Walking the tightrope on South Carolina’s coastal insurance crisis
By Bill Settlemyer
President and CEO, Setcom Media
It wasn’t that long ago that howls of pain and protest began emanating from homeowners on the South Carolina coast, prompted by a large number of insurance policy cancellations and dramatic premium increases.
Disagreements over how to respond to this “insurance crisis” prompted the resignation of state director of insurance Ellen Kitzman. Gov. Mark Sanford, citing his desire for market-based solutions, appointed Scott Richardson as her successor.
Richardson’s background includes both extensive experience in the insurance business and political experience as a state senator, a position he occupied until resigning recently to move into his new role. Another qualification is that he lives on the coast, in Hilton Head, and has the benefit of sharing the “near-ocean experience” with coastal residents struggling with the cost and availability of windstorm coverage for homes and businesses.
Following the governor’s lead, Richardson is proposing various tax credits, tax incentives and sales tax reductions. These would (1) help homeowners who pay more than 5% of their income toward premiums, (2) provide homeowners with incentives to carry higher insurance deductibles and establish reserve accounts as a cushion against non-reimbursed losses, (3) encourage insurance carriers to provide full coverage along the coast, and (4) reduce the cost of building supplies used by homeowners to make their homes more wind-resistant.
In addition, Richardson proposes a small extension of the boundaries of the coastal areas covered by the state’s “wind pool” as a means of providing access to coverage for homeowners otherwise unable to obtain insurance.
An insider’s view
In one of my past careers I was government affairs counsel for a property insurance company. During that time I did my best to learn the ins and outs of insurance regulation and the economics of the business, which is regulated state-by-state rather than at the federal level.
From inside the industry, I watched as some states dealt with insurers using a sledge hammer, arbitrarily freezing rates and otherwise making demands that put pressure on insurance executives to make decisions against their better business judgment.
Other states put their bets on “open competition,” trying to establish an inviting regulatory climate that would attract as many carriers as possible, in hopes that competition would benefit the state’s consumers.
When things seem to be going wrong with insurance markets in a state, it’s certainly tempting for regulators and legislators to reach for the sledge hammer. There’s no question that coastal policy cancellations and dramatic rate increases are causing serious problems.
From my viewpoint, I can easily understand a carrier’s strategy of “thinning the herd” by reducing the total number of policies they write along the coast. Each property represents a potential hurricane loss, and hurricanes tend to hit many properties at the same time when they make landfall. It makes sense to put some limits on the number of policies issued.
I have more difficulty accepting the spectacular premium increases some residents have encountered here and in other coastal states. If your premium quadruples, does that mean Mother Nature has suddenly increased your risk of getting hit by a storm fourfold? Not likely. Does it mean that the carrier’s previous rates were based on loss assumptions that were off by the factor of four? Not likely either. Does it mean that insurers are trying to recover losses incurred in recent storms, or trying to drive away coastal customers? As an educated guess, I think that’s at least partially the case.
The most palatable explanation for spectacular rate increases is that the reinsurers, the giant companies that sell insurance to the carriers to cover losses they can’t handle alone, have pushed the rates they charge the carriers to unheard of levels, forcing the carriers to raise premiums to cover the cost of reinsurance.
Sorting out the elements of insurance rates and company losses and expenses is tricky, and tends to cause the same kind of public bewilderment that rising gas prices cause. Is it a conspiracy? Is it just the free market at work? The answers are out there, presumably, but it’s hard both for the public and for policymakers to find or understand them.
A good start
I believe Gov. Sanford made a wise move in appointing Richardson, and I think the initial steps they have proposed in response to the crisis are a good start.
That said, our state’s elected and appointed leaders need to stay on top of this issue, monitoring market conditions and gathering data on the plight of individual property owners along the coast. It is no small matter for people to lose access to coverage or be forced to pay premiums that may drive them out of their homes or make it impossible to buy or sell residences in some areas along the South Carolina coast.
A middle-ground regulatory approach is the right way to start, and that’s the path that the governor and insurance director are following. They need to stand squarely in the camp of beleaguered property owners without creating a hostile environment for insurance carriers. That’s the tightrope we’re on. Let’s hope Mr. Richardson’s political skills and insurance experience can carry him (and us) across the abyss.
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