Yes, I’m still catching up on news from the past few days….
Earlier this week, the Cape Cod Times reported on a panel discussion held regarding Massachusetts homeowners insurance issues:
The panel discussion - which included leaders of the Massachusetts Insurance Federation and the Massachusetts Association of Insurance Agents, a consumer advocate and an executive from the state’s third-largest auto insurer - was sponsored by the Cape chapter of the Massachusetts Association of Insurance Women and was held Tuesday at the Hyannis Golf Club.
Gov. Mitt Romney has said that by eliminating rate-setting for auto insurance, the state can entice larger, national companies to do business in Massachusetts. Those companies, the administration has argued, would then be more inclined to write homeowners insurance policies on the Cape and Islands.
Concerns about hurricane risk have led a number of smaller, regional insurers to abandon the Cape, leaving many residents no alternative but the state’s property insurer of last resort, the FAIR Plan. That program often costs property owners about twice their former premiums.[...]
In the event of a hurricane, ”the losses would be dramatic, and the regional carriers who command this market would not have the resources to sustain that,” [said Jim Harrington, executive director of the Massachusetts Insurance Federation]. Harrington added that Arbella is one of three insurers that have thrived under the current auto insurance system, and oppose changes.
However, Harrington said he doubted national insurance carriers would be more willing to take on coastal homeowners’ policies, even if they did decide to venture into Massachusetts under Romney’s changes.
I don’t know about that last point.
One of the reasons that insurers are willing to accept new risk…indeed one of the reasons insurance works…is that risk is spread. The money that could be used to pay for losses in the event of a major Florida hurricane could also be used to pay for losses from a west-coast earthquake. Because the risk of both occurring in any given period of time is low (the risks are uncorrelated), the insurer doesn’t have to have quite as much cash on hand, and its customers are quite as pressured to help build the kitty, or to provide capital providers with an acceptable rate of return.
A homeowners carrier who feels a little over-exposed to (say) Florida hurricanes might find Cape Cod an attractive place to do business, under the right regulatory environment, and if the market will bear attractively profitable rates. It would be “cheaper” for such an insurer to write $1 of additional annual expected exposure on Cape Cod than it would be to write the same risk in an area where the carrier already has a concentration. By adding business in an area where it has no concentration, the insurer is diversifying its portfolio of risks, enabling it to use its surplus more efficiently.
”That won’t fix coastal homeÂowners’ insurance problems,” he said.