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By CYRIL TUOHY, managing editor of Risk & Insurance®

Total exposures of the residual markets--markets that insure properties considered at high risk of damage or destruction from natural catastrophes--declined last year due partly to the collapse of property prices and the transfer of policies into the private market, according to a new report.

The U.S. residual market includes properties insured by the following four insurance groups: the Fair Access to Insurance Requirements (FAIR) plans, the U.S. Beach and Windstorm Plans, the Florida Citizens Property Insurance Co. and the Louisiana Citizens Property Insurance Corp. plans.

FAIR plans' exposures dipped to $612.2 billion in 2008, down slightly from the $684.8 billion in 2007. The FAIR plans are run by state regulators in conjunction with private insurance carriers.

Exposures to U.S. Beach and Windstorm Plans also dipped, to $83.7 billion in 2008, down from $85.5 billion in the previous year.

Florida Citizens removed 632,971 policies with a total exposure amount of $175.2 billion from 2007 to 2008, and Louisiana Citizens was reported to have removed 40 percent of its policies to private insurers from 2007 to 2008, the report found.

The report, titled "Residual Market Property Plans," has been published for the last three years and is co-authored by Robert Hartwig, president of the Insurance Information Institute and Claire Wilkinson, vice president of global issues for the III.

Data for 2008 and preliminary data for 2009 show that policy counts have flattened in Florida and Louisiana because of the economic slowdown, according to the authors. There's new capacity as well but the financial strength of the new companies is unproven, said Wilkinson. "This year's hurricane season is light, but we'll have to see about next year."

Despite the recent drop in exposures, the high-risk pools have grown significantly over the past 20 years, moving from "markets of last resort to markets of first and only choice," the co-authors wrote. Even before the active 2004 and 2005 hurricane seasons, FAIR plans still barely managed to turn a profit.

This has led plans to levy additional taxes, surcharges and special "assessments" on property owners who are not necessarily exposed to similar levels of risk.

"Policyholders in coastal and even noncoastal areas are left paying the additional price of the risk," said Wilkinson. In the past, said Wilkinson, the assessments would be levied only after the plans exhausted their reinsurance layers.

December 1, 2009

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