Battening down the hatches: coastal-state homeowners are facing a crisis in finding homeowners insurance. And in cases where they can find it, they may not be able to afford it

Mortgage Banking, August, 2007 by Jack Milligan

McCarty counters that Citizens has accumulated a significant amount of capital and surplus that can be used to pay claims--although he does not dismiss out of hand the industry's charge that the company could be taken down by, say, a Category 5 hurricane that devastates a highly populated coastal area.

"It's not difficult to construct a scenario that would bankrupt Citizens and the [catastrophe] fund," he says. But he also argues that Florida lawmakers had no real alternative when faced with the homeowners insurance crisis a few years ago. "Florida's economic vitality was at stake, and this was the only thing they could do," he says. "It was seen as a matter of necessity."

McCarty also believes that Citizens has helped change the competitive environment in Florida's homeowners insurance market. A number of new insurance companies have come into the state, which has brought new capacity into the market, and so far this year the state has approved 325 rate reductions that took effect on June 1 of this year.

The Mississippi market

After Mississippi's coastline along the Gulf of Mexico was devastated by Hurricane Katrina, it quickly found that private insurers were reluctant to write homeowners insurance there. The state has maintained a residual market facility--the Mississippi Windstorm Underwriting Association (MWUA), Jackson, Mississippi--since 1969, when all of its private insurers save one left the state after Hurricane Camille, a Category 5 storm, slammed into the Gulf Coast.

Prior to Katrina, there were 16,000 residents in the pool, according to Insurance Commissioner Dale. Today there are approximately 32,000. Mississippi has expanded the pool, but stopped short of converting it into a multi-line insurance company capable of competing with private insurers--although it still acts as an insurer of last resort for those residents who can't find homeowners coverage in the private market.

The MWUA paid out $750 million in claims after Katrina. Because this was substantially more than the funds it had on hand, the state was forced to raise $500 million from the private insurers that make up the underwriting association. Two years later, Mississippi residents and the MWUA's member companies are still paying for Katrina. Prior to Katrina, the underwriting association had $175 million in reinsurance coverage, which cost it $8 million. Dale says that when the association increased its reinsurance coverage last year to $325 million, it had to pay $82 million for a two-year policy.

The MWUA's board of directors also approved a 90 percent rate increase for coastal residents last year--a highly unpopular decision, to be sure, although the facility had initially asked for a 400 percent rate hike. Dale says he understands why companies like State Farm decided to stop writing new homeowners policies in his state, given the size of their Katrina-related losses.

"If companies find an area or product unprofitable, they choose not to offer the product," he says.

But many of Mississippi's coastal residents have been much less understanding than Dale--and they've directed some of their ire at him. "The consumer thinks I'm supposed to make State Farm and Allstate write [homeowners policies] in Biloxi at the old rates," he says.