Tag Archives: Residual Market

Residual Property Market: Overall Exposures Stabilize Somewhat

While the size of the residual property market in hurricane-exposed states in 2012 declined from the peak in exposure value and policy counts seen in 2011, the market overall remains at near-record levels, the Insurance Information Institute (I.I.I.) says.

In an updated report Residual Market Property Plans: From Markets of Last Resort to Markets of First Choice, the I.I.I. notes that exposure to loss in the residual property market totaled $818.1 billion in 2012 with total policies in-force of 3.23 million.

This compares with total exposure to loss of $884.7 billion and total policies in-force of 3.3 million in 2011.

The I.I.I. notes that today, overall exposures in the residual property market appear to have stabilized somewhat and many of the plans are underwriting profitably.

Legislative reform passed in some of the most at-risk markets, for example the state of Florida, has contributed to an improvement in the overall financial position of the plans, it says.

Diminished hurricane activity in recent years in areas like Florida has been another positive factor.

The I.I.I. warns:

But, 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.†

Despite attempts by certain states to reduce the size of their plans, the fact of the matter is that this market of last resort remains the market of first choice for many vulnerable, high-risk coastal properties, the I.I.I. says.


Property Insurers of Last Resort: Still Growing

Five years since Hurricane Katrina and with no major hurricane making U.S. landfall in 2010, the assumption might be that the residual property market in hurricane-exposed states would have reduced significantly in size and regained financial equilibrium.

However, this year’s report by the Insurance Information Institute (I.I.I.), like the reports of the last two years, records the ongoing growth in the exposure base of the residual market property insurers along with the still-precarious financial condition of some plans.

According to the newly updated paper, total exposure to loss in the residual market (FAIR and Beach/Windstorm plans) rose from $419.5 billion in 2005 to $703.0 billion in 2009 – an increase of 68 percent – and since 1990 exposure to loss in the plans has surged by 1,184 percent.

Arguably many of the plans have become home for the most highly exposed, wind-only risks – in other words the least attractive types of business. In some cases, this has left plans with huge concentrations of risk, the I.I.I. study notes.

Consequently, it is not surprising that many of the plans experience severe financial difficulties in certain years.

Further, because most of these plans do not charge rates that reflect the true cost of risk, demand for the coverage they provide remains high.

As long as the plans continue to grow, state finances will remain under threat and ultimately taxpayers, many of whom live nowhere near the coast, will continue to face the prospect of increased assessments in the years ahead, according to the I.I.I.

State-Run Insurers Spur Risky Coastal Development

State-run beach and windstorm plans in some states provide unintentional incentives for economic development in areas vulnerable to severe wind damage, according to a new study from the Insurance Research Council (IRC).

The study comes just months after a Government Accountability Office (GAO) report that found that most state-run plans do not charge premium rates that reflect the full risk of loss.

Insurance Information Institute (I.I.I.) research and analysis has also found that over the last four decades, state-run property insurers have experienced explosive growth both in terms of the number of policies issued and the exposure value covered.

The combination of burgeoning exposure growth and inability to charge rates that are commensurate with the risk means that a number of residual market property plans in hurricane-exposed states are in a precarious financial situation.

The IRC study focuses on the role of beach and windstorm plans and explains how state-run plans interact with voluntary homeowners insurance markets.

It also describes how each of the five state beach and windstorm plans – Alabama, Mississippi, North Carolina, South Carolina and Texas – and two state wide plans (Louisiana and Florida) would weather a hurricane catastrophe.

Check out an online article at National Underwriter for more on this story. Check out I.I.I. information on residual markets for an explanation of state-run property insurers.