Economic Impact of Insurance Costs on Mississippi Gulf Coast Development

Transcription

1 Economic Impact of Insurance Costs on Mississippi Gulf Coast Development Prepared for Gulf Coast Business Council by The John C. Stennis Institute of Government at Mississippi State University Dr. W. Martin Wiseman, Director Dr. Edwin H. Duett, Author January 2009

2 About the Author Dr. Edwin H. Duett, Peter K. Lutken Chair of Insurance Professor of Finance at Mississippi State University Dr. Duett is the holder of the Peter K. Lutken Chair of Insurance and Professor of Finance at Mississippi State University. He received his Ph.D. from the University of Georgia in 1987, MBA from Mississippi State University in 1980 and his B.S in business from MSU in Dr. Duett has been a visiting professor at Universities in Puerto Rico and Mexico. He serves on editorial boards and as a reviewer for multiple journals and is an officer in various professional organizations. He is a member of the American Risk and Insurance Association, National Association of Insurance and Financial Advisors, the Financial Planning Association and other organizations. He has published over thirty journal articles and three books, with articles in journals including Global Finance Journal, Journal of Reinsurance, Journal of Insurance Issues, Quarterly Journal of Business and Economics and others. His research interests focus on the integration of capital markets, international risk management, insurance linked securities and others. He has presented research findings and professional development seminars in over thirty states and eight countries.

3 Table of Contents Executive Summary I. History and Background of Mississippi Windstorm Underwriting Association 1 A. Recent Reform 3 B. New Zones 4 C. Mitigation Programs HB II. Fair Access to Insurance Requirements (FAIR) Plans 9 A. Texas FAIR Plan 11 B. Alabama FAIR Plan 12 C. South Carolina FAIR Plan 12 D. Louisiana FAIR Plan 13 E. Florida FAIR Plan 14 III. Cost of Home Ownership for MS Coastal Areas 17 IV. Mississippi Wind Pool Information 23 V. Homeowner Premiums for North and Coastal MS 31 VI. Multiplier Effect 35 VII. Summary Information 37 VIII. The Mississippi Gulf Coast 39

4 This page is blank.

5 Executive Summary Overview Population and employment growth on the Mississippi Gulf Coast came to a halt in 2005 when Hurricane Katrina, the worst natural disaster in United States history, devastated the area. Initial recovery has been impressive, but high insurance rates have slowed down the recovery effort and now threaten further recovery. This study examined the history of insurance relative to the area and the impact of the cost of insurance on the area s recovery and revitalization. Background In 1987, the Mississippi Legislature established the Mississippi Windstorm Underwriting Association (MWUA), often referred to as the Mississippi Windpool. The MWUA legislation of 1987 provided a method whereby an adequate market for windstorm and hail insurance is provided in the coastal area of Mississippi. The windpool was designed to be an insurer of last resort and provide insurance coverage when the private market would not. Each year since Katrina, new and helpful legislation has taken place to bring some relief to the homeowners. In 2005, approximately 16,000 policies were written in the wind pool. Following the devastation of Hurricane Katrina in August of 2005, the wind pool lost all of its accumulated reserves and assessed member insurers $295 million. This resulted in a skyrocket of insurance premiums statewide to cover the cost of these assessments, and drove private insurers out of the coastal market. Today, as businesses and homeowners have no other insurer to turn to, the number of policies written in the wind pool has increased to over 42,000. The total insured value in the wind pool more than tripled by 2007 from $1.8 billion to almost $6 billion. Findings This study found that higher insurance costs negatively affect sales of existing homes, new home construction and sales, discretionary spending and rebuilding efforts in the area. In particular, Insurance costs that are higher in the six coastal counties than North Mississippi reduce the value of the home a typical family can afford.

6 By 2006, the same $100,000 of coverage cost $1,290, and by June of 2008 the same $100,000 of coverage cost $1,189. If 90% of the $20 million grant to the Mississippi Windpool is passed through as a rate reduction to the policyholders, this would create a multiplier effect on spending. The final impact would be based on the amount spent versus the amount saved and other leakages out of the spending cycle. Nevertheless, it is reasonable to expect that a $20 million investment to the Mississippi wind pool would generate at least $26.9 million in additional tax revenues to the state. The impact of a $20 million investment to the wind pool would generate 715 jobs in the local economy and an increase of $72 million in consumer spending.

7 Economic Impact of Insurance Costs on Mississippi Gulf Coast Development I. History and Background of the Mississippi Windstorm Underwriting Association During the 21 st century, insurance on coastal property has become a topic of increased importance and discussion. Increased hurricane activity has greatly escalated both losses and premiums for both homeowners and business owners in coastal areas. The problem is exacerbated by the increased amount of development along coastlines. The 2004 and 2005 hurricane seasons proved to be extremely costly with Hurricane Katrina causing record amounts of damage in Mississippi. Hurricane activity for coastal areas in the gulf has recently increased, but by no means is this a new threat. The Mississippi Gulf Coast has been affected by hurricane systems every 3.51 years, and taken a direct hit every years. In 1969, Hurricane Camille, a category 5 storm, killed 137 and injured thousands more. The Gulf Coast was fairly untouched for the next few years until 1985 when Hurricane Elena came through with an 8 foot storm surge. Following these two unforgettable storms, the Mississippi Legislature saw the need to address adequate insurance protection for citizens in the lower six coastal counties. Thus, in 1987 House Bill 274 established the Mississippi Windstorm Underwriting Association (MWUA), often referred to as the Mississippi Windpool. The MWUA legislation of 1987 provided a method whereby an adequate market for windstorm and hail insurance is provided in the coastal area of Mississippi. The windpool was designed to be an insurer of last resort and provide insurance coverage when the private market would not. Although the Mississippi Windstorm Underwriting Association was modified in 2007 with the introduction of the Mississippi Economic Growth and Redevelopment Act, the basic purposes and needs remain unchanged: Economic Impact of Insurance Costs on MS Gulf Coast Development - 1 -

