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Bridging the Coastal Insurance Gap

The flight of insurance companies from the Gulf coast has opened the whole state up to the risk of shrinking coverage and higher premiums.

Photo by Dan Anderson

Everyone knows the insurance business is based on a complicated assessment of risk. But over the past several years, Alabama’s Gulf Coast has experienced more catastrophic incidents than expected by those risk calculations. The high number of claims filed after Hurricane Ivan, Hurricane Rita, Hurricane Katrina, and other storms has led insurance companies to raise rates, restrict coverage, and in some cases, avoid insuring coastal properties altogether. Today, the average homeowner’s insurance premium in Alabama’s non-coastal counties is $700 per year, while the average premium in coastal counties is $3,000.

“We have an issue of availability and affordability of insurance for tens of thousands of property owners in Mobile and Baldwin counties,” says Ben Brooks, state senator from Mobile, who has presented several legislative bills to address the issues. “But we’re all Alabamians, and we’re all in this together.”

Difficulty obtaining insurance on the coast isn’t just a coastal problem; it’s a statewide problem, say those familiar with the issues. Since insurance is a shared risk, sharing risk across multiple markets, what happens on the coast ultimately does affect other areas. That’s why a number of bills addressing coastal insurance are currently facing the Legislature, and Governor Robert Bentley has promised to hold a special legislative session just to address coastal insurance legislation if necessary.

A statewide issue

As insurance companies adjust their risk models to account for increased potential payouts, “they have changed their appetite for coastal business,” says Carl Schneider, partner at Schneider Insurance and a member of the Coastal Alabama Leadership Council. The four largest insurance companies—Allstate, ALFA, State Farm and Nationwide—have cancelled 50,000 policies in coastal Alabama.

While insurance may be easy to obtain in non-coastal areas of Alabama, the problems on the coast will still have a statewide impact. First, the coastal insurance problems could become a drain on the state’s economy. Currently, due to staggering rate increases, 20 percent of homes on the Alabama coast are going without any wind insurance, Schneider says. “The problem will be when the next storm comes, who’s paying for damages on the coast?” he says. “Those who are uninsured or underinsured, with deductibles of 4 percent or 5 percent, won’t be able to pay for repairs and banks will have to foreclose on the damaged homes and the coastal economy will suffer.”

When the coastal economy suffers, the whole state suffers. While Mobile and Baldwin counties represent only 17 percent of the state’s population, they contribute about 25 percent of the state’s total tax revenues. For years, “Citizens in Mobile and Baldwin counties have contributed two dollars to state revenue coffers for every dollar contributed by other Alabamians,” Brooks says, thanks to oil taxes, tourism and other factors. If the coastal counties fail economically, the state’s general fund will suffer, and less money will be available for schools and services across Alabama.

Aside from the loss of state revenues, insurance problems on the coast can translate into insurance problems elsewhere. Ultimately, if insurance companies can’t operate successfully on the coast, they may not be able to operate statewide. For instance, Mississippi Farm Bureau, Mississippi’s equivalent of ALFA (Alabama Farmers Federation) Insurance, became insolvent after Hurricane Katrina. Not only did coastal residents and businesses lose the option to purchase insurance from Mississippi Farm Bureau, but also so did residents and businesses across the state. Also after Katrina, State Farm stopped writing new insurance business in the entire state of Mississippi, as a result of multiple lawsuits from coastal customers who were unhappy with their coverage when they needed it.

Many of the property owners in coastal areas who can no longer find commercial insurance have opted to use the Alabama Insurance Underwriters Association, commonly known as the “Alabama wind pool.” More expensive than commercial insurance with less coverage, the wind pool is “the insurance carrier of last resort,” Brooks says. In 2004, the wind pool carried 3,000 policies with $350 million of insured value, and today, it has more than 20,000 policies with more than $3.4 billion in insured value. With only $500 million in reinsurance (insurance against the insured value), the wind pool is at particular risk. “What if there were significant losses and the reinsurance wouldn’t cover the damages?” Brooks says. “All companies who write insurance in Alabama could be subject to a post-traumatic assessment, which could affect the pricing of insurance across the state.”

In addition, weather patterns indicate that coastal storms don’t just affect coastal properties. “Hurricane Ivan went inland and caused millions of dollars of damage to Ohio,” Schneider says. “If these storms continue going inland, we’re going to start seeing hurricane damage and subsequent rate increases all the way to Montgomery. And if we don’t resolve this issue, we could find rates going up [statewide] or the ability to find insurance just as difficult inland as it is on the coast.”

A look at legislation

At press time, a number of bills addressing coastal insurance reform were working their way through the Alabama House and Senate, and additional bills are on the table for the summer, as well as a likely special session in the fall. “We have to keep in mind that the problem with insurance availability and affordability is that there’s no silver bullet,” Brooks says. “We need a package of bills and ideas to address all the different aspects of the problem. These bills are not competing; they must be looked at collectively. No one of them, individually, can solve the problem.”

For instance, there are bills that address restructuring the wind pool, rewriting building codes, increasing transparency about rates, and offering tax incentives for insurance companies to encourage expansion in the marketplace. While solving a huge problem like coastal insurance reform is a slow process, some progress already has been made. In 2009, the state Legislature passed a bill requiring insurance companies to give premium discounts to homeowners who take steps to strengthen their homes, Brooks says. A current bill under consideration would go further, setting up a trust fund with monies from a federal grant or BP penalties that would reward homeowners with grant money to retrofit their homes to better withstand storms. “With this bill, insurance companies will have less risk, homeowners will have stronger homes, and contractors will be put back to work doing these retrofits to people’s homes,” Brooks says. “It’s a win, win, win.”

While there’s no guarantee the bills on the table will be passed, with the governor’s commitment to hold a special session about the coastal insurance issue, Brooks feels confident more progress will be made this year. “There’s still a lot of hard work to do, but I feel confident that we’ll put more pieces of the puzzle in place this regular session, and I’m looking forward to putting more in place this summer and fall,” he says.

Nancy Mann Jackson is a freelance writer for Business Alabama. She lives in Huntsville.

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