I.I.I. Report: Actuarially Sound Rates Key To Residual Property Market

Just in time for the peak of hurricane season, our updated paper on the residual property market is hot off the press.

At first glance the numbers on the property insurance provided by the nation’s FAIR and Beach and Windstorm plans indicate that attempts by certain states to reduce the size of their plans appear to be paying off.

As you’ll see, the exposure value of the residual property market in hurricane-exposed states has declined significantly from the peak levels seen in 2011. In fact between 2011 and 2013, total exposure to loss in the plans fell by almost 30 percent – from $885 billion to $639 billion.

Why such a drop?

Florida Citizens, a plan that accounts for more than half (51 percent) of the total FAIR Plans’ exposure to loss, saw its exposure drop by nearly 50 percent from $429.4 billion in 2012 to $228.9 billion in 2013, as Citizens took much-needed steps to reduce its size.

This accounted for the overall reduction in total exposure under the FAIR plans. In 2013 total exposure to loss in the FAIR Plans was $445.6 billion, a 38 percent drop from its 2011 peak of $715.3 billion.

But what of the Beach and Windstorm plans?

Latest data show that between 2011 and 2013 exposure to loss in the Beach and Windstorm Plans actually grew by 14 percent.

Five state Beach and Windstorm plans are covered in our report: Alabama, Mississippi, North Carolina, South Carolina and Texas.

Over a longer time period, 2005 to 2013, the I.I.I. finds that some of the Beach and Windstorm plans saw accelerating growth. For example, total exposure to loss in the Texas Beach Plan (the Texas Windstorm Insurance Association (TWIA)) increased by 230 percent during this period.

A plan that would move TWIA’s policies over to private insurers and depopulate its book of business (much like Florida Citizens has done) is in the works, but so far nothing definite.

An ongoing and arguably more pressing concern is the fact that many of the residual market plans charge rates that are not actuarially sound and do not accurately reflect the risk of loss.

What does this mean? The I.I.I. warns that a major hurricane could expose residents in certain states to billions of dollars in post-storm assessments:

While hurricane activity in the most exposed states may have been lower in recent years, there is no question that over the long-term major hurricanes will cause extensive damage in future. This highlights how important it is for the rates charged by these plans to be actuarially sound.”