An insurance group is sounding a warning to “hurricane-exposed states,” saying their residual market property plans may be vulnerable.

The Insurance Information Institute, a nonprofit research organization, suggests that as the 2009 Atlantic hurricane season reaches its peak months – September and October – the credit crunch and economic downturn “exacerbated the already vulnerable financial condition of certain plans,” and those states will struggle to borrow money, the institute said.

Robert Hartwig

Residual market property plans have grown in the last two decades, serving the role of ensuring policyholders to obtain insurance coverage, according to the institute.

“State-run insurers are putting themselves at increased risk through greater dependence on bond markets even as credit markets struggle to recover from the current financial crisis,” wrote institute president and economist, Robert Hartwig, and Claire Wilkinson, the group’s vice president for global issues, coauthors of the group’s white paper. “Disruptions to credit markets will likely make it more difficult and more expensive for some of these plans to issue debt to pay for hurricane losses.”

The authors suggest, “ill-advised legislative steps over the course of several years have also expanded the exposure base of a number of plans such as Florida, yet at the same time curbed the rates they can charge. Such moves put state finances under threat and leave taxpayers and policyholders facing the potential for increased assessments in the years to come.”

The study pointed out that over the last four decades, state-run property insurers have experienced explosive growth both in terms of the number of policies issued and the exposure value covered.  Further, in the 19-year period from 1990 to 2008 – a period characterized by major catastrophes such as Hurricanes Andrew and Katrina – that growth has accelerated. Total policies in force (both habitational and commercial) in the nation’s FAIR, Beach and Windstorm Plans combined nearly tripled from 931,550 in 1990 to 2.6 million in 2008.  Total exposure to loss in the plans surged from $54.7 billion in 1990 to $696.4 billion in 2008 – an increase of 1,173%, the group said.

While a number of factors have contributed to the overall growth of the plans in the course of the last 20 years, the institute found that in some states, such plans have shifted away from their original purpose as predominantly urban property insurers.  As a result, many have evolved from their traditional role as markets of last resort into much larger insurance providers, in some cases even becoming the largest property insurer in the state, the group said.

In Florida, for example, Florida Citizens, a plan that accounts for 69% of the total FAIR Plans exposure to loss, saw its exposure more than double from $210.6 billion in 2005 to $485.1 billion in 2007, reflecting rising coastal property values and higher building and reconstruction costs. Florida Citizens’ exposure to loss declined somewhat to $421.9 billion in 2008 and by June 30 this year, to about $400 billion.