FAIA Speaker Warns: Make Hurricane Policy Changes Before That One-in-10,000 Hurricane Hits

July 1, 2005

It’s essential to prepare now in case that one-in-10,000 major hurricane hits the Southern United States, Roger Looyenga, CEO of Auto-Owners Insurance told conventioneers attending the Florida Association of Insurance Agents 101st Convention and Education Symposium in Orlando, Fla. Auto-Owners, a large property and casualty company based in Lansing, Mich., is represented by 34,000 independent agents in more than 5,400 agencies in 22 states.

Looyenga said “the threat is real, it needs to be addressed and a better solution is needed for the way hurricane losses are handled today. “What would happen if we had the worst imaginable event? In other words, the one-in-10,000 year storm which could happen this year, or 10,000 years from now?”

Looyenga suggested a one answer is an “open market system,” similar to ones already in use in Hawaii for hurricanes and California for earthquakes, with the creation of a hurricane fund to cover catastrophic losses.

He said the fund would combine Citizens Property Casualty Insurance Company and the Florida Hurricane Catastrophic Fund. “You wouldn’t need either one any longer,” Looyenga explained.

Loyeenga emphasized that his outline was preliminary and would need to be refined, and listed seven basic requirements for a hurricane fund. He said that without the first provision, none of the other six would be practical.

1) Allow companies to exclude hurricane coverage from their policy.

Right now in Florida companies are allowed to exclude all wind exposure, including hurricane coverage in only small areas of the state. This proposal would permit companies to exclude hurricanes anywhere in the state.

“If a company wants to write hurricane coverage, they can write hurricane coverage,” Looyenga said. “We at Auto Owners would write some hurricane coverage, after all, we are in the risk business and it is a premium that we would collect-we would take some hurricane exposure and I am sure that all companies would take some hurricane exposure–it is not like all hurricanes are going to be covered under the fund.

2) Companies must have the freedom to exclude hurricane coverage on both new and renewal business.

3) Hurricane coverage would be replaced by a hurricane fund policy.

Looyenga explained that the company writing the basic property policy would underwrite the hurricane policy on behalf of the hurricane fund. That company would also pay the commission to the agent and that company would service the entire claim with the company’s staff or contracted representatives, again on behalf of the hurricane fund.

The policy would be written on “hurricane fund paper.” According to Looyenga, this is essential. He said the hurricane exposure would no longer be part of the company writing the basic property coverage and would now be the hurricane fund’s risk. The company writing the basic policy would be given a ceding commission for expenses, the biggest of which is agent’s commission.

4) The hurricane policy would cover all of the damages to property that is currently covered in the standard homeowners policy, including additional living expenses. This hurricane fund policy must be available for all personal and commercial policies.

An open market

Looyenga said this proposal completely opens up the market. “We would no longer have to discontinue writing policies … it would be just like business anyplace in the U.S., like Iowa,” he explained. “We would compete with each other for additional business. Auto Owners would be willing to write all of the good business that agents give us.”

5) All assessments paid by insurance companies could be passed on to their policyholders. If the hurricane fund needed additional money should it become deficient in its surplus, any assessment would be filed with the insurance commissioner on a use-and-file basis and could not be rejected by the Insurance Department.

6) To encourage companies to write hurricane exposure, Looyenga suggests a credit on their assessment, if a company writes hurricane exposure on the coast they would receive a greater assessment than if they wrote hurricane coverage in the middle of the state.

Looyenga suggested setting up zones, the closer you are to the water the more credit you would receive on your assessment.

7) The hurricane fund should be free to implement any program or series of programs which would provide the cash necessary to fund the hurricane reserve.

“Obviously it is going to be built from premiums, but like the earthquake fund you can build your fund by doing other things, other than premiums,” Looyenga said. “The state can build its fund by issuing bonds, they have lots of people buying earthquake bonds in California. The hurricane fund would have the unlimited right to borrow funds, which would be repaid by premiums paid by the hurricane fund policyholders and assessments.”

Looyenga cautioned that it would be important to protect the hurricane fund from being tapped for other reasons. “In other words, if the state has a zero-deficit policy, no one can go to the fund and say, there is some money that has not been used, why don’t we just take some money out of this fund,” he said. “This hurricane fund is intended to pay for hurricane losses and as we get adequacy in the fund the cost of hurricane insurance will be favorably impacted.”

Looyenga suggested there are many ways to supplement the fund. He said that in Hawaii they supplement the fund because every mortgage charges one-tenth of one percent and puts that money in the fund.

Florida, for instance, could increase the hospitality tax. “It’s almost the same now as the room charge,” Looyenga said in jest, “just add on an additional one percent — then when I come to Florida on vacation I will supplement your fund.”

Looyenga said there are lots of ways you can supplement the fund besides premiums. He suggested that the more you can spread out the supplement to the fund to as many people as possible, the lower the premium for hurricane insurance.

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