Alabama’s coastal property insurance crisis could be resolved by the state and cities working together to form special types of insurance companies to offer coverage, the state revenue commissioner said.
Tim Russell, the former mayor of Foley, told a gathering of local and state officials that the insurance problem — soaring rates and policy cancellations since recent hurricanes — has worsened with the nation’s financial crisis.
An insurance executive for 35 years, Russell said he believes the state could invest up to $20 million into a captive company, which is a closely held firm that might be organized around a particular city or in a large residential neighborhood. It’s crucial that Alabama’s tax-producing coastal real estate industry be restarted, he said.
“When you suffer in Mobile and Baldwin counties, the entire state suffers,” Russell said.
Russell said the captive companies could be profit or nonprofit. He would recommend that they be nonprofit and financed in the beginning by the cities issuing tax free bonds. He said he would recommend that they be operated as new companies and not by existing ones.
A state senator said that Russell’s plan could be implemented thanks to a bill the Legislature passed in May that allows captive companies to sell residential insurance along the coast. State law had previously limited the insurance to commercial properties.
State Sen. Ben Brooks, R-Mobile, who sponsored the captive insurance bill that passed in May, said Russell’s plan would allow coastal cities like Orange Beach and Gulf Shores to join with the state and the county to form an insurance company and offer coverage in those coastal communities.
Russell said the cost and availability of insurance are hurting two of the area’s biggest industries — construction and real estate sales.
Russell said there are captives in other states, but he does not know of any similar to what he is suggesting.
“I haven’t found one set up to protect against coastal risks,” Russell said.
The next step, Russell said, will be for local governments to pass resolutions supporting the concept. The governments involved would then have to find the money to start the captive companies. He said the source of the state’s $20 million investment has not been determined.
Russell said the captive company would be run like a regular insurance firm. The board of directors would select a CEO and the CEO would hire a staff to run it. The company would collect premiums and put the money back in to pay claims. The current law would require that these companies have at least $1 million to get started, but Russell said he would recommend as much as $20 million.
Russell said captives, by adding competition, also could pressure private insurers to lower rates and increase coverage.
Baldwin County Commissioner Wayne Gruenloh said the concept might work.
“It could help stabilize our economic foundation,” Gruenloh said. “The risk is not great, and the reward is so much greater.”
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