Insurance Vital to Alabama Coast Long-Term Plan, Says Commission

December 23, 2010

Coastal Alabama should seize the BP Gulf oil disaster as an opportunity for “resiliency planning” that will not only help the region recover from the oil damage but also put it in a position to better recover from any future disasters, whether natural or manmade, according to a sweeping report from a special commission.

The recently released report from the Alabama Coastal Recovery Commission, entitled “A Roadmap to Resilience,” makes a case that risk management initiatives and private insurance markets are vital to this resiliency planning.

“The insurance industry forces a rubber-meets-the road discussion about resiliency planning because it establishes a dollar amount for perceived vulnerability. Despite the volatility of the debate over what’s fair in regards to coastal insurance affordability, the bottom line is that somebody is going to pay the bill for the degree of risk the industry is willing to take,” the report says.

The report contains numerous risk management and insurance recommendations including that the state strengthen its building code; find ways to attract new property insurers; encourage the sale of multi-year policies; require that insurers offering multi-peril policies show the separate premiums charged for wind and non-wind portions of policies; and that the state enact tax-free funds to help homeowners save for the cost of insurance deductibles and mitigation measures.

Its insurance and risk management recommendations can “help stabilize the cost of insurance and even lower insurance premiums,” according to the commission.

“This will help workers live closer to their jobs and save for their children’s education. It will help the coastal economy thrive. And it will help limit the number of people who are without property insurance or who are under-insured, reducing uninsured losses so that individuals and communities can recover more quickly from storms,” the report says.

Beyond Claims

The plan calls for improving the claims process for people and businesses affected by the BP oil disaster and making sure any monies collected from BP or the government are spent where they will do the most good.

But it also goes beyond addressing immediate claims and financial needs to recommending broad efforts to restore South Alabama’s beaches and the barrier islands; boost the state’s seafood and tourism industries; and improve education, public safety and public health so that the recovery is sustainable.

The commission, launched by Gov. Bob Riley and hundreds of community leaders, collected testimony and research for 90 days to come up with its blueprint for South Alabama’s future.

According to the commission, the BP oil spill is more than a temporary threat to Gulf coastlines; it is a catastrophe that may take decades to measure. “Its impacts transcend emergency response issues and have lasting implications for our coastal economy, ecology and social institutions,” the report says.

According to the commission, the solution is for South Alabama to build regional capacity for long-term resilience.

“We must position ourselves to respond not only to future oil spills but also to other forces beyond our control, including everything from hurricanes to sudden shifts in the economic environment. We must assure a future for our coast that strengthens its appeal to visitors and investors from around the world and protects its environmental assets for generations to come,” the commission states.

The far-reaching report calls for the creation of a Coastal Environmental Management Council to develop a comprehensive coastal resiliency plan. It wants this council to also work toward assuring that the water throughout coastal Alabama is fishable, swimmable and drinkable.

The report recommends the creation of a world-class marine and coastal institution on the level of the Scripps Institution of an Oceanography in California or Woods Hole Oceanographic Institution in Massachusetts focusing on the Gulf.

Insurance, Risk Management

The report emphasizes the roles of risk management, mitigation and insurance – and cooperation between the private and public sectors– in helping the region achieve sustainable recovery.

“Achieving an acceptable balance of risks and costs for insuring coastal property is only possible if the responsibility is shared among property owners, government and the insurance industry,” the report says.

The insurance industry must work with individuals and government to form a “three-pronged approach” so that homeowners strengthen their homes and states adopt tougher construction standards, according to the commission.

The report describes the insurance market on the coast since Hurricanes Ivan and Katrina as “unsustainable,” one where demand for affordable, comprehensive insurance has far exceeded the supply. It is a market consisting of small regional insurance companies and one with little competition. The biggest problem is the lack of availability of wind coverage, which is forcing homeowners to obtain coverage though the insurer of last resort, the Alabama Insurance Underwriting Association, or from high-priced surplus lines insurers. The number of homeowners with wind pool policies under the AIUA has grown since Ivan, from about 3,500 policies to 18,865 as of Oct. 31. Many homeowners are simply going without coverage, according to the report.

Alabama should refrain from subsidizing the rates charged by the AIUA pool, according to the commission, citing problems with the Florida insurance market and the federal flood insurance program where governments have subsidized rates.

“If the overriding policy goal is to foster a competitive private market and give consumers more choice, subsidizing policies with taxpayer dollars should not be considered a viable, long-term option,” the report says.

The report continues:

“In a purely market-driven environment, families and businesses pick up the total tab. To offset some of the burden on citizens and the regional economy, governments may reduce insurance providers’ risk through subsidies. Or there might be combinations of public, private and non-profit approaches that mitigate risks and achieve levels of insurance affordability, making living and doing business on the coast easier for more folks.