8 To provide an adequate market for windstorm and hail coverage which is necessary to the economic welfare of the coastal area and assure its orderly growth and development; To provide adequate insurance for property in the coastal area which is necessary to enable homeowners and commercial owners to obtain financing for the purchase and improvement of their property; To provide an equitable method whereby every licensed insurer writing windstorm and hail coverage in Mississippi is required to meet its public responsibility; and To provide a mandatory plan to assure an adequate market for windstorm and hail coverage in the coastal area of Mississippi and to fulfill the purposes provided by the Mississippi Legislature. The wind pool is operated and managed by the Mississippi State Rating Bureau; administered by a Board of Directors; and all rules and regulations are subject to the review of the Commissioner of Insurance of Mississippi. The Board of Directors consists of eleven members, five representatives of licensed insurance companies and three representatives of insurance agencies along with two coastal business representatives and the State Treasurer. Counties served by the wind pool are Jackson, Harrison, Hancock, George, Pearl River and Stone. The wind pool provides coverage up to $1 million for one to four family dwellings and $250,000 for contents for high-risk applicants who have difficulty obtaining coverage in the voluntary market. Prior to the 2007 Act established by House Bill 1500, all insurance companies that wrote property insurance in Mississippi were called member companies within the windpool. Now any companies that are directly admitted to write insurance in Mississippi and are engaged in writing property insurance are called assessable insurers. The windpool is funded through customer premiums and assessments from the assessable insurers, according to their percentage of participation in Mississippi. The Southern Governors Association Property Insurance Brief for Mississippi explains that in 2005, approximately 16,000 policies were written in the wind pool. Economic Impact of Insurance Costs on MS Gulf Coast Development - 2 -

9 Following the devastation of Hurricane Katrina in August of 2005, the wind pool lost all of its accumulated reserves and assessed member insurers $295 million in This resulted in a skyrocket of insurance premiums statewide to cover the cost of these assessments, and drove private insurers out of the coastal market. Today, as businesses and homeowners have no other insurer to turn to, the number of policies written in the wind pool has increased to over 36,000. The total insured value in the wind pool more than tripled by 2007 from $1.8 billion to almost $6 billion. A. Recent Reform In 2006, Mississippi Governor Haley Barbour secured $50 million from federal funds to help reduce the rate increases. With this funding, homeowners endured a 90 percent increase rather than the requested 397 percent rate increase. However, the federal funding was little assistance for the small business owners who suffered a 268 percent commercial rate increase. These increases for wind coverage provided by the MWUA were necessary to assure the financial stability of this organization after the devastating losses suffered from Katrina combined with increases in both the amount and price of reinsurance bought by the windpool. Another measure taken in an attempt to attract insurers back into the market in 2006 was the adoption of building codes. Under House Bill 1406, five coastal counties, Jackson, Harrison, Hancock, Stone and Pearl River, are required to enforce, on an emergency basis, all of the wind and flood mitigation requirements of the 2003 International Building Code and the 2003 International Residential Code. By complying with the building codes, some insurers may offer homeowners up to a 35 percent discount for homeowners insurance. In March 2007, Governor Barbour signed into law House Bill 1500, which established the Mississippi Economic Growth and Redevelopment Act. This bill provided reform to the wind pool, including the creation of the MWUA Reinsurance Assistance Fund. Among the modifications of this Bill, the following are included: Economic Impact of Insurance Costs on MS Gulf Coast Development - 3 -

10 MWUA can access the Reinsurance Assistance Fund to cover costs as necessary; The fund is capable of accumulating reserves up to $50 million with any excess amount deposited into the state s general treasury; HB 1500 authorizes the wind pool to levy regular assessments against the wind pool association s assessable insurers if a storm produces losses in excess of funds immediately available to the association; and As reimbursement to assessable insurers who paid the regular assessments, the insurance commissioner can implement a surcharge on property and casualty premiums, free of premium taxes and commissions within 120 days of the regular assessment. The bill provided for $80 million over the following four years to be transferred into the MWUA Reinsurance Assistance fund. These funds came from the insurance premium tax revenue collected by the State Tax Commission. Barbour also secured $30 million additional federal funding for commercial premium reduction. With the additional funding, the wind pool reduced the fall 2006 commercial rate increase of 268 percent to 142 percent. B. New Zones Rates from MWUA that became effective in 2008 introduced new zones for insurance premiums in the six Mississippi coastal counties. Prior to 2008, the rates were different for areas on the mainland south of I-10 and north of I-10. The new rate plan took these two zones and created four. Zones for MWUA Rates Zone A Zone B Zone C Zone D Beach to RR track South of I-10 to RR track North of I-10 to County Line Pearl River, Stone and George counties Economic Impact of Insurance Costs on MS Gulf Coast Development - 4 -

