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					 Economic Impact of Insurance Costs
on Mississippi Gulf Coast Development

                    Prepared for

            Gulf Coast Business Council

                         by

     The John C. Stennis Institute of Government
           at Mississippi State University

          Dr. W. Martin Wiseman, Director
            Dr. Edwin H. Duett, Author


                   January 2009
                                        About the Author


                        Dr. Edwin H. Duett, Peter K. Lutken Chair of Insurance
                          Professor of Finance at Mississippi State University

          Dr. Duett is the holder of the Peter K. Lutken Chair of Insurance and Professor of Finance at
Mississippi State University. He received his Ph.D. from the University of Georgia in 1987, MBA from
Mississippi State University in 1980 and his B.S in business from MSU in 1977.
          Dr. Duett has been a visiting professor at Universities in Puerto Rico and Mexico. He serves on
editorial boards and as a reviewer for multiple journals and is an officer in various professional
organizations. He is a member of the American Risk and Insurance Association, National Association of
Insurance and Financial Advisors, the Financial Planning Association and other organizations.
          He has published over thirty journal articles and three books, with articles in journals including
Global Finance Journal, Journal of Reinsurance, Journal of Insurance Issues, Quarterly Journal of Business
and Economics and others. His research interests focus on the integration of capital markets, international
risk management, insurance linked securities and others. He has presented research findings and
professional development seminars in over thirty states and eight countries.
                           Table of Contents


Executive Summary


I. History and Background of Mississippi
                                                         1
  Windstorm Underwriting Association

      A.   Recent Reform                                 3

      B. New Zones                                       4

      C. Mitigation Programs – HB 753                    5

II. Fair Access to Insurance Requirements (FAIR) Plans   9

      A. Texas FAIR Plan                                 11

      B. Alabama FAIR Plan                               12

      C. South Carolina FAIR Plan                        12

      D. Louisiana FAIR Plan                             13

      E. Florida FAIR Plan                               14

III. Cost of Home Ownership for MS Coastal Areas         17

IV. Mississippi Wind Pool Information                    23

V. Homeowner Premiums for North and Coastal MS           31

VI. Multiplier Effect                                    35

VII. Summary Information                                 37

VIII. The Mississippi Gulf Coast                         39
This page is blank.
Executive Summary


Overview

Population and employment growth on the Mississippi Gulf Coast came to a halt in 2005
when Hurricane Katrina, the worst natural disaster in United States history, devastated
the area. Initial recovery has been impressive, but high insurance rates have slowed
down the recovery effort and now threaten further recovery. This study examined the
history of insurance relative to the area and the impact of the cost of insurance on the
area’s recovery and revitalization.

Background

In 1987, the Mississippi Legislature established the Mississippi Windstorm Underwriting
Association (MWUA), often referred to as the Mississippi Windpool. The MWUA
legislation of 1987 provided a method whereby an adequate market for windstorm and
hail insurance is provided in the coastal area of Mississippi. The windpool was designed
to be an insurer of last resort and provide insurance coverage when the private market
would not. Each year since Katrina, new and helpful legislation has taken place to bring
some relief to the homeowners.

In 2005, approximately 16,000 policies were written in the wind pool. Following the
devastation of Hurricane Katrina in August of 2005, the wind pool lost all of its
accumulated reserves and assessed member insurers $295 million. This resulted in a
skyrocket of insurance premiums statewide to cover the cost of these assessments, and
drove private insurers out of the coastal market. Today, as businesses and homeowners
have no other insurer to turn to, the number of policies written in the wind pool has
increased to over 42,000. The total insured value in the wind pool more than tripled by
2007 from $1.8 billion to almost $6 billion.

Findings

This study found that higher insurance costs negatively affect sales of existing homes,
new home construction and sales, discretionary spending and rebuilding efforts in the
area. In particular,

   •   Insurance costs that are higher in the six coastal counties than North
       Mississippi reduce the value of the home a typical family can afford.
•   By 2006, the same $100,000 of coverage cost $1,290, and by June of 2008 the
    same $100,000 of coverage cost $1,189.

•   If 90% of the $20 million grant to the Mississippi Windpool is passed through
    as a rate reduction to the policyholders, this would create a multiplier effect on
    spending. The final impact would be based on the amount spent versus the
    amount saved and other leakages out of the spending cycle. Nevertheless, it is
    reasonable to expect that a $20 million investment to the Mississippi wind
    pool would generate at least $26.9 million in additional tax revenues to the
    state.

