Commission report offers solutions to home insurance dilemma, pleasing few

By Steve Myrick, The Martha Vineyard Times - December 6, 2007

When the remnants of Hurricane Noel blew over Martha's Vineyard last month with wind gusts topping 70 miles per hour, Wesley Brown was one of many local homeowners who's property was damaged by the lashing winds. A heavy old tree came crashing down, clipping a rain gutter and taking out a porch post.

In all the years he has insured his Oak Bluffs home, Mr. Brown doesn't remember filing a property claim, and he won't be filing a claim for this damage, either.

Like many Island property owners, his insurance premiums have skyrocketed in recent years. When his insurance company stopped writing policies of any kind on the Vineyard, his only viable option was the FAIR (Fair Access to Insurance Requirements) Plan, a state organized agency considered the insurer of last resort.

The FAIR Plan recently raised its estimate of his home's value, which nudged him into a category of insurance requiring a five percent deductible for wind damage. For Mr. Brown, that means he has to pay the first $33,000 of damage. The harm to his porch didn't merit even a moment's consideration.

"I don't know who came up with the name FAIR Plan, but it's anything but fair," said Mr. Brown. "It's really put a lot of people in a terrible bind."

The matter of $33,000 deductibles was one of many issues addressed in a report issued last Friday by the Special Commission on Insurance, appointed to recommend solutions to the perfect storm of complex, sometimes arcane market conditions that have caused significant premium pain for many Vineyard homeowners. (The report is available here.)

Of the 18-page report, eight pages are dissenting opinions signed by eight of the 16 commissioners, indicating the level of disagreement among the legislators, industry representatives, and public advocates appointed to the panel. Among those signing on to a strongly worded dissent are state representative Eric Turkington and senator Robert O'Leary, who represent Martha's Vineyard residents at the statehouse. The lawmakers did not disagree with the reports recommendations, but they feel it does not go nearly far enough.

"It is imperative," wrote the dissenters, " that we take immediate steps to protect consumers beyond those endorsed by the majority of the Commission.

"There is nothing in the report that will change the cost of protecting Island property. The state legislature and the governor will have to agree on new legislation before any of the report's recommendations make it to the bottom line of anyone's insurance bill.

Catastrophic changes

Among the most significant reforms recommended is creation of a state-run catastrophic event fund. Such a fund would build up a reserve of money that would mitigate insurance company losses should a catastrophe like a strong hurricane, a powerful earthquake, or even a calamitous act of terrorism strike Massachusetts. Insurance industry representatives on the commission argue that these catastrophes are more likely now than in the past. Many insurance companies purchase re-insurance, a kind of insurance for the insurers, to protect themselves in the event that many of their customers experience large losses at the same time. All agree the cost of re-insurance has soared, following large losses experienced after several destructive hurricanes in Florida, and after the September 11 attack on the World Trade Center in New York City.
If a catastrophic event fund reduces the risk for insurance companies, the commission majority reasons that many insurers who left the market would come back, introducing more competition and reducing the cost of premiums.

"I think that's a good step," said Ken Ward, vice-president of Martha's Vineyard Insurance. "If you could write a homeowners policy without wind, you could write it for significantly less. If you take that away, the Cape and Islands is a very safe and profitable place for companies to write insurance."

Mr. Brown says such a fund makes sense from his point of view as a consumer. "That sounds like a good idea," he said. "That would take some of the burden off the insurance companies so they can make their rates a little better. They ought to make all the insurance companies that do business in Massachusetts take a fair share of high risk insurance."

A conspicuous omission from the report, however, is any recommendation about how a catastrophe risk pool should be funded. Sen. O'Leary has filed a bill to create a catastrophic event fund that would be funded jointly by state taxpayers and insurance companies. The goal is to establish a $6 billion reserve, the estimated cost of recovery for a rare but very powerful hurricane.

Models for mayhem

Another recommendation of the special commission is appointment of an independent body to study the accuracy and reliability of the scientific models insurance companies use to predict the risk of catastrophic losses. Currently, those formulas are trade secrets, guarded zealously by the companies that create the models and sell their proprietary expertise to insurers.

The complex equations take into account weather patterns, building codes, property values, and a host of other factors. The changing climate and the rising value of coastal properties mean the models calculated dramatically higher risk in recent years, which has resulted in dramatically higher premiums for consumers.

During the commission hearings, consumers criticized this secretive process of predicting risk, and called for more transparency. While recommending an independent study of the models, the report leaves conspicuously absent any suggestion of how the models should be reviewed, who should do it, or what should happen if a review panel finds the models inaccurate.

Dissent divided

Minority factions of the commission issued two separate dissenting reports.

A report issued by three commission members representing the insurance industry strongly opposes the catastrophic event fund. They contend that such a fund would have unintended consequences, including an increase in insurance costs to all consumers, and the possibility of insurance insolvencies. The dissenters also dispute majority's contention that a catastrophic event fund would reduce the risk to insurers, drawing them back into the Massachusetts marketplace. They say it's more likely that more companies will leave, creating an even more dysfunctional market.

"We do not believe that a catastrophe fund will lower premiums for coastal homeowners," wrote the dissenters. "Premiums have not gone down in Florida, the only state with such a fund, and we see no reason that Massachusetts will be any different. It would be unfair to give people false hope that their premiums will go down."

A minority of five commissioners, including Rep. Turkington and Sen. O'Leary, issued a separate dissent. While supporting a catastrophe fund and many other recommendations, the dissenters charge the commission's proposals don't go nearly far enough to help consumers on the Cape and Islands. They contend that the two risk-forecasting models adopted by the FAIR Plan vary widely in their predictions, and that the models have not been calibrated to reflect historic conditions in Massachusetts.

The group advocates a new hurricane risk model, created and maintained with state funds, with all formulas open to public scrutiny.

"The FAIR Plan must not be allowed to use a model in support of its rate filing unless that model's underlying data, formulas, and calculations are fully disclosed," says the dissenting report.

Middle Ground

While the report offers long-term solutions to the property insurance dilemma, many Island homeowners are faced with a more immediate concern.

On December 15, the FAIR Plan deductible for wind and hail damage, already increased for many, will be increased for all Island homeowners. The deductible will rise from two to five percent of the home's value.

The median price of a home sold on the Vineyard last year was $695,000. Using that figure as an example, the FAIR Plan will only cover damage in excess of $34,750, the five percent deductible.

Also pending is a FAIR Plan request for a 25-percent increase in premiums, in addition to the 25-percent increase approved and implemented last year. The state attorney general is challenging last year's increase before the state's highest court, requesting instead, a 29-percent decrease in premiums.

The insurance commissioner is expected to rule on this year's request for a rate increase early in 2008.

"The commission, they study things, but there's not a lot in here that triggers a reduction to the premium, or the added risk that the citizens are asked to take on," said Paula Aschettino, a Cape Cod-based grass-roots organizer who testified before the insurance commission. "We cannot stop, and won't stop, to look for the proper way to make our rates reasonable. At the moment they are unreasonable and excessive."

"Is there an answer? Yeah, of course," said Mr. Ward. "The answer is probably some place in the middle, which isn't really going to satisfy the folks that feel they're paying too much, and it isn't going to satisfy the insurance people."