Familar Problems in Alabama’s X-Wind Homeowners Insurance Market

The first week of April, Jeff Amy at the Mobile Press Register authored an excellent story on the coastal X-wind HO market in Alabama. His story, unlike our coverage of it, is very timely. However, unlike justice delayed, Mr Amy’s piece has gotten better with time. The reason for that also explains my detour back to November 29, 2006 and the deposition of State Farm Senior Vice President Mr Robert Trippel, an otherwise useless character who still managed to provide some enlightening commentary when he was deposed in Watkins v State Farm about several Katrina related matters. While the meat of Mr Trippel’s depo is dedicated post on its own he had a few things to say about X-Wind policies in his zone, which includes Mississippi and Alabama so it is on page 103 of his deposition that we begin as the Watkins lawyer Jeff Marr questions Mr Trippel:

Q All right, Mr. Trippel, after you identified — what are these called, initiatives, is that what we’d call them — in these different states these things that are being conducted, what are they called?

A I would say it’s the new underwriting guidelines.

Q Okay. And you covered Mississippi and Georgia. Which state is next? What’s another state in this zone that’s been affected by the change of underwriting guidelines following Katrina?

A Alabama.

Q How has Alabama’s underwriting guidelines been changed following Katrina?

A Very similar with a mile setback off the coast and hurricane deductibles for new business.

Q Okay. So similar to Mississippi in that new business is only a mile off the coast, correct? Is that correct?

A Correct.

Q And then the wind hurricane — excuse me, hurricane deductible is now 2 percent to 5 percent?

A Correct.

Q Any others?

A No.

Mr Marr, like Nowdy and I must have been scratching his head wondering what skills besides the ability to recite the company line Mr Trippel brought to his very senior position on the Farm. He certainly does not know the basics of insurance finance as we continue on the bottom of page 104:

Q What effect will these underwriting changes have on State Farm surplus, positive?

THE WITNESS: I don’t know that I can answer that. It will help us — it will allow us to continue to write business in a coastal area that has been, that is growing right now in the United States at a huge rate without having, limiting our growth. A number of corporations, as you know, have moved away from the coast totally. We’re staying on the coast, we’re continuing to write business on the coast, and we’re writing it without restrictions other than writing it with hurricane deductibles and a setback of a mile. And in Mississippi, quite frankly, we’re the only state or, excuse me, the only company that I’m aware of that’s still writing business on the coast, even with all the issues that we are facing.

Q That’s the one now where you are excluding wind coverage?

A Correct.

Q But my question was: What effect will these underwriting revisions following Katrina have on State Farm’s surplus? And by surplus I mean the amount of money that State Farm has on hand?

THE WITNESS: I’m not sure you can make that correlation.

That wasn’t a factor in making these underwriting revisions?

A No.

Q There were no discussions or projections as to what effect making these underwriting revisions would have on State Farm’s surplus as part of this plan?

A No, not to my knowledge.

Finally Mr Marr drags a response out of Mr Trippel. Incredibly, while he claims State Farm did not consider the impact to its bottom line of leaving the coastal wind market he finally admits the Farm considered the money agents made. How do we have consumers have any confidence int he rate structure int he southweast when State Farm’s senior exec for the entire area can’t tell us if they were making or losing money before or after the Katrina.

Q Money wasn’t even a consideration, is that correct? Is that right?

A Whose money? We considered, as you do, what I’m suggesting there’s an impact on the agent’s income. To be specific, I mean their premium income to the agents is going to vary based on these changes.

Team big insurance is sticking to that story as the gang rape of Alabama consumers begins and it is here that we introduce Jeff Amy’s story to our readers:

Some Alabama insurers are charging coastal customers more to cover risks like fire and theft — those having nothing to do with hurricanes — than customers elsewhere, despite no clear evidence that such losses are generally higher here, Insurance Commissioner Jim Ridling says.

Spokesmen for the state’s four largest homeowners insurers deny that they are overcharging and say they generally can’t break out separate prices for wind and non-wind risks. They note that their rates are approved by Ridling’s own department.

“We feel like our rates are justified,” said Allstate Corp. spokesman Shane Robinson.

Insurers divide the state into areas and develop rates for each, then further review individual policyholders on risk factors such as how a house is built, how far it is from a fire hydrant, and whether there’s a burglar alarm.

Ridling said the department believes that the rate gap developed over a 25-year period.

Companies filed analyses showing that higher prices were justified statewide, then agreed to lower rates in some inland areas, in order to undercut competitors.

Explained Ridling, “You’re willing to take a lot less of a profit in area A than you do in area B.”

On the coast, since companies were worried about hurricanes, they wanted the whole amount of the increases that they sought, Ridling said.

“They just wanted to discourage business down there,” he said.

Ridling says he hopes to reduce disparities as insurers file for future rate changes, but policyholders should not expect immediate relief.

We’ve seen this before, insurers making their coastal policies X-wind yet charging the same or a higher price than the wind included policies they sold before Katrina. Unlike the exposure “right tail” Cat events such as Katrina which as not easily modeled other covered X-wind perils like theft or fire can be modeled to a great deal of precision. Isn’t it amazing that Amy’s sources on team insurance denied they could break out the risk or even better they have an insurance commish that not only recognizes the problem but also refuses to do anything to solve it over the short term. In fairness Mr Ridling took over this problem from Walter “Revolving Door” Bell who now chairs the US ops for Swiss Re. That does not stop him from peeing on the Alabama coastal policyholder’s leg claiming rain as we continue the story:

“Rate-setting is an art, at best,” the commissioner said. “I think, quite frankly, it just comes down to negotiation to get the consumer as big a break as we can.”