11 The rates differentiate for different types of construction and diminish as one moves geographically away from the beachfront. As mentioned, the rates that became effective on June 1, 2008 also allow the homeowner to purchase insurance with different deductible percentage amounts for a Named Storm Deductible. C. Mitigation Programs HB 753 In April of 2007, House Bill 753 created a mitigation program that would offer grants to encourage single-family, site-built, owner-occupied, residential property owners or commercial property owners to retrofit their properties to make them less vulnerable to hurricane damage. The mitigation program develops and implements, upon availability of funding, a comprehensive and coordinated approach for hurricane damage mitigation that includes the following: Cost-benefit study on wind hazard mitigation construction measures; Wind certification and hurricane mitigation inspections; Financial grants to retrofit properties; Education and consumer awareness; Advisory council; and Rules and regulations. HB 753 requires that the 26 members of the Building Codes Council represent a variety of professional organizations and must be state residents. The associations represented include: American Institute of Architects of MS; Home Builders Association of MS; Associated General Contractors of MS; American Council of Engineering Companies of MS; Building Officials Association of MS; MS Municipal League; MS Manufactured Housing Association; MS Fire Chiefs Association; MS Association of Supervisors; the MS State Fire Marshal; State Board of Professional Geologists; and the MS Gulf Coast Building and Construction Trade Council. The Governor appoints a representative of the property/casualty insurance industry; a disabled person; a Economic Impact of Insurance Costs on MS Gulf Coast Development - 5 -

12 representative of the MS Minority Contractors Association; and a person with no interest in the construction industry. In addition, the American Subcontractors Association appoints a master mechanic, master plumber, and master electrician. Also in 2007, the wind pool approved two measures to help decrease premium charges along the Gulf Coast. One measure gives new deductible options of 5, 10, 15 or 20 percent to homeowners. Another measure gives premium credits for using Fortified construction techniques designed to lessen damages from hurricanes. Fortified homes are built above and beyond what the local building codes require. Insurance rates have to be partially based on frequency and severity of expected losses. In coastal areas, there is no way to prevent or decrease the frequency of major storm or wind activity. To reduce the severity of losses from these perils, better construction methods should be used. The Institute for Business and Home Safety (IBHS) certifies buildings as being Fortified if it is equipped with special features. Fortified buildings must have three areas of protection. The first area of protection is the building envelope protection. All entry doors, windows, skylights, patio doors, and garage doors must be installed to meet impact resistance and pressure standards or have a protection system (storm shutter or screen) that meets the impact resistant standards from wind-borne debris. The second Fortified building requirement is that buildings must meet load path construction requirements. The load path from the roof to the foundation of the home includes roof-to-wall straps, reinforced concrete block walls, wall anchors and connections for exterior structures such as carports and porches that attach to the main structure of a home. The third Fortified building guideline includes roof construction measures. The roof framing, sheathing, and covering are constructed to resist wind pressures by bracing gable ends, using thicker roof decking and more nails. Sealing all roof deck joints helps prevent moisture penetration if the shingles do fail (Disaster Safety). According to the Fortified Homes Protect Against Natural Disasters article, the cost of a fortified house is generally 5-8 percent above conventional construction. Although a homeowner cannot retrofit an existing house to achieve Fortified standards, homes can be strengthened to lessen damage by future wind storms. Economic Impact of Insurance Costs on MS Gulf Coast Development - 6 -

13 According to a 2008 press release from the Mississippi Department of Insurance, homeowner s insurance on the Mississippi Gulf Coast for a masonry dwelling cost an average of $679 per $100,000 of coverage prior to Hurricane Katrina. By 2006, the same $100,000 of coverage cost $1,290. In June of 2008, similar coverage dropped to $1,189. With Fortified home credits, homeowner rates can drop to $776, which is just $97 more than pre-katrina levels (Mississippi Insurance Department). In 2008, The Federal Alliance for Safe Homes, Inc. (FLASH) CEO and President, Leslie Chapman-Henderson testified before the subcommittee on technology and innovation at the U.S. House of Representatives. In this testimony, Chapman- Henderson explained that by building code-plus residential homes, the average annual expected insured losses from hurricanes could drop up to 78% per year. The mission of FLASH is to strengthen homes and safeguard families from disasters of all kinds. FLASH seeks to put into place a system of state-of the art, consistently enforced, model building codes before windstorms strike. According to the testimony, using new techniques and mitigation measures will help break the build-destroy-rebuild cycle that is currently being used (Congressional Testimony, Chapman-Henderson 3-4). Since Hurricane Camille, Mississippi has taken on the challenge of providing windstorm insurance to homeowners on the Mississippi Gulf Coast. Each year since Katrina, new and helpful legislation has been introduced to bring some relief to the homeowners. This study examines the effect of insurance on the rebuilding of our Mississippi Gulf Coast. Economic Impact of Insurance Costs on MS Gulf Coast Development - 7 -