“Definitions of acceptable affordability cover a wide range, however. And almost no one faced with high insurance premiums and high deductibles is going to be excited about paying the price. But the price is going to be paid one way or another.”


So what should be done? How should costs and responsibilities be shared? The commission’s insurance subcommittee, headed by former Alabama Insurance Commissioner Walter Bell, who is now an executive with Swiss Re, offered numerous recommendations in the areas of insurance and risk management. These include:

Mitigation Recommendations

  1. Establish a trust fund to provide incentives and financing for homeowners to take mitigation measures.
  2. Commission a study of what hurricane models suggest that mandated mitigation discounts should be for homeowners in Alabama.
  3. Require consumers, Realtors and builders to identify to potential home buyers all the wind-mitigation features on a home.
  4. Evaluate whether to require admitted carriers to obtain proof of wind and flood coverage from consumers located in zones A and V.
  5. Develop a nonprofit entity to utilize FEMA’s Hazard Mitigation Grant Program (HMGP).
  6. Strengthen local inspection programs for mitigation measures by developing sources of funding to increase the operating budgets of local building-code departments.
  7. Encourage accurate mitigation inspections by requiring they be conducted by trained and licensed professionals.
  8. Eliminate sales tax on materials used to retrofit homes against the effects of storms.
  9. Educate consumers and other stakeholders about the potential insurance cost savings and return-on-investment that can come from fortifying and retrofitting their homes.

Building Standards Recommendations

  1. Develop a strong statewide building code, or at minimum a strong, uniform code for local jurisdictions in Alabama’s coastal counties to adopt.
  2. Develop and implement a uniform process for localities to review construction plans and to inspect homes and buildings.
  3. Work with stakeholders in the construction, sale, appraisal, and financing of homes and buildings to develop and implement stronger codes and a uniform review process.
  4. Strengthen inspections and enforcement at the local level by developing sources of funding to increase the operating budgets of local building code departments.
  5. Strengthen and develop programs to train and license local building-code officials to increase effectiveness of code enforcement throughout the coastal region.
  6. Require insurance carriers to recognize industry-established Building Code Effectiveness Grading Standards (BCEGS) ratings and provide related discounts.
  7. Develop and implement higher standards for freeboard levels for flooding, setbacks from water, and floodproof requirements.
  8. Adopt and implement more restrictive local land-use policies that recognize risks associated with structures in flood-prone areas.
  9. Encourage code uniformity by establishing that changes to local building standards will be adopted uniformly by all of the jurisdictions in Baldwin and Mobile counties.
  10. Publicize information about stronger building standards with consumers and other stakeholders.
  11. Develop entities and resources needed to gather data on the quality of construction of homes and buildings in the coastal region.
  12. Develop ongoing involvement and dialogue among stakeholders through a new Alabama Insurance Institute.

Transparency and Education Recommendations

  1. Increase transparency by making both insurers’ rate filings and their aggregate historical data public information.
  2. Require that insurers offering multi-peril policies show the separate premiums charged for wind and non-wind portions of policies on their declaration pages.
  3. Require insurance companies provide consumers with a uniform disclosure form, or check list, showing what is included and not included in a residential policy.
  4. Establish a new Alabama Insurance Institute by governor’s executive decree to develop research, encourage dialogue and coordinate public education campaigns.

Market and Alternative Products Recommendations

  1. Conduct a study on the concept of “recoupment,” which would allow insurers participating in the wind pool to recoup potential assessments.
  2. Conduct a study of premium tax revenues.
  3. Conduct a study on the possibility of utilizing a captive insurance company to provide homeowners with short-term relief from the cost of insurance.
  4. Encourage insurers to offer multi-year homeowners insurance policies to protect consumers against annual spikes in the cost of insurance.
  5. Invite insurance companies to Alabama for an annual symposium to attract new carriers to the market.

Other Regulatory and Legislative Recommendations

  1. Require licensing of contractors and subcontractors.
  2. Enact an insurance fraud bill to protect consumers from unscrupulous agents and insurers and from consumers who defraud the insurance system.
  3. Enact a reasonable statute of limitation for reporting property claims.
  4. Enact and promote at the state level tax-free funds for individuals to help homeowners save for the cost of insurance deductibles and mitigation measures.
  5. Encourage Alabama lawmakers in Washington, D.C., to reform the National Flood Insurance Program.
  6. Encourage Alabama lawmakers in Washington, D.C., and Montgomery to find a resolution to wind and flood claim settlements and increase transparency.
  7. Encourage Alabama lawmakers in Washington, D.C., to support and pursue a tax-deferred catastrophe reserve for insurance companies.

Ala. Coastal Commission Report

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