Insurance forum offers little solace

By Janet Hefler - March 20, 2008

Islanders cannot predict the weather with any certainty, but they can be fairly certain that the rates they pay for homeowner's insurance will not go down. That was the message conveyed at a public forum on homeowner's insurance Monday.

About 35 people met at the Tisbury Senior Center Monday night to discuss the issue with John Golembeski, president and CEO of the Massachusetts Property Insurance Underwriting Association (MPIUA) and Cape and Islands Rep. Eric Turkington.

Mr. Golembeski offered some hope to Island homeowners who have faced a shrinking pool of insurance companies willing to insure their homes. "I definitely see we've turned a corner - the trend of more availability in the private market is going to happen." However, he cautioned, "This is not necessarily going to lower the rates - they are not going back to the rates of two or three years ago."

The Martha's Vineyard Insurance Agency, Lambert Insurance Agency, and the Dukes County commissioners sponsored the forum. "This is not an event to sell insurance, but to try to help people understand what's been happening in the insurance market over the past five to seven years," said Martha's Vineyard Insurance Agency vice president Ken Ward in his opening remarks.

The insurance enigma

Labeling insurance as "the most complicated subject I've had to wrap my brain around," Rep. Eric Turkington said that he began hearing from Island residents about three years ago who were being dropped by their insurance companies. The problem has now spread beyond the Cape and Islands to Plymouth, New Bedford, and the North Shore of Boston, he said.

Adding insult to injury, Mr. Turkington said, the homeowners whose policies were dropped found they could only get insurance from the Fair Access to Insurance Requirements (FAIR) plan - at a higher cost. In the interim, the FAIR Plan has been "tweaked" to allow rate increases, which raised deductibles for wind damage and raised home replacement values, Mr. Turkington said, all of which cost policy-holders money.

Mr. Turkington said that even though New England has not been hit by a major hurricane since 1938, based on hurricane forecasting models, model-makers are still predicting "the big one." As a result, despite many hurricane-free years, private insurance companies are reluctant to write policies for coastal homeowners.

"The premise has been what can we do to get the private market back," Mr. Turkington said.

Playing FAIR

Elaborating on Mr. Turkington's remarks, Mr. Golembeski said insurance companies actually started withdrawing from the Cape and Island markets in February 2004, based on new computer hurricane-forecasting models formulated in 2003. The scientific industry refined and changed the forecasting models after Hurricane Andrew in 1992, which resulted in damages of $20 billion.

The MPIUA administers the FAIR Plan. "We're charged with providing access to insurance for every homeowner who can't get insurance, some 60,000 on the Cape and Islands," said Mr. Golembeski. All insurance agents in Massachusetts have the ability to access the FAIR Plan.

The FAIR Plan increased premiums by 25 percent and raised the minimum deductible for wind or hail damage from two to five percent of the policy face value in 2007. Another 25-percent rate increase has been proposed for this year. A decision by the state insurance commissioner is expected by May.

"This is a cyclical business," Mr. Golembeski said. "Volumes are starting to turn down, and I genuinely believe the pricing spiral we've seen over the last several years will come to an end."

In response to criticism about costs, he noted that despite recent increases, the FAIR Plan still offers the lowest base rates of any insurance company that writes policies on the Cape and Islands.

Although established by the state legislature in 1968, MPIUA is not a state agency and is funded by and comprised of a pool of insurance businesses that share both the profits and the losses. From 1973 to 2007, Mr. Golembeski said the FAIR Plan lost $70 million, including profits from the last 10 years.

"You seem to be reaping the harvest of a fixed audience here," said Roger Wey, an Oak Bluffs selectman, country commissioner, and director of the Oak Bluffs Council on Aging. He argued that the number of FAIR Plan policies is decreasing because people can't afford them and are going without insurance. "How can people get by?" he asked. "Some homeowners can barely afford their taxes. You're choking people to death."

Mr. Wey added, "You're going to get the profits - if there are a few years with no hurricanes, the rates should come down - you have a captive audience here."

Mr. Golembeski told him, "It's not our choice to do this - we are controlled and regulated by the Division of Insurance."

He likened the MPIUA to a "safety valve." If the FAIR Plan hadn't existed when companies left the Cape, it would have been difficult for private companies to provide coverage, he said, and added, "We're not the ones who want to provide this market - we don't want to have the best rates out there,"

The MPIUA would like to see more private companies come back into the market, and is starting to see evidence of that, Mr. Golembeski said. Many states are starting to see reductions now. Rhode Island, for example, went from a high of 21,000 policies through the FAIR Plan to 16,000 now.

Gambling on the weather

The four major factors that affect insurance rates, he explained, are historical losses, administrative expenses, reinsurance costs, and actuarial analysis, which includes hurricane forecasting models. The last two are the most expensive.

The 25-percent rate increase requested for the FAIR Plan is tied to hurricane forecasting models and the cost of reinsurance based on data through December 2005. That year, two "catastrophic events" struck in Massachusetts, with wind and hail damage accounting for 14 percent of all claims, according to a 2007 report on the Massachusetts insurance market from the insurance commissioner.

Wind and hail claims increased significantly again in 2006, accounting for 21 percent of all claims, according to the same report. Though no named hurricanes or tropical storms hit the region directly, the report says three "relatively minor catastrophic events" struck Massachusetts in 2006.

The next rate file will be based on data from 2006-07, when the weather was fairly good, and should push rates down, Mr. Golembeski said. However, he also cautioned, "The probability exists and increases every year that you could have a hurricane."

Although many believe that a Category 4 or 5 hurricane is not possible in New England because of its colder waters, Mr. Golembeski said the new hurricane forecasting models show there is a slight possibility of such a storm, as does the National Hurricane Center.

Just the slight possibility of a hurricane makes a difference in the cost of reinsurance, the insurance bought by insurers to cover their own losses in the case of a catastrophic event. The cost of reinsurance is driven by about 25 companies based mostly in London, but also in other parts of Europe and Bermuda, which set the price, Mr. Golembeski said.

During a question session, several members of the audience asked whether the hurricane forecasting models were calibrated for conditions in the Northeast. Mr. Golembeski said the AIR and RMS hurricane forecasting models used by MPUIA are area-specific and based on data from 100,000 storm events. Although the model-makers do not want their work to be made public, they are willing to have their formulas reviewed by an oversight agency, he said.

Mr. Ward said that one of the questions his clients ask is if the 25-percent rate increase is granted, will there continue to be another one every year?

Given that insurance is a cyclical business, Mr. Golembeski said with several years of good weather, as MPIUA goes forward and makes the next rate filing, there could be some decreases.

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