14 This page is blank. Economic Impact of Insurance Costs on MS Gulf Coast Development - 8 -

15 II. Fair Access to Insurance Requirements (FAIR) Plans During this century, the increased level of storm activity has brought issues related to coastal insurance back to the forefront. With predictions of high levels of hurricane activity prevalent, these issues will not decrease in importance in the next few years. The storms and disasters in recent years have resulted in countless homes and businesses being lost to these events, and thousands of people have been displaced. When residents and business owners return to these devastated areas and rebuild, they are faced with having been categorized as high risk applicants when they look to purchase insurance. The frequency and severity of hurricanes in the coastal regions of gulf coast states has caused many private insurance companies to reduce or stop writing property insurance in those areas. In these coastal regions the private insurers who will write coverage typically exclude wind and hailstorm coverage. Private insurance companies are for-profit and cannot be forced to write insurance coverage at a loss. For example, if the insurance premium on a $200,000 house in the coastal region is $1,000 a year, and if the region experiences a catastrophic hurricane every 15 years resulting in a total loss on this house, the insurance company will collect $15,000 for every $200,000 they have to pay out. This for-profit principle requires private companies deny applicants they statistically consider to be too susceptible to catastrophic loss. Some are able to obtain coverage from Excess and Surplus Lines carriers, but the premium is often significantly higher, and E & S carriers can also deny coverage. Applicants that are denied private insurance are then forced into what is termed a residual market. In the 1960s, the federal government established Fair Access to Insurance Requirements (FAIR) plans to make property insurance more available to people who live in these high-risk areas. Thirty-two states have set up insurers of last resort for high-risk applicants, offering only basic coverage for a higher premium than the applicant would have paid in the private market. FAIR plans are regulated by each state s insurance regulator, and policies are written through insurance agents who are licensed in that state. All FAIR plans cover losses from fire, vandalism, riot, and windstorms. Economic Impact of Insurance Costs on MS Gulf Coast Development - 9 -

16 Mississippi, Texas, and South Carolina have specific plans called windstorm or windpool plans in addition to their FAIR plans, which typically cover only damage from wind or hailstorms. Alabama has a specific plan called the Beach Pool, and Louisiana has a Coastal Plan. These plans have specific eligibility requirements, which often include having periodic proof of denial from private carriers. All types of FAIR plans set up a pool to help finance the losses that occur in the coverage area. Private property insurance companies that write insurance in a state with a FAIR plan become a member (or assessable insurer) of the pool. Insurance companies, including the state-run FAIR programs, take a percentage of premiums collected and hold these as reserves to pay claims. When there is a catastrophic event in a FAIR plan covered area, reserves of the pool are usually depleted to pay the claims, and then member companies are assessed for the remainder of claims owed. Assessments are typically made based on the private company s market share within the state. Insurance companies are often able to recoup the money they have to pay out in losses and assessments by charging a higher rate or a surcharge to their private policyholders. In a year when the FAIR Plan policy holders have significant losses, insurance rates may go up all over the state, not just for those who live in the high-risk areas. Rate increases for the FAIR plan covered area will often last longer than those for the private insurance companies as the pool has to rebuild its reserve fund. FAIR plan insurers typically purchase reinsurance every year. Reinsurance is insurance for insurance companies and allows the FAIR plan to transfer risk to the reinsurer. This reduces the burden on the pool if the policyholders have major losses. With greater amounts of reinsurance, FAIR plans are able to take on more risk than they would otherwise. Reinsurance also gives room for the pool to need fewer reserves to pay claims. Money for reinsurance costs comes out of premium payments and other revenues for the FAIR plan, therefore the more reinsurance desired, the greater the amount of dollars needed to purchase this reinsurance and transfer risk from the pool. In high-risk areas, it is not uncommon for residents to have three policies on their home: a private homeowner s policy which excludes flood, wind, and hailstorm damage, a federal flood policy, and a FAIR plan policy. Many FAIR plans require the applicant Economic Impact of Insurance Costs on MS Gulf Coast Development

17 have a flood policy before wind and hail coverage will be written. The high cost of these three policies has created a serious burden on people who choose to live in these areas. The current rate of catastrophic events has also led to higher rates in non high-risk areas allowing private companies to recoup their losses. A. Texas FAIR Plan The Texas Windstorm Insurance Association (TWIA), established in 1971, covers properties in the 14 coastal counties and parts of Harris County east of Highway 146. The Association was formed in response to Hurricane Celia which struck the Texas coast in 1970, and caused many private insurers to stop writing coverage on the coast. TWIA provides wind and hail coverage when they are excluded from coastal homeowners policies. Coverage is available for commercial and residential property, as well as signs, fences, swimming pools, and flags. The standard deductible is 1% with minimums, and higher deductible options are available. When a hurricane enters the Gulf of Mexico, TWIA implements binding exception rules that state no new or increased coverage can be applied. These rules are in effect until the hurricane leaves the designated catastrophe area. Texas also has the Texas FAIR Plan Association which provides insurance to residential property owners who cannot obtain coverage in the private market. Applicants must have been denied coverage by at least two private insurers, and cannot have received an offer for coverage. Applicants must also reapply for coverage in the private market every two years. The Texas FAIR plan can refuse an applicant if the dwelling does not meet the Association s underwriting standards. Available coverage limits are as follows: dwelling, $1,000,000; other structures, 10% of dwelling amount; and personal property, 50-70% of dwelling amount. The policy also covers liability and medical payments, and loss of use. Economic Impact of Insurance Costs on MS Gulf Coast Development

