and direct response Sup. I of course do not have your verbal skills nor your indepth understanding of the issues so I muddle through the subject matter in a manner which is less clear and concise. Thanks for sticking with me as I ponder the subject matter from the perspective of a consumer.

    Sup very good point on your part about the industry embracing the combined wind/water policy on the private side. Of course would we want the private carriers exposed to the real risk of BK which such an undertaking would pose for the industry.

    Systemic risk is a dirty word these days. Why expose the entire or at least the largest providers of insurance for the Nation to BK risk when it can be handled in anouther manner.

    Also who would want to own a stock which depends upon the weather for its viability and which experiences wide swings in earnings.
    Certainly not a retired person who uses the stock for a fixed income. So providers would cut out the retired investors from their stock holders and thus drive down your P/E ratios even further than they have been recently. They would also tie huge amounts of investment portfolio up in investments which are highly liquid but low ROE in nature.

    I think the market may have some upstart comanies willing to roll the dice on the wind/water market but it is doubtfull they would survive a big hit to a heavily populated Florida city like they have in Dade County.

    Companies with good predictive modeling AND alternative uses of capital would shy away from such markets. Plus right now which is the time period we are talking about, I doubt any major carrier could cover such risk due to the current economic crisis.

    The private sector cannot do one thing which Brian did bring up in his post. They cannot force people to change their risk taking behavior. The government can and has done this. I have been with Gene Taylor when he has absolutely stood upto locals down here who want to build in the flood zone. He is actually quite confrontive with them and I think a little too hard on them. But this is his way. He doesn’t mislead people and tells them it would not be fair to ask the rest of the county to pay for us building in the flood plane. He told one guy to “get real” when he complained about not being able to build on grade in an area which had 4 foot elevation. My point is we have a culture down here of not building in flood planes because of the fed’s program called NFIP and our congressman supports it. If we had a wind program by the fed’s THEY COULD reduce the wind risk people develop. The state of Miss. has not been willing to do so. Infact I think only the fed’s could really reduce the risk we take which is the ONLY real long term manner inwhich the rates will go down. So think about that. Thanks for your good response.

  27. Steve, I agree with all your points.

    I will not spend much time on the private wind/water policy as it will not happen. I believe it could work from the private industry standpoint, but it would be “cherry picking”. Their models could determine what their individual capcities are.That is the nature of the private sector. There would still be a need for a residual wind and water facilities.

    My hat is off to Rep. Taylor for his candid approach. This approach is necessary. Peopel have to understand they cannot build in areas or at levels that are not allowed.

    This is good dialogue, but does not solve the affordable insurance of affordable housing issues on the MS Gulf Coast.

  28. Now that Sop and Editilla has introduced “whores” to the conversation, Sup, it seems like a good time to post this “proposition” published on the National Underwriter.

    One way to reduce the government subsidy for flood insurance would be to pass legislation requiring that bank mortgages on homes hit by a deluge be considered paid in full, according to proposals by two academics.

    Another proposal… would be to require all homeowners purchase flood insurance.

    By putting the banks at risk, they suggested, lenders faced with the risk would price it into the interest rate charged for a mortgage.

    Regarding the second proposal mandating flood coverage, if it was implemented, enough capital would enter the insurance industry to meet the demand without the need for public subsidy, they argued.

    The advantage of putting the flood risk on mortgage bankers, Mr. Browne and Mr. Halek said, is that the financial markets have significantly greater capacity to assume losses than the property-casualty insurance industry.

  29. Nowdy, in theroy the proposal has merit. If mortgagees were on the hook they would require Flood insurance. Then there would be an outrage from non-flood prone areas as those government entities have not chosen to become part of the NFIP program.

    To require every homeowner to buy Flood insurance would once again cause an outrage. Then we are right back where we are. Politicians would much rather kick the can down the road than be candid with voters. Mr. Taylor is the exception, not the rule.

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