Unit 2
Risky Insurance
Coastal Policy Course Interactive Exercise
© 2002 sschmidt

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Construction and living on the coasts can be risky business. These areas are often low lying and therefore subject to storm-surges of sea-water and water from canals and marshes. They are also often exposed to winds from storms the most powerful of which are hurricanes. Here is a brief description of the hurricane scale.

"The Saffir-Simpson damage potential scale is used by the National Weather Service to give public safety officials a continuing assessment of a landfalling hurricane's potential for wind and storm-surge damage. Herbert Saffir, a consulting engineer in Coral Gables, Fla., and Robert Simpson, who was then director of the National Hurricane Center, developed the scale in the early 1970s."

A "Category 5" storm is the most damaging with winds starting at 155 mph. A special report in USA Today summarizes the consequences of a cat. 5 storm as follows -

"Catastrophic": Shrubs and trees blown down; considerable damage to roofs of buildings; all signs down. Very severe and extensive damage to windows and doors. Complete failure of roofs on many residences and industrial buildings. Extensive shattering of glass in windows and doors. Some complete building failures. Small buildings overturned or blown away. Complete destruction of mobile homes. Major damage to lower floors of all structures less than 15 feet above sea level within 500 yards of shore. Low-lying escape routes inland cut by rising water 3 to 5 hours before hurricane center arrives. Massive evacuation of residential areas on low ground within 5 to 10 miles of shore possibly required." (USA Today, Saffir).

One of the most devastating of these cat 5 storms hit the Florida Keys. The USA today special report on hurricanes says:

"What became known as the Labor Day hurricane of 1935 cleared every tree and every building off Matecumbe Key, and destroyed the railroad that connected the Florida Keys to the mainland. The official death toll was 423 - 164 civilians and 259 World War I veterans living in three federal rehabilitation camps. "There were so many dead people and no place to take them," said Russell, who was 17 when the hurricane hit. "They stacked them up and burned them." The National Hurricane Center says that storm was the strongest to hit the United States in this century and was the first of two Category 5 hurricanes to hit the United States since record-keeping began." (USA Today, 1999)

With this information in mind, the question I need you to consider in this case study is this - "If you build on the coast, with all the risks that are implied, who should bear the cost?"

(Some of the follwing information comes from NWS, October 2, 2000, p. 25A, and has been edited for this case study) The current debate over the cost of insurance comes down to one key point, writes Rebecca Fussel, the Executive Director of the Florida Windstorm Underwriting Association, "Should all Floridians pay to subsidize the cost of insurance for those living in high-risk, coastal areas of the state?"

The Florida Windstorm Underwriting Association, (FWUA) (http://www.fwua.com/) is a non-profit insurance group of last resort. It's mission is "… to "provide Florida citizens adequate wind and hail coverage, when it is not available in the insurance marketplace; and pay insured's claims when losses occur". It issues hurricane insurance to about 10 % of people in Florida who live in coastal areas. These, according to Ms. Fussel are people who cannot get private insurance because the risks are too high. Most of the FWUA's 429,000 policyholders live in South Florida? However, even in South Florida, most people are not covered by FWUA (25% in Miami and 20% in Broward and Palm Beach counties to the north).

However, "when the FWUA suffers big losses, everyone pays," writes Ms. Fussel. "Since Hurricane Andrew, all Floridians have paid $236 million to subsidize the insurance premiums for the 10 percent insured by the FWUA."

In October of 2000 FWUA had $8 million in cash on hand to pay potential claims. However, Mr. Fussel notes that even a minor storm would set off assessments to all Florida taxpayers. "If another big storm hits our state, all homeowners will face large assessments, possibly for several years," says Ms. Fussel.

FWUA premiums have been insufficient to cover its responsibilities because the agency has not been granted the increased funding it has requested.

