When private insurers refused to sell insurance to homeowners building or living in disaster-prone areas along the Gulf Coast prior to Hurricane Katrina's devastation, state governments stepped into the breach.
Under political pressure in a region where hurricanes are a recurring fact of life, states have created their own insurance companies to write policies for some of the riskiest areas -- with premiums that are higher than most but not high enough to cover losses incurred in a disaster.
As a result, facing big losses from Hurricanes Katrina and Rita, state-backed insurers in Louisiana, Mississippi, Alabama and Texas are imposing surcharges -- up to 20 percent in Louisiana's case -- on other policyholders or their insurers to pay claims on the coast.
The surcharges have rekindled a debate over whether these "insurers of last resort" encourage development in areas where it shouldn't occur and whether inland homeowners should help pay for the claims of coastal dwellers.
"Sometime down the road, a decision is going to be have to be made that if a guy lives on the side of a cliff, or wants to rebuild after the Watts riots, or lives in an area that every so often is going to be hit by a hurricane . . . whether states should be required to give that person insurance," Mississippi Insurance Commissioner George Dale said in an interview.
While the National Flood Insurance Program is often criticized for enabling unwise development, critics say state-backed insurers are beginning to rival it. The federal flood program provides $764 billion in coverage on 4.7 million policies, while state-backed insurers have quietly grown to provide more than $400 billion in coverage on 1.9 million policies.
And while federal flood coverage is capped at $250,000 for structures, some of the state programs are more generous. For instance, Texas's state-backed insurer provides coverage on single-family homes of up to $1.5 million. Florida's massive Citizens Property Insurance Corp., which insures some of the most expensive homes on the Gulf, provides unlimited coverage for wind-damage policies. Efforts by some Florida legislators to impose a $1 million cap failed earlier this year.
Earlier this year, Florida Citizens' board asked for an assessment of 6.8 percent on newly written policies to cover a $516 million shortfall caused by claims following four major hurricanes that hit the state last year. By law, insurers may recoup the amount from policyholders. The one-time surcharge will amount to about $100 per $1,500 in premiums, according to the Insurance Information Institute, a New York-based trade group.
Last month, Florida Gov. Jeb Bush (R) announced the creation of a Coastal High Hazard Study Committee, which will explore, among other things, the role of Florida Citizens in driving development policy.
"There's always going to be in an insurance market some form of cross-subsidizing," Bush said in announcing the committee, according to the Miami Herald. "But if no one in the private market wants to insure on the coast because their underwriters say that's just not sound to do, then that means Citizens fills that void. Is it appropriate for the policyholders of the state of Florida to subsidize coastal insurance?"
The committee's report is due Feb. 1.
Critics of state-backed insurers, who include private insurance groups, say the plans have strayed far from their original mission -- providing fire insurance to riot-torn inner cities.