18 B. Alabama FAIR Plan The Alabama Insurance Underwriting Association (AIUA), commonly called the Beach Pool, was formed in 1971, specifically targeted to residents of Baldwin and Mobile counties who are unable to obtain essential insurance in the private market. There are two types of policies available from the AIUA, one being fire and extended coverage of basic perils, the other being a wind and hail only policy, which is written in a package policy by a private insurer who offers the other basic coverage. Vacant property, farm property, and motor vehicles are ineligible for coverage. In the event of a hurricane, the hurricane deductible applies; the usual deductible for all other perils is $500. In certain zones designated by the Beach Pool, a flood policy is required to be in force before a policy can be written through AIUA. The AIUA offers higher deductible options to reduce the annual premiums, and will soon begin to participate in the Fortified home program, which gives credits to existing property owners who build or retrofit to the accepted standards. Participation in the AIUA is determined by the private company s market share written in the state, and is translated into a market share for the two coastal counties. Companies that voluntarily write their share of property insurance on the coast typically have a smaller percentage or even no participation in the AIUA. C. South Carolina FAIR Plan The FAIR plan in South Carolina is called the South Carolina Wind and Hail Underwriting Association (SCWHUA), and covers the coastal areas in the state. Wind and hail are the only perils covered by the plan. Coverage is divided into two zones. Many types of property are ineligible for coverage, including farm property, motor vehicles, structures located in whole or in part on water at any time, including property subject to tidal wave wash. Structures can be written on actual cash value or replacement cost coverage. For a dwelling to have replacement cost coverage, the home must be owner occupied. Economic Impact of Insurance Costs on MS Gulf Coast Development

19 Recent updates to the SCWHUA include requiring applicants to have flood insurance before they can be eligible for replacement cost coverage from the Association. Flood insurance must be purchased even if the dwelling is not in a special flood hazard area. South Carolina is attempting to implement a Single Adjuster Program to combat the problem of having different agents handling the three types of insurance necessary. South Carolina is also participating in the Fortified home credit program, where premium credits are given on insurance to homes that meet the Fortified standards. D. Louisiana FAIR Plan In 2003, Louisiana Citizens Property Insurance Corporation (Louisiana Citizens) was created to cover the state s FAIR Plan. This state-run entity handles the market of last resort for commercial and residential property insurance. All private insurers in Louisiana are members of the FAIR plan, and regular assessments on these private companies are made based on their market share of written premium within the state. There is no state government financial support for Louisiana Citizens; in the event there is a deficit greater than the premiums and assessments taken in, the board can call for emergency assessments for as many years as necessary. Legislation requires that Louisiana Citizen s rates are 10% higher than the rates in the voluntary insurance market. There are two separate coverage plans in Louisiana. The first is the Louisiana Citizens FAIR Plan, which offers coverage across the state north of the Intercoastal Waterway. The second plan is the Louisiana Citizens Coastal Plan, which provides coverage south of the Intercoastal Waterway in the most high-risk hurricane area. The standard hurricane deductible is $500, and there are optional 2% and 5% deductibles which can result in decreased premium cost. The 2007 reinsurance model for Louisiana Citizens is as follows: in the event of a catastrophe, LA Citizens would pay the first 100 million dollars in losses, and reinsurance would pay $0.90 for each dollar over the next 400 million in losses. Assessments on private insurance companies account for the remainder of loss coverage, which are passed on to their policyholders. Policyholders can then claim the increased Economic Impact of Insurance Costs on MS Gulf Coast Development

20 amount they are charged as a credit on their Louisiana state income taxes. If emergency assessments are needed, LA Citizens can issue revenue assessment bonds. After the 2005 hurricanes, LA Citizens issued $978 million in Revenue Assessment Bonds, which they began to pay off in 2007 and will continue to pay until E. Florida FAIR Plan Prior to 2002, Florida had two separate FAIR plan entities: the Florida Residential Property and Casualty Joint Underwriting Association (FRPCJUA), which provided homeowners property coverage statewide, and the Florida Windstorm Underwriting Association (FWUA), which provided wind-only coverage in designated coastal areas. The merger resulted in the Citizens Property Insurance Corporation (Citizens). Citizens gives discounts up to 45% on residences that have implemented hurricane mitigation features, including having a hip-shaped roof with an approved covering, hurricane clips or straps on the roof-wall connection, and having secondary water resistance on the roof. These discounts are only applicable to the wind portion of the policy. Many of these mitigation features became standard Florida construction practices after Citizens is Florida s largest property insurer, having 1.2 million policies in Like other insurers of last resort, Citizens was required to charge rates above the highest price charged by the top 20 home insurers in Florida. However, in 2007, the Florida legislature allowed Citizens to be competitive with private insurance companies, and also allowed Citizens to start writing policies for businesses. Citizens offers two types of polices: the multi-peril and the wind/hurricane only. Both are offered as personal residential policies or as commercial residential policies. Rates for plans through Citizens are frozen through December 31, 2009, for both commercial and personal insurance. Beginning January 1, 2009, residential properties located in the wind-eligible coverage area will no longer be able to obtain insurance from Citizens if the replacement cost is $2,000,000 or more. However, Citizens will cover these properties if the owner has been rejected from at least one private insurer and three surplus lines insurers. Florida Building Codes are in place for new residential Economic Impact of Insurance Costs on MS Gulf Coast Development

