State Insurers Billing Many for a Risky Few

"The programs were very well intended, but over time some have morphed to end up catering to people who live on beaches," says Robert Hartwig, an economist with the Insurance Information Institute, which advocates allowing private insurers to charge rates high enough to make coastal coverage profitable.

Defenders say the state-backed coverage has underwritten coastal development that has been vital to regional growth while protecting homeowners in areas that private insurers have shunned, including parts of New Orleans, Houston and outlying coastal regions where workers in the oil and fishing industries live.

"If they like their fresh seafood in Chicago, they do want us to insure those homes," Louisiana Insurance Commissioner J. Robert Wooley said in an interview.

The skirmishes over surcharges come at a time when state insurance plans in Louisiana and Mississippi have been hit with complaints of poor claims-handling following the recent hurricanes.

State-backed property insurance dates to the Housing and Urban Development Act of 1968, passed in response to the riots of that era. The act allowed states to create corporations, known as Fair Access to Insurance Requirements, or FAIR, plans, to take on high-risk properties and to tap insurers and policyholders statewide in a crisis. Most plans are required by law to charge higher-than-market premiums so as not to compete with private insurers.

At the end of last year, 32 states, including Maryland and Virginia, and the District had a form of FAIR plan.

A big push came after Hurricane Andrew in 1992, which prompted private insurers to flee the wind-damage market. The exposure of state-run plans to windstorms ballooned to $115 billion by 2001, from $17 billion in 1992, according to the Insurance Information Institute. The number of policies of state-backed plans, meanwhile, rose a staggering 90 percent between 1996 and 2004 to the current 1.9 million.

Some insurance executives and regulators say state-backed coastal insurance has been a key driver -- along with the flood program, ill-considered zoning laws and building codes and after-disaster relief efforts -- of the coastal development boom of recent years. "They obviously encourage development, particularly on coastal barrier islands," says James W. Oliver, general manager of the Texas Windstorm Insurance Association and the Texas FAIR Plan Association.

Louisiana Citizens, with $14 billion in exposure, is the state's fourth-largest writer of homeowners insurance, with 8 percent of the market. Florida Citizens, with 651,000 policies and $206 billion in exposure at the end of last year, is the state's second-largest homeowners insurer behind State Farm Insurance Co.

By law, most plans are required to charge higher-than-market rates so as not to compete with private insurers. But the rates don't always reflect the true economic cost of the insurance, hence the surcharges.

In 2003, 15 of 27 FAIR plans reporting data posted an operating loss, according to a study by the Property Casualty Insurers Association of America, a Chicago-based trade group. Louisiana led the way with $28 million of roughly $100 million in losses, a light year compared with 2004 and 2005.