Reinsurance Poses Dilemma for Mass. Fair Plan and Regulator

Last summer when the Massachusetts Fair Plan, the state’s involuntary homeowners insurance market, looked into purchasing reinsurance, the premium was about $17.5 million. The plan did not purchase the reinsurance then, which left its participating individual property insurers to cover Fair Plan business as part of their own reinsurance.

But the Fair Plan board of directors, after some prodding by state officials and individual company members, changed its mind. It just bought $455 million worth of reinsurance, effective July 1, for a lot more money. The new premium: $38 million.

“The reinsurance market has changed dramatically,” John K. Golembeski, told Insurance Journal. Golembeski is president of the Massachusetts Property Insurance Underwriting Association, the formal name for the Fair Plan, the residual market that is shared by all of the state’s property insurers.

Reinsurance emerged as the major factor in the state’s rejection of Golembeski’s organization’s rate filing for an average 12.5 percent increase, a bid that was initially submitted last September with a Dec. 31, 2005 proposed effective date.

The original filing included the net cost (the premium offset by costs already measured by hurricane models) or about $13 million in its rate filing. The net cost for the reinsurance actually purchased is about $28 million.

The insurer argued that it needed assurance that the premium cost would be covered before actually spending the money to purchase reinsurance.

But Insurance Commissioner Julianne Bowler last week turned down the rate filing, indicating that she would only approve a filing that had reinsurance costs as part of rates if in fact the Fair Plan bought coverage.

Bowler wrote that “[I]f MPIUA can demonstrate that it has purchased premium of a dollar at least as great as $17.5 million… it may include in its rates the $13 million net cost of reinsurance as initially filed.”

This week, MPIUA, with proof of purchase in hand, is expected to submit a so-called compliance filing that incorporates the $13 million reinsurance net cost.

This would mean leaving for a future rate filing any recovery of the additional $15 million in reinsurance costs. Although the insurer does have the option of submitting an entirely new filing for the full amount, it has already lost seven months from its original proposed effective date and new rates cannot be retroactive.

“We’re overdue for a major correction,” said Golembeski.

The compliance filing is expected to look a lot like the original filing since Bowler agreed with most of the Fair Plan’s figures and analysis, including its practice of averaging the estimates of two major hurricane models.

Bowler did indicate, however, that the Fair Plan’s estimates of hurricane losses not captured by hurricane models seemed high and suggested that the compliance filing adjust them downward.

“It appears the commissioner agreed with the case we presented except on reinsurance and non-modeled losses,” noted Golembeski.

Despite indications that a 28.4 percent statewide rate hike was called for, the Fair Plan last September requested only a 12.5 percent hike across all homeowners policies, which was to account for hurricane forecasts and reinsurance costs.

The Fair Plan’s original request, which it is not expected to change much in its compliance filing, included an average hike of 12.9 percent on the major homeowners forms (HO-2,3,5) and a slight 0.3 percent jump for tenants’ policies (HO-6). The association has also asked for an increase of 6.4 percent on dwelling policies statewide. Officials said actuarial indications support a filing for an increase of 29.3 percent for homeowners and 9.3 percent for dwellings.

The biggest increases are in store for coastal Cape Cod, where the Fair Plan has become the leading property insurer rather than the insurer of last resort as intended. For Cape homes, it has filed for an average 25 percent hike, although its actuaries maintain that experience supports as much as a 68 percent increase.

The Fair Plan is not the only property insurer grappling with hurricane models and reinsurance costs. These same forces are also driving private insurers to exit markets and raise rates, making the Fair Plan the most affordable and often only option for many Cape Cod and other coastal homeowners.