21 construction, requiring protections on all openings on the home. Homestead designations do not apply to coverage obtained from Citizens, and there is no non-homestead assessment. After the 2004 hurricane season, Citizens was left with a $516 million deficit, which caused all Florida property policyholders to pay $68 per every $1,000 of premium they pay as an assessment. The 2005 hurricane season was also hard on Citizens, leaving the insurer with a $1.7 billion deficit. Florida property policyholders partially compensated for that deficit with a one-time $20.70 per $1,000 in premium. Policyholders will also pay $10 for every $1,000 in premium for the next 10 years to help pay for that deficit. The 2007 legislature also allowed Citizens to assess auto insurance policyholders to help cover deficits. Florida state legislators have created a task force to review options on how to return Citizens to an insurer of last resort, beginning with the effects of increasing the premiums for Citizens insurance. Because Citizens is now in the competitive market and not required to have higher rates than private companies, they are sometimes seen as a better, safer option for homeowners insurance. With reserves on hand and pre-event financing, Citizens can withstand about $11 billion in losses, but even this amount would likely not be enough to cover the losses resulting from a major hurricane. With almost 15% of the Florida market share of property insurance, Citizens looks to see major changes in The preceding discussion shows some of the methods developed to handle severe risks faced by businesses and homeowners in coastal areas. In many cases, private insurers have deemed these risks not feasible for them to provide coverage. FAIR plans in states all over the country have been created to offer residual coverage where private insurers have made the decision to not provide coverage. Due to the high risks resulting from high frequency or the severity of losses, insurance rates provided by FAIR plans can be relatively high. These high rates increase the cost of home ownership and the cost of doing business in these areas covered by FAIR plans. Economic Impact of Insurance Costs on MS Gulf Coast Development

22 This page is blank. Economic Impact of Insurance Costs on MS Gulf Coast Development

23 III. Cost of Home Ownership for Mississippi Coastal Areas In this section we examine the cost of homeowner s insurance on a hypothetical family living in one of the six coastal counties in Mississippi. For many homeowners in these counties, their homeowner s insurance consists of 3 parts: homeowner s insurance excluding wind coverage, flood insurance, and wind and hail coverage provided through the Mississippi Windpool. The following examples show the impact of high insurance costs on the family budget and how insurance costs that are higher in the six coastal counties than in North Mississippi reduce the value of the home our hypothetical Johnson family can afford. Percentages based on information taken from the National Federation for Consumer Credit and the Consumer Credit Counseling Service Economic Impact of Insurance Costs on MS Gulf Coast Development

24 The household budget percentages above combine information from the National Federation for Consumer Credit and the Consumer Credit Counseling Service to provide an example of percentages that could comprise a typical household budget. Obviously, percentages will vary for different households. Based on the above percentages of household expenditures, the chart below shows the dollar amounts typically spent on each category each year. This example is based on a household that has two wage earners with a combined gross income of $60,000. Our hypothetical family, the Johnsons, have 30% of their gross income going to taxes and other nondiscretionary expenses, leaving net discretionary income of $42,000. For our example, the $10,500 amount for housing includes principal repayment, taxes, interest, and insurance costs. Economic Impact of Insurance Costs on MS Gulf Coast Development

25 WIND POOL COVERAGE $1883 For our family living in one of the six coastal counties of Mississippi, they would possibly have to buy wind coverage separate from their homeowner s policy at a potential cost of $1883. This cost is calculated on a $146,000 house with wind coverage from the MS Wind Pool. This amount could vary based on the construction of the home, location and any rate changes by the MWUA. A discount from their private insurer providing the homeowner s policy should reduce the impact of this increase. The discount for excluding wind coverage from the homeowner s policy would vary by insurer. Economic Impact of Insurance Costs on MS Gulf Coast Development

26 In this example, the Johnsons spend 25% of their income on housing, which would be a payment of $875 per month. Considering a 6% mortgage rate, this couple could purchase a home in North Mississippi with a value of $146,000. In the coastal counties, this $146,000 house could generate a wind insurance premium of $1,883 per year or $ per month. This additional insurance charge could reduce the value of the home the Johnsons would be able to afford to approximately $120,000. These home values would be adjusted for escrow payments. The maximum value of the home purchased would depend on a number of factors including the wind premium and the reduced value of homeowner s insurance excluding wind. Economic Impact of Insurance Costs on MS Gulf Coast Development

27 Homeowner Insurance Costs in Mississippi The information below shows the most expensive states for homeowner insurance using data from the National Association of Insurance Commissioners for Obvious from this information, states with high occurrences of natural disasters have higher costs for homeowner s insurance. Unfortunately, more current data were not available from the NAIC. Although we might propose that Mississippi might have moved higher in the rankings below after Katrina, other states listed below have experienced serious losses from natural disasters also. Average homeowner costs for different states Rank Most expensive avg HO premium 1 Texas Louisiana Florida Oklahoma D.C Mississippi California 895 Source: NAIC Economic Impact of Insurance Costs on MS Gulf Coast Development

