Recent trends in homeowners insurance along the nation’s coast and in other areas at high risk of storms or natural disasters have seen in increase in state operated insurance programs known as insurers of last resort. These plans provide insurance for people who otherwise would find it difficult to find coverage. In the wake of natural disasters such as Hurricane Katrina and Hurricane Ike, private insurance companies have grown wary of covering properties in high risk areas and many companies have backed out of coastal areas altogether, so state operated “insurers of last resort” have stepped in to make up the difference.
The benefit of insurers of last resort is that it allows for continued development and increased revenue in areas which otherwise would be unable to support population growth. New homes can be built and purchased in high dollar coastal resort areas and homeowners can purchase insurance at rates that often significantly undercut private insurance rates. This means economic growth for the local area as well as the state as a whole. Many states have been unable to resist the appeal and insurers of last resort programs are being developed across the nation.
The programs are not without problems, however. Most are set up as associations, with any insurance provider in the state being required to become a member. Because the state operated programs typically do not have sufficient funds in reserve to cover numerous high dollar losses such as might occur with a hurricane or other natural disaster, they can require all members of the association, including those who don’t offer coverage in high risk areas, to contribute to claims payments in times of catastrophic loss. They can also dip into state funds in order to pay claims. In this way, responsibility and risk is transferred not only to private insurance companies resulting in higher premiums for customers statewide, but also to taxpayers. This results in an upside down system where the highest risk customers receive the best insurance rates at the expense of lower risk customers.
While conventional wisdom would dictate fewer structures going up in places at high risk of damage due to natural disasters, many states are not willing to sacrifice the revenues generated by development in popular coastal areas such as Miami Beach, Florida or Hilton Head, South Carolina. Hundreds or thousands of new homes going up in areas such as these create increased demand for affordable homeowners insurance since banks will not write a mortgage without adequate coverage. At the same time that private companies are backing out of these areas resulting in diminished competition, liability is increasing by billions of dollars each year. Insurers of last resort have gradually taken on a greater role than originally intended; rather than being literally a last resort for those who cannot obtain insurance any other way, they have become major providers. Instead of spreading risk across multiple private companies and many individual homeowners, the programs concentrate risk in one place. Unfortunately, the state programs are unlikely to keep enough funds in reserve to cover claims when disaster strikes.
Coastal areas are not the only places utilizing the concept of insurers of last resort. Disasters such as earthquakes and tornadoes that are common across the country have prompted at least thirty such homeowners insurance programs to be developed nationwide. The California Earthquake Assistance program is one example. It provides earthquake insurance to customers since most private insurance companies do not offer this type of coverage.
Criticisms of insurers of last resort include fears that transferring liability from high risk customers to low risk ones will undermine competition in the state and ultimately drive private carriers away altogether. In addition, customer service and administration are sorely lacking in efficiency, raising questions about the long term effectiveness of the programs and their ability to continue to meet customer demand.
Glimpses of possible problems can be seen in the aftermath of recent hurricanes in Louisiana, Florida and Texas. Growing liability and increased risk will place ever greater burdens on the backs of homeowners statewide which could ultimately result in harm to state economies. Despite these concerns, however, insurers of last resort continue to grow.