Father and son Steve Nelson, who lives on Mobile Bay in the Belle Fontaine community, is one customer who’s not surprised at the findings.

At a November public meeting with Ridling at Theodore High School, Nelson offered the example of his son, who bought a house last year in Moody, an eastern suburb of Birmingham. The son’s policy, including wind and hail risks, cost less than one-fifth what the father was paying for non-wind coverage alone.

“He told me his policy, and I just couldn’t believe it,” Nelson said. “I sort of understand the wind part of it and I’m willing to accept that because of the area where we live, but this seems out of line.”

The two Nelsons don’t make for a perfect comparison. The son’s house was built in 2004, while the father’s house was built in 1974, when codes were weaker. The son’s house is partially brick, the father’s is all vinyl siding.

Despite the differences, Ridling said that Nelson’s story sparked his interest.

Walter Bell, who preceded Ridling, had told the Press-Register that the department was examining pricing of non-wind coverage. That review, however, wasn’t completed before Bell resigned.

Ridling, who took over in September, ordered his own review. According to spokesman Ragan Ingram, the department compared coastal costs excluding wind coverage with complete coverage in other areas of the state.

“Generally speaking, the non-wind-related coverage is more expensive in Mobile and Baldwin counties than in other counties,” he said. “Not in all circumstances, but generally speaking.”

Ridling said he conveyed the findings to the state’s four largest homeowners insurers in separate meetings late last year. The group — State Farm Mutual Automobile Insurance Co., Alfa Mutual Insurance, Allstate and Farmers Insurance Group — together in 2007 controlled almost 70 percent of Alabama’s homeowners market by premium.

Contacted over the last two weeks, none of the companies could recall Ridling raising the issue of non-wind costs.

“Not that we can determine,” State Farm spokesman David Majors said. He said that officials with State Farm, Alabama’s largest homeowners insurer, do remember Ridling stating general opposition to further price increases in coastal areas.

Farmers spokesman Randy Cooper said he has attended every company meeting with Ridling since he took office and doesn’t remember any such discussion.

The companies said they know the wind and non-wind costs for Mobile and Baldwin counties, but not in other areas. That’s because the coastal counties are the only places where they sell policies that exclude wind risk.

“We don’t file our rates based on all the different perils,” said Wyman Cabaniss, Alfa’s senior vice president of underwriting. “We’re not sophisticated enough that we can break that down by all the different perils.”

‘Not rocket science’ But some regulators say companies are able to determine how much they need to charge to cover individual perils in various regions.

“They can break that out,” said Ed O’Brien, deputy commissioner of the Louisiana Department of Insurance. “It’s not rocket science.”

Ridling said some companies have moved toward better rates, citing Alfa. That company, at least on policies that exclude wind, has reduced rates.

Cabaniss said that when Alfa started writing policies excluding wind, it used industry data to figure out how much to cut the price from a complete policy. He said the company learned from its own experience that losses have been lower than expected.

“Our discounts have increased as we have filed new rates,” Cabaniss said.

Ridling said the department hopes to break the pattern of companies decreasing rates inland and increasing them on the coast, especially for non-wind charges.

“If you’re going to come in here and ask for a 5 percent increase and you’re going to go down 5 percent in the rest of the state and up 15 percent on coast, we’re going to question that,” Ridling said.


4 thoughts on “Familar Problems in Alabama’s X-Wind Homeowners Insurance Market”

  1. This is one “Oklahoma deposition” that isn’t about “out of state conduct”.

    It’s loaded with Mississippi – Katrina information in addition to all the general information on how the company is organized and the impact that has on operations – specifically of interest the segregation of sales and claims

    A lot of the issues discussed in the deposition are ones we see regularly in these cases.

    Nice work, Sop.

  2. I don’t rememeber where, but a year or two ago I read a report on how easy it is for insurers to overprice ex-wind policies and get state approval.
    Rather than price the policy only on the fire, theft, and liability risks, they establish the “actuarial” rate for policies that would include wind coverage, and then discount by some percentage (I think somewhere from 30 to 50%) that is supposed to be the wind portion of the average homeowners premium.
    The problem, of course, is that coastal policies are not average policies with average premiums. The wind risk would probably account for 75% of a coastal premium.
    So the way they figure it would be the equivalent of tripling the non-wind price and then giving a 50% discount for excluding wind. The net effect would be to double the price of the non-wind coverage on the coast and then put your wind coverage in the wind pool.

  3. An interesting conversation as to why carriers have different X-wind rates. Foe whatever reasons, carriers do give different credit percentages for excluding wind. Historically State Farm and Allstate have given smaller credits than other carriers. I don’t think there is a particular reason other than these two carriers have always written “with wind” in the areas and it was not an issue to them. It should also be mentioned some carriers just prefer not to deal with “X-wind” business. Being in the industry, I don’t understand that position as excluding wind certainly reduces exposure. This is just another reason for consumers to look around for coverage.

    Every case is different and Sop mentioned this with his Birmingham/Mobile comparison. In this instance the difference in age of construction and masonry/frame are big factors. Also, the use of credit scoring can make significant differences.

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