Homeowner's insurance rates may rise

By Dan Cabot - July 13, 2006

A story in the Boston Globe last week reported that the FAIR plan, Massachusetts home insurer of last resort, will soon submit to state regulators a request for a rate increase of 25 percent for Cape Cod and the Islands, and seek another price increase in the fall. About a third of all homes on the Cape and Islands are insured by the FAIR plan. If the rate increase is approved, the average FAIR annual premium on Cape Cod would rise from $1,306 to $1,632.50, according to Tuesday's Cape Cod Times.

The Massachusetts FAIR plan (Fair Access to Insurance Requirements) was created by the state legislature to serve as an insurer of last resort for homeowners who cannot obtain homeowners' insurance elsewhere. All companies who write insurance policies in Massachusetts belong to the Massachusetts Property Underwriting Association (MPIUA) and share the risks of claims against FAIR. If no regular insurance company will issue a policy, the homeowners can always go to the FAIR plan, originally at a somewhat higher premium than they might pay to a regular company.

According to Ken Ward, vice-president of Martha's Vineyard Insurance Agency, FAIR was originally created to provide insurance in inner-city neighborhoods which had been "red-lined" by insurance companies. However, because catastrophic hurricanes in Florida and New Orleans have raised the specter of huge coastal damage claims against Massachusetts companies, more and more companies are drastically limiting their exposure to such claims. In effect, hurricane-vulnerable areas are also being "red-lined."

Ironically, the problem is not that there have been catastrophic claims on the Cape or on the Islands, Mr. Ward explained. In fact overall homeowners' claims have remained at the same level or even decreased slightly. However, it is standard practice in the industry for insurance companies protect themselves against ruinous claims by buying "reinsurance" from companies that insure insurance companies. Because of disasters like hurricane Katrina, the escalating cost of reinsurance is driving companies away from writing policies for coastal properties. According to Mr. Ward, when the cost of reinsurance exceeds 35 percent of the premium, the insurer can't make money and may withdraw from a region entirely or decline to renew some of its policies.

In a telephone interview, Jack Golembeski, president of the FAIR plan, told The Times that all regular insurance companies remaining on the Cape and Islands have raised their rates, to the point that the FAIR plan is sometimes not the most expensive alternative. "It has been five or six years since we had a significant rate increase," he said.

The FAIR rates may now be lower than some regular plans, not the reason FAIR was created. Mr. Golembeski told The Times, "Our rates are becoming more and more competitive, and we don't want to be competitive." The Globe quoted him, "The FAIR plan is becoming a market of choice and not a market of last resort."

Insurance commissioner Julianne Bowler rejected a rate-increase request from the FAIR plan on June 30. Mr. Golembeski told The Times, "There were some aspects [of our application] with which she was uncomfortable, but she said she would consider a modified request within 30 days." He conceded that Ms. Bowler's willingness to hear a new request might be considered a good sign, and said that the new application would be filed soon.

Mr. Ward warns that all homeowners can expect to see insurance rate increases continue over the next few months, for other insurance carriers as well as for the FAIR plan, because of the continued risk of a catastrophic storm and the rising costs of reinsurance.