Wind insurance costly, scarce on Gulf Coast.

Many businesses along the Gulf of Mexico coast have had a difficult time obtaining wind insurance coverage since Hurricanes Katrina, Rita and Wilma hit in 2005 mad have often ended up paying more than twice as much for the insurance as they did previously, according to a RAND Corporation study co-sponsored by NAA.

Gulf Coast businesses are also paying higher wind insurance deductibles while getting lower limits on policy coverage, the study found. That means businesses are spending more for less protection from hurricanes, tornadoes and other major wind storms.

Because they have been increasingly unable to purchase coverage in the regulated insurance market (known as the "admitted" market), businesses have often turned to state-run "residual" insurance markets that provide limited insurance to businesses unable to find insurance elsewhere, according to the study. The residual markets can recover premium shortfalls from taxpayers mad policyholders throughout a state.

Researchers found that as wind insurance coverage limits have declined and deductibles have increased, while the use of residual markets has risen, wind risk has shifted in part from insurers to policyholders and taxpayers--including those not living in high-risk areas along the Gulf Coast.

HIGH PREMIUMS BLOW IN

The report says the scarcity and high cost of wind insurance has delayed some business investments in the Gulf States region since the 2005 hurricanes, but that the overall effect on the region is hard to assess because higher insurance premiums may have in part redirected economic activity to lower risk areas. Half the lenders interviewed for the study said they were aware of delayed or cancelled business projects in 2006 because of high insurance prices or the unavailability of insurance.

"The plight of homeowners after Hurricane Katrina has received most of the attention," said Lloyd Dixon, a RAND researcher and lead author of the study. "But business owners---especially small businesses in the hardest-hit areas--had a difficult time finding wind insurance despite steep price increases, and some couldn't get insurance at any price."

The study found that in the first three quarters of 2006 the cost of insurance for commercial property skyrocketed, and coverage became less available in areas most exposed to substantial wind risk.

One large insurance broker said that among its business clients with catastrophic risk exposure, premiums increased 80 percent on average from the time Katrina struck in August 2005 to July 2006. And, while coverage limits for overall policies rose slightly, coverage limits for losses caused by wind fell by approximately 30 percent on average from August 2005 to July 2006.

"Many firms are bearing more of the risk than they did before the recent hurricanes, so they are less protected against the next big windstoma," Dixon said.

Researchers found that small businesses in high-risk areas are less attractive to insurance underwriters, in part because they are typically less geographically diverse than large firms.

Such companies are also more likely to be in a weaker bargaining position when negotiating insurance rates and often lack the leverage with lenders to negotiate insurance coverage requirements lower than their loan balance. The study notes some good news: wind insurance premiums for firms with operations concentrated in hurricane-exposed areas remained flat or showed only modest increases in Q1 2007. Large firms with geographically diverse operations saw price declines, in part because there were fewer storms than expected in 2006.

REASONS BEHIND THE HIKE

The study identified several reasons behind the large premium increases.

"While some of the factors that caused price increases may be transitory, the expectation of more frequent hurricanes mad higher repair costs will likely prevent wind insurance prices from returning to pre-Katrina levels," Dixon said. He also noted that greater expected risk may require increases over pre-Katrina premiums.

The study calls for an evaluation of what type of government commercial wind insurance programs--if any--might be warranted given the turmoil following the 2005 hurricane season.

Researchers also warn policymakers not to put blind faith in either the private market or government programs to create a well-functioning insurance system.

Private insurance markets work best for high-frequency events without widespread impact, such as auto insurance. But the study notes that the private markets are less effective for infrequent, catastrophic events--like hurricanes--that affect a large number of policyholders at the same time. To reduce the risk of financial collapse, insurers may charge premiums that substantially exceed the expected value of losses.

"Commercial Wind Insurance in the Gulf States: Developments" Since Hurricane Katrina and Challenges Moving Forward," is available at www.naahq.org and www.rand.org.