Damage Control

Coastal insurance is an emerging conundrum for states from New England to the Gulf of Mexico but one that boils down to an age-old question: more government or less?

Wittingly or otherwise, states have taken on a much bigger role in the past few years of providing insurance for property along the Eastern seaboard. The busy hurricane seasons of 2004 and 2005, combined with new forecasting models that show stormy years ahead, have prompted many insurers to flee the coasts.

Enter the "insurers of last resort," state-supported insurance plans that back properties when the private sector won't. For years, these entities were minor players but, as a result of the private exodus, they've been expanding rapidly. Florida's Citizens Property Insurance is by far the biggest, today insuring $434.3 billion worth of real estate, nearly triple the amount it did five years ago. States from Texas to Massachusetts have seen equally rapid growth rates.

States are now at a decision point over whether to embrace the role of insurer or run away from it. Florida, which has experienced skyrocketing rates in the private sector, is in the embracing camp. Governor Charlie Crist signed legislation in January that mandates rate cuts for Citizens Property Insurance customers and eliminates rules that prevent the insurer of last resort from competing with private insurers. That action, combined with the decision to pledge billions to a state fund that provides reinsurance--insurance that insurers themselves use--guarantees that Florida's government will be a major player in the industry for years to come.

Private insurance companies are unsettled by that arrangement but relieved that other states have not followed Florida's lead. Overall, says Joe Annotti, senior vice president for public affairs with the Property Casualty Insurers Association of America, "state legislatures didn't go overboard expanding the role of the state as an insurer."

Two states, Louisiana and South Carolina, took significant steps in the opposite direction. In late June, Louisiana approved $100 million in tax credits to try to lure private insurers back into the state. The catch: to qualify, a quarter of the companies' new clients have to come from the state's insurer of last resort, Louisiana Citizens Property Insurance Corp. Louisiana is trying to get completely out of the property insurance businesses through a privatization plan-- offering policies from the insurer of last resort up for bid. To drive home the point that the state is going to be as friendly to insurance companies as possible, policy makers also eliminated a commission that regulated insurance prices.

South Carolina Governor Mark Sanford approved a similar approach in June, signing a law that offers tax credits for insurance companies that provide full coverage along the coast. "It's a lot easier to keep your premiums stable," says Scott Richardson, South Carolina's director of insurance, "if you have 20 to 25 companies writing insurance, instead of three or four."

South Carolina's and Louisiana's actions aren't intended just to lower prices, however. As state entities, insurers of last resort lack deep financial reserves and don't spread risk globally the way private insurers do. As a result, lawmakers worry that, unless they can reduce the size of their insurers of last resort, natural disasters will turn into budgetary disasters, too.