28 This page is blank. Economic Impact of Insurance Costs on MS Gulf Coast Development

29 IV. Mississippi Wind Pool Information The MWUA was created to be an insurer of last resort. After Katrina, every aspect of the Windpool has grown significantly. Private insurers were assessed millions of dollars to cover losses of the Windpool from Katrina and had no means to recoup these losses or assessments prior to the enactment of HB As a result they quit writing wind/hail coverage in many parts of the six MS coastal counties, particularly South of I-10. This resulted in significant growth in the number of policies written by the MWUA. The number increased from 13,312 in 2003 to over 36,000 in This also increased the amount of insurance provided by the Windpool from $1.4 billion in 2003 to over $6 billion in As can be seen from the following tables, the Windpool has evolved from a residual insurer to the only insurer in many cases. The MWUA has taken steps to provide additional coverage for policyholders in case of another Katrina sized event by increasing the amount of reinsurance. This increased amount of reinsurance combined with changing rates in the reinsurance market has increased the amount spent on reinsurance by the Windpool by nearly $60 million dollars from 2003 to The increase in reinsurance and the changes initiated by HB 1500 enable the Windpool to be better prepared for a Katrina sized event. However as the number of policies have increased, the amount of insurance provided increased and the amount of reinsurance purchased increased, the total amount of premiums collected by the Windpool have increased by a multiple of six since While the amount of premiums collected by the Windpool has increased significantly accompanied by increases in rates, the majority of this money has gone to the purchase of reinsurance. In 2006, premiums collected from homeowners were significantly less than the amount of premium paid for reinsurance. This reversed in 2007 with premiums collected by the Windpool approximately $7.4 million greater than the cost of reinsurance paid in Although reinsurance does allow the Windpool to transfer risk to the reinsurer, it does not cover all Economic Impact of Insurance Costs on MS Gulf Coast Development

30 losses as the Windpool retains the first layer of losses. To cover this first layer of losses, the Windpool does require a reserve account to pay these losses. The following graphs and tables also show the high percentage of policies written by the Windpool for the three coastal counties with beachfront. The three counties of Hancock, Harrison and Jackson do have a larger percent of population and business activity than George, Pearl River and Stone, but these figures provide at least anecdotal information that availability of private insurance is better for the three counties without beachfront. The proximity to the Gulf is definitely a factor in availability and pricing. The high losses on and close to the beachfront are a strong disincentive for both private insurance companies and reinsurance organizations. The possibility and probability of catastrophic losses near the Gulf make it very difficult for a for-profit organization to justify assuming the risk of the property holder. If risk transfer is available, the cost is extremely high as the possibility of a total loss on the property is extremely high. Policies written by the Windpool for the three coastal counties with beachfront Premium earned 9,268,971 11,564,448 13,282,881 29,355,009 68,855,666 loss and exp 738,036 3,828, ,084,525 43,630,601 10,149,435* Reinsurance Pr 4,594,708 6,850,354 8,817,760 57,796,922 61,429,793 Grant revenue 30,000,000 50,000,000 # of policies 13,312 14,796 15,252 30,962 35,962 $ limits 1,429,658,000 1,631,720,000 1,872,999,000 5,369,509,000 5,722,603,000 Assessments 2,992, ,000, ,000,007 *approximately 10,000,000 of this related to Katrina Information obtained from the Mississippi Windstorm Underwriting Association reports. Economic Impact of Insurance Costs on MS Gulf Coast Development

31 Mississippi Windpool Underwriting Association s Reinsurance Program 8/15/2008 MWUA Chart data from the Mississippi Windstorm Underwriting Association, as of June 1, 2008 Economic Impact of Insurance Costs on MS Gulf Coast Development

32 50,000 Number of Policies in Force 40,000 30,000 20,000 10, Number of Policies 13,312 14,796 15,252 30,962 35,962 36,098 Information obtained from the Mississippi Windstorm Underwriting Association Economic Impact of Insurance Costs on MS Gulf Coast Development

33 Commercial versus Residential Policies Commercial Policies 1, % Residential Policies 34, %. Dollar Limits on Policies $7,000,000 $6,000,000 $5,000,000 $4,000,000 $3,000,000 $2,000,000 $1,000,000 $- Dollar Limits (in thousands) $1,429,658 $1,631,720 $1,872,999 $5,369,509 $5,722,603 Information obtained from the Mississippi Windstorm Underwriting Association reports. Economic Impact of Insurance Costs on MS Gulf Coast Development

34 Information obtained from the Mississippi Windstorm Underwriting Association reports. Economic Impact of Insurance Costs on MS Gulf Coast Development

35 Information obtained from the Mississippi Windstorm Underwriting Association reports. Economic Impact of Insurance Costs on MS Gulf Coast Development

36 Total Insurance in Force by County (in Millions) 3,500 3,000 2,500 2,000 1,500 1, George Stone Pearl River Hancock Jackson Harriso n Dollars in Millions ,710 2,882 Information obtained from the Mississippi Windstorm Underwriting Association reports. Economic Impact of Insurance Costs on MS Gulf Coast Development

