Special Report: Storm of Money: The weird world of insurance wind pools, and South Carolina’s vulnerability to the global reinsurance industry [The Post and Courier, Charleston, S.C.]
By Tony Bartelme, The Post and Courier, Charleston, S.C. | |
Welcome to the Byzantine world of the "wind pools," where rates are set high on purpose and insurers spend millions to insure themselves.
Most coastal states have wind pools -- government-chartered nonprofits that insure high-risk homes and buildings no private insurance company wants to cover.
And some have become massive enterprises.
In
"I'm paying almost
Some consumer advocates say wind pools reflect a troubling trend: Private insurance companies are shifting high-risk properties to these groups and keeping "the safest risks for themselves," a report by the
"It is akin to solving the health insurance crisis by requiring states to cover sick or terminally ill patients, while the private sector writes coverage for young and healthy consumers," the report said.
Others say wind pools have helped prevent real-estate meltdowns in hurricane-prone areas by giving homeowners another option to buy wind hazard insurance, even though it's expensive.
What is clear is that as private companies such as
What are wind pools?
The wind pool's roots stretch back to a double-whammy of fear during the 1960s.
After inner-city riots, insurers grew nervous about covering homes in urban areas. States responded by creating FAIR plans, short for "fair access to insurance requirements," to cover properties that private insurance companies dropped.
At the same time, insurance companies grew anxious about their potential losses in a hurricane strike. The federal government responded by creating the National Flood Insurance Program in 1968; states followed by forming wind pools.
In 1971,
Though created by state statute, the association is run by the insurance industry, including many insurers that are canceling policies. The association's board comprises 11 insurance company officials, two insurance agents and four consumer representatives.
The association is funded by the premiums it collects from property owners. Much of the legwork with customers is done by traditional insurance agents who last year received
Unlike the federal flood insurance program, the
Its small staff works out of an office in
"We don't want to push companies out of the market, but we do want to be a safety net," said
Although the wind pool collects
That presents the group with a major problem: If a catastrophic hurricane made a direct hit on
And it does this by taking out insurance policies of its own.
Masters of disaster
Insurance is about spreading risk, and it has a long tradition. Ancient traders increased their odds of getting materials to destinations by spreading cargoes among different ships and caravans.
Today, a relatively small group of wealthy reinsurance companies across the globe do something similar for insurance companies and groups such as the
The world's 200 reinsurance companies have become global masters of disasters, taking in vast sums of money in
Every year, these companies collect more than
And the insurance industry is quick to say we would be in trouble without them. After hurricanes Rita and
According to the reinsurance giant
Ten reinsurance companies control three-quarters of the market.
A
In response,
Selling
Every year, Harrison and other staff members with the
Harrison said their sales pitches have worked well over the years, even though the reinsurance industry tends to look at state wind pools as bad overall risks.
Of the 99 reinsurance entities the state works with, about 80 have decided to cover potential wind pool losses. That means the wind pool effectively spreads the risk of a devastating hurricane hit to 80 companies. Average premiums have risen only 14 percent since 2007.
Other states have set up special catastrophe funds or systems to assess property owners and insurers after a storm. Both approaches have problems. A catastrophe fund could be wiped out quickly in a major storm, and when it comes to assessments, "you're basically asking people who have just had a major loss to pay more money," Marlett said.
Reinsurance may be expensive, but it takes care of the problem of covering high-risk properties, he said, adding that Harrison and his team have an excellent reputation in the industry.
"I'm comfortable saying that over that time period, the
That's small comfort, however, to customers in wind pool zones who have seen their rates skyrocket -- people like
Feelings of betrayal
The couple has lived off
"In 2007, all of a sudden they dropped our wind and hail coverage,"
"It's like they're really into risk avoidance instead of risk insurance." She called the
Her last bill from the
"It got to the point where it was ridiculous," she said. She and her husband recently found a private insurance company willing to write a policy for about
'Market of last resort'
In a sense, though, their experience is a wind pool success story.
Staff members with the
"We are truly trying to remain a market of last resort," Amick said. At the same time, they're trying not to create too heavy a burden for homeowners.
They acknowledge that setting rates is a bit of an art form. If the wind pool gets a huge influx of homeowners seeking policies, that usually means the group's rates are too low, said
"No computer can figure this out, but if you screw it up, you know the effects immediately," he said.
One sign that the market has stabilized is that the number of policies has stayed around 47,000 for several years.
Black boxes and rates
The problem homeowners face is that rates are likely to continue going up because reinsurance companies are reassessing their vulnerabilities to disasters, Leadbitter and other experts say.
That's because insurance industry computer models are predicting higher losses.
The models, dubbed "black boxes" because of their secret algorithms, have their critics, including some who say they overstate the risks and make it easier for insurers and reinsurers to charge higher rates.
A Post and Courier report this month found that
Meanwhile, as
Their rates are subject to reinsurance giants oceans away; state lawmakers are doing little to support efforts to monitor the fairness of rates; and if their insurance company drops them they're left with what officials from the wind pool acknowledge is an unusual sales pitch: "We're not only expensive," Amick said. "But you get less coverage for your money."
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