Could state windstorm plans survive a hurricane?

Most U.S. states which are at risk of landfalling hurricanes have state windstorm plans and pools which are designed to be insurers of last resort for people living in high-risk zones where getting any insurance cover is difficult. So as the ultimate backstop for some states how would they fair if a major hurricane hit?

Well this article from USA Today suggests that they’d be in trouble. After hurricane Katrina the state plans in the area had to impose nearly $6b in surcharges on insureds in the region. If another major hurricane occurs the surcharges will be forced on millions of people who aren’t even affected by the hurricane, so people outside of the landfall zone will pay for the damage to properties within it.

The state plans have small cash reserves and can’t afford a hurricane to hit their zone, which does make you wonder the point of them. Eight of the coastal state plans now cover $632b of property but have only $6b in cash reserves to pay any claims and $11b in reinsurance. The Florida state plan alone covers $433b and only has $15b in reserves and reinsurance, which means any hurricane loss over that amount would impose surcharges.

Of course, the reality is that surcharges get imposed no matter whether the hurricane wipes out the plans reserves or not as premiums always go up to cover the damages (another kind of surcharge).

The Texas plan is one to really worry about, it covers property worth $73b but only has $150m in reserves and no reinsurance at all.

These plans must be looking closely at the reinsurance market to provide further cover. North Carolina now has the Johnston Re Ltd. catastrophe bond to provide it with extra reinsurance cover, but at only an additional $305m it wouldn’t go far if a major hurricane hit. You would have thought that the rest of the state plans and funds would have taken up catastrophe bonds to augment their ability to pay claims without having to impose surcharges on consumers.

So the plans will survive hurricanes but only by passing responsibility for making good the claims to consumers. Ideologically that is wrong (after all, the plans are there to protect consumers) and the plans should be tapping the alternative risk market to hedge their risks and gain as much extra reinsurance cover as they can.