37 V. Homeowner Premiums for North and Coastal Mississippi Sample Homeowner Premium Quotes for Similar Construction North Mississippi vs. Mississippi Gulf Coast $6,000 $5,000 $4,000 $3,000 $2,000 $1,000 $0 $122,000 Masonry Construction $385,000 Masonry Construction North Mississippi Mississippi Gulf Coast Economic Impact of Insurance Costs on MS Gulf Coast Development

38 Effects of Building codes on Losses and Insurance Costs Information obtained from Verbal Testimony of Leslie Chapman-Henderson. Economic Impact of Insurance Costs on MS Gulf Coast Development

39 Information obtained from the Mississippi Department of Insurance. Economic Impact of Insurance Costs on MS Gulf Coast Development

40 This page is blank. Economic Impact of Insurance Costs on MS Gulf Coast Development

41 VI. Multiplier Effect Increase in Discretionary Income Multiplier Effect If a $20 million grant to the Mississippi Windpool is completely passed through as a rate reduction to the policyholders, this would create a multiplier effect on spending. The final impact would be based on the amount spent versus the amount saved and other leakages out of the spending cycle. The higher the propensity to consume by the policyholders, the greater will be the economic stimulus by a rate reduction in insurance costs. This basic idea can be applied in the opposite direction and show how increased insurance costs take extra discretionary income from households and this could lead to a multiplier effect in reduced spending. By reducing insurance costs for households, consumers are left with a higher percent of income for other purchases. The multiplier is calculated as MPC/(1-MPC) where MPC is the marginal propensity to consume. If 80% of every dollar of increased discretionary income is spent, the total impact on spending could be a multiple of 4 times the initial increase. For example, a $20 million increase in discretionary income for the six coastal counties could increase spending by $80 million with a MPC of 80%. Increase in MPC Potential Increased discretionary income MPC Spending $20,000, $180,000, $80,000, $60,000, $46,666,667 The numbers above show the importance and potential strength of the multiplier effect. The key is obviously how much of an increase in income the consumer spends. Economic Impact of Insurance Costs on MS Gulf Coast Development

42 The initial spending by consumer A becomes income for Consumer B and so on creating the huge increase in spending. The increased spending should also lead to job creation and increased housing demand. Economic Impact of Insurance Costs on MS Gulf Coast Development

43 VII. Summary Information The following table summarizes the potential impact of reducing insurance costs on the Mississippi Gulf Coast. As can be seen from the table, the economic impact can come from a combination of many different areas including: A positive impact on sale of existing homes, Positive impact on construction of new homes and A potential multiplier impact from reduced insurance costs/increased discretionary income. Obviously these numbers only offer the potential economic impact, but it is widely accepted that increases in discretionary income will lead to increased spending and further increases in spending resulting in a magnified impact. Real estate is a significant percent of the Mississippi economy. The construction of new homes will result in new jobs, additional sales tax and income taxes. The sale of existing homes does not have as strong of an impact on job creation as new construction, but does generate income that can also result in a multiplier impact and job creation. Homeowner s insurance is a significant cost for homeowners on the Mississippi Gulf Coast and as shown in earlier graphs much higher than for homeowners in noncoastal areas of Mississippi. Reductions in insurance costs can easily make home ownership more obtainable and provide a stimulus for the real estate industry and related industries. The summary table shows that the potential exists for money from the State Treasury used to decrease rates from the MWUA can create an economic impact that could generate taxes in excess of the funding provided by the State. Economic Impact of Insurance Costs on MS Gulf Coast Development

44 This page is blank. Economic Impact of Insurance Costs on MS Gulf Coast Development

45 VIII. The Mississippi Gulf Coast In early 2009, much talk is being devoted to different type of stimulus packages as a result of the sharp economic downturn of the latter part of However, the Mississippi Gulf Coast is still rebuilding and renewing from August Unfortunate for the coastal counties, as they began to see improvement in parts of their economy after Hurricane Katrina, the national economy has gone into a deep recession. It is important to the Mississippi economy that steps be taken to boost the State economy and particularly the Coastal economy. Although improvement has been made since 2005, many areas of the coast are far from a complete recovery. In particular, areas south of I-10 and particularly close to the beachfront struggle to bring their economy back to pre-katrina levels. Data show that businesses on the beachfront in Gulfport have only rebuilt at approximately 25% of the level of business activity prior to Katrina. These vacant properties do not generate the same property tax revenue and particularly the same amount of sales tax revenue as before. With the massive catastrophic losses of Katrina and the fear of future losses, the private insurance market does not have an appetite for these exposures close to the Gulf. As we have seen, the MWUA has greatly increased its exposure since Katrina with a large number of its policies being written in the three coastal counties. Basic common sense tells us that high insurance costs or any type of increased cost is a disincentive for business rebuilding and business expansion. Any steps taken to provide more affordable and available insurance for the coastal area could easily provide an economic stimulus for these areas. The question is what is the best method to reduce the cost of insurance? As stated earlier, insurance is simply risk transfer. If the risk is perceived as high or catastrophic, the cost of transfer will be high and possibly transfer through typical insurance methods not available. This scenario requires strong steps taken by government to make insurance available and affordable. As can be seen in this report, the cost of insurance provided by the MWUA is strongly influenced by reinsurance rates. Even with the state government taking steps to improve the insurance environment for the Mississippi Gulf Coast, private markets play an important role. Economic Impact of Insurance Costs on MS Gulf Coast Development