"After a lengthy arbitration process and several court hearings, our request for an average 96 percent increase&emdash; phased in over time&emdash;was approved as necessary and fair. Also approved was a new plan that allows homeowners to save nearly 60 percent on their premiums by making home-safety improvements that have been proven to save property and lives. Moreover, by using computer models (approved by the Florida, Hurricane Modeling Commission) to predict likely storm losses, we were able to reduce rates for homeowners who resize further inland in FWUA eligible areas."

Clearly this issue, while very technical is extremely important. Millions of people have moved to the shore, built and bought homes and condominiums in areas that are very exposed to the risk of storms, wind, and water damage. The question is a typical insurance issue. Some people have higher risk of such things as disease, injury, or for our purposes in this case study, storm damage. Should those people bear alone the high costs of their insurance needs or should risk be spread so that coverage can be provided even to those who have a hard time paying the commercial "going rate."

According to Ms. Fussel, "under the new plan, people w ho live in unmitigated homes in high-risk coastal areas pay the most. People living farther inland and people who make their homes more hurricane-safe pay less. People who live in lower-risk areas and are covered by private insurance will pay no … assessment in the event of a catastrophe."

"The FWUA was never intended to be a subsidized-insurance program." It was, in fact, created by the Florida Legislature in l970 to provide coverage for homeowners who had nowhere else to go. The law clearly mandates that the FWUA charge rates sufficient to cover losses and encourage competition from the private sector."

The purpose of the program is to face the reality of Florida, which is the fact that it is located in a relatively high risk, hurricane prone region. At the same time it is precisely its location that has drawn millions of people and businesses to the state. Insurance, we discover, is one of the crucial economic variables that must support this population.

The FWUA is structured so that "Ideally, private insurance companies would offer hurricane coverage to all Floridians." If that were to happen, the need for a state-supported program would disappear. "But that is not the case, according to Ms. Fussel. "After the massive losses of Hurricane Andrew, private insurers fled the high-risk areas along the ocean. As private companies canceled policies and refused to write new ones, the Florida Department of Insurance expanded our coverage area. Since Hurricane Andrew the value of property we insure has grown from $7.5 billion to $89 billion."

Ms. Fussel notes that there have been complaints that the FWUA board of directors is controlled by the insurance industry (and that's why they want the state and taxpayers to cover the risks of coastal insurance coverage). There are also claims that the state computer models for weather overestimate the potential losses from storms.

The Florida Naples Daily News also reported a new twist in all of this when it reported the following:

"The state's high-risk windstorm insurance pool cannot drop customers because they have been offered coverage by a private company, a hearing officer has ruled"

State hearing officer John G. Van Landingham ruled this week that the Florida Windstorm Underwriting Association failed to follow rule-making procedures state agencies must follow by law. He rejected the association's assertion that it is not a state agency and, therefore, exempt from the procedures.

The state established the pool after Hurricane Andrew struck South Florida in 1992. Andrew had driven some companies out of business and caused others to stop offering windstorm coverage in high-risk areas.

The pool's purpose is to provide coverage to homeowners who cannot purchase a windstorm policy from a private company.

The disputed rule would have dropped customers from the windstorm pool if they were offered coverage by private companies even though they may have had to accept less coverage at a higher cost.

The decision immediately affects 58,000 windstorm pool customers who had been offered coverage by Atlantic Preferred, a subsidiary of Tampa-based Poe Financial Group. To get the private coverage, however, they also would have had to buy full homeowners policies from the company, not just windstorm protection."

The article concludes by pointing out that "While the decision may benefit coastal residents it will mean higher cost for all other homeowners in Florida…" "The windstorm pool collects insufficient premiums to cover projected losses so it is subsidized through fees assessed on all homeowner polices sold in the state."

After all is said and done, according to Ms. Fussel, the crucial question that has to be asked remains this: "Do all Floridians want to subsidize hurricane insurance for the 10 percent living in high-risk coastal areas?"

What are the most significant public policy (and political) implications raised in this case study?

© 2003 SAS consulting, sschmidt