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Critical Issue Report

State-run FAIR plans experience explosive growth

I.I.I. white paper examines trends

By Phil Zinkewicz

In the 1960s, insurance regulators around the country began creating residual market mechanisms to provide access to property insurance for certain volatile exposures that were shunned by the voluntary market. These were usually urban risks, often located in ghetto areas where fires and other types of damage to property were frequent.

The idea was that these state-run FAIR Plans (an acronym for Fair Access to Insurance Requirements) would take on these high-risk exposures, usually at a higher rate than in the voluntary market, giving insureds the opportunity to build up and repair their properties so that they would then become attractive to insurers in the regular market. Under this scenario, the FAIR Plans would slowly become depopulated.

Of course, this also had to do with market conditions. In soft markets, FAIR Plans tended to lose business to the regular market, while in hard market cycles the opposite was true.

Now comes an industry white paper, which shows that FAIR Plans have undergone serious metamorphoses in various states.

Over the last four decades, these state-run property insurers have experienced explosive growth both in terms of the number of policies issued and the exposure values covered, according to a recently released white paper published by the Insurance Information Institute (I.I.I.). The paper is titled “Residual Market Property Plans: From Markets of Last Resort to Markets of First Choice.” In fact, total exposure to loss in the plans surged from $54.7 billion in 1990 to $656.7 billion in 2006, according to the paper.

FAIR Plans have usually been referred to as the last resort for buyers of homeowners insurance and, because of storms and hurricanes in recent years, beach and windstorm plans have also emerged. The white paper states that there are FAIR Plans in 32 states and the District of Columbia while Texas, Mississippi and South Carolina have sizeable beach and windstorm plans.

“FAIR, beach and windstorm plans are run by state insurance regulators in conjunction with private insurers and basically operate as pools, combining public and private resources to finance economic recovery from accidental losses,” says the paper. “The pool acts as a single insuring entity, and premiums, losses and expenses are shared among pool members (i.e., insurers) in agreed-upon amounts.

“In contrast to the private market, state-run insurers concentrate risks on the state itself—its property owners, business owners, even its drivers, and, in some cases, the state’s taxpayers. While private insurance transfers and spreads risk ensur-ing that sufficient funds will be available in the event of a loss, state-run plans act as a conduit to pass along their cost to other insurance buyers, even those who have never filed a claim, live nowhere near the coast and in some cases have no property exposure at all,” write I.I.I. President Dr. Robert P. Hartwig, CPCU, and Claire Wilkinson, the I.I.I.’s vice president of Global Issues, co-authors of the white paper.

Between 1997 and 2006, for example, the number of residential FAIR Plan policies nationwide grew to 2.4 million from about 1 million and FAIR Plan commercial policies expanded even more dramatically in percentage terms, to a little over 172,000 from almost 58,000. Florida and Massachusetts were, as of 2006, the states with the most FAIR Plan policyholders, according to the Property Insurance Plans Service Office (PIPSO).

“Today, many residual property market plans have shifted away from their original mission as insurers of urban properties into major providers of insurance in high-risk coastal areas. It is important to recognize that many operate at deficits, or from slim positions of surplus, even in years with little or no catastrophe losses,” explain Hartwig and Wilkinson.

The I.I.I. also found that the rela-tively calm hurricane seasons of 2006 and 2007, along with state legislative efforts to reduce the exposure of their state-run property insurers, contributed to either a flattening or a slight decrease in the number of home owners and businesses purchasing property insurance policies through a state-run insurer since January 2007. For example, so far in 2008 (as of press time), the Florida Office of Insurance Regulation (OIR) has approved plans to remove 500,000 policies from Florida’s state-run plan.

Nevertheless, Florida’s state-run Citizens Property Insurance Corporation has become the largest homeowners insurer in the Sunshine State, the paper’s authors say. In fact, Florida Citizens accounts for the vast majority (68%) of the total FAIR Plans’ exposure to loss, and 60% of the total policy count nationwide. Of the 2.6 million total policies insured by U.S. FAIR Plans in 2006, just over 1.5 million were in Florida Citizens.

Massachusetts had the next largest number of policies, with 217,056, or 8.5% of total policies, according to the I.I.I. paper. Meanwhile, the Texas FAIR Plan, which insures residential properties but not commercial ones, had 109,461 policyholders as of 2006 while the Lone Star State’s beach and windstorm plan (the Texas Windstorm Insurance Association) had 158,233 policies in force across 14 coastal counties and part of Harris County two years ago, making it one of the largest beach and windstorm plans in the United States.

The I.I.I.’s white paper gives an overview of the plans, chronicles their legislative history and assesses the claims-paying capacity of the following state-run insurers:

• Florida Citizens Property Insurance Corporation
• Louisiana Citizens Property Insurance Corporation
• Mississippi’s FAIR Plans
• Texas Windstorm Insurance Association
• Massachusetts Property Insurance Underwriting Association
• North Carolina Joint Under-writers Association and North Carolina Insurance Underwriting Association
• South Carolina Wind and Hail Underwriting Association

The question is, however, why some state residual markets have become a market of first choice when they used to be the market of last resort. The answer apparently lies in regulatory fiat. In Florida, for example, premium rates are frozen, while the regular market has raised its rates because of proximity to coastal areas. Naturally, some insureds will opt for the lower rates in the residual market. *

The author
Phil Zinkewicz is an insurance journa-list with some 30 years’ experience covering the international insurance and reinsurance arenas. He was the insurance editor of the Journal of Commerce for a number of years, handling all their domestic and international supplements. In addition, he regularly writes for a number of London publications.


“Today, many residual property market plans have shifted away from their original mission as insurers of urban properties into major providers of insurance in high-risk coastal areas.”

—Insurance Information Institute white paper:
“Residual Market Property Plans: From Markets of
Last Resort to Markets of First Choice”















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