•   The impact of a $20 million investment to the wind pool would generate
    715 jobs in the local economy and an increase of $72 million in consumer
    spending.
       Economic Impact of Insurance Costs
      on Mississippi Gulf Coast Development


I.      History and Background of the
        Mississippi Windstorm Underwriting Association


        During the 21st century, insurance on coastal property has become a topic of
increased importance and discussion. Increased hurricane activity has greatly escalated
both losses and premiums for both homeowners and business owners in coastal areas.
The problem is exacerbated by the increased amount of development along coastlines.
The 2004 and 2005 hurricane seasons proved to be extremely costly with Hurricane
Katrina causing record amounts of damage in Mississippi. Hurricane activity for coastal
areas in the gulf has recently increased, but by no means is this a new threat.
        The Mississippi Gulf Coast has been affected by hurricane systems every 3.51
years, and taken a direct hit every 15.22 years. In 1969, Hurricane Camille, a category 5
storm, killed 137 and injured thousands more. The Gulf Coast was fairly untouched for
the next few years until 1985 when Hurricane Elena came through with an 8 foot storm
surge. Following these two unforgettable storms, the Mississippi Legislature saw the
need to address adequate insurance protection for citizens in the lower six coastal
counties. Thus, in 1987 House Bill 274 established the Mississippi Windstorm
Underwriting Association (MWUA), often referred to as the Mississippi Windpool.
        The MWUA legislation of 1987 provided a method whereby an adequate market
for windstorm and hail insurance is provided in the coastal area of Mississippi. The
windpool was designed to be an insurer of last resort and provide insurance coverage
when the private market would not.
     Although the Mississippi Windstorm Underwriting Association was modified in 2007
with the introduction of the Mississippi Economic Growth and Redevelopment Act, the
basic purposes and needs remain unchanged:




Economic Impact of Insurance Costs on MS Gulf Coast Development                       -1-
   •   To provide an adequate market for windstorm and hail coverage which is
       necessary to the economic welfare of the coastal area and assure its orderly
       growth and development;
   •   To provide adequate insurance for property in the coastal area which is necessary
       to enable homeowners and commercial owners to obtain financing for the
       purchase and improvement of their property;
   •   To provide an equitable method whereby every licensed insurer writing
       windstorm and hail coverage in Mississippi is required to meet its public
       responsibility; and
   •   To provide a mandatory plan to assure an adequate market for windstorm and hail
       coverage in the coastal area of Mississippi and to fulfill the purposes provided by
       the Mississippi Legislature.
   The wind pool is operated and managed by the Mississippi State Rating Bureau;
administered by a Board of Directors; and all rules and regulations are subject to the
review of the Commissioner of Insurance of Mississippi. The Board of Directors consists
of eleven members, five representatives of licensed insurance companies and three
representatives of insurance agencies along with two coastal business representatives and
the State Treasurer. Counties served by the wind pool are Jackson, Harrison, Hancock,
George, Pearl River and Stone.
       The wind pool provides coverage up to $1 million for one to four family
dwellings and $250,000 for contents for high-risk applicants who have difficulty
obtaining coverage in the voluntary market. Prior to the 2007 Act established by House
Bill 1500, all insurance companies that wrote property insurance in Mississippi were
called member companies within the windpool. Now any companies that are directly
admitted to write insurance in Mississippi and are engaged in writing property insurance
are called assessable insurers. The windpool is funded through customer premiums and
assessments from the assessable insurers, according to their percentage of participation in
Mississippi.
   The Southern Governors’ Association Property Insurance Brief for Mississippi
explains that in 2005, approximately 16,000 policies were written in the wind pool.



Economic Impact of Insurance Costs on MS Gulf Coast Development                    -2-
Following the devastation of Hurricane Katrina in August of 2005, the wind pool lost all
of its accumulated reserves and assessed member insurers $295 million in 2005. This
resulted in a skyrocket of insurance premiums statewide to cover the cost of these
assessments, and drove private insurers out of the coastal market. Today, as businesses
and homeowners have no other insurer to turn to, the number of policies written in the
wind pool has increased to over 36,000. The total insured value in the wind pool more
than tripled by 2007 from $1.8 billion to almost $6 billion.


A. Recent Reform


       In 2006, Mississippi Governor Haley Barbour secured $50 million from federal
funds to help reduce the rate increases. With this funding, homeowners endured a 90
percent increase rather than the requested 397 percent rate increase. However, the federal
funding was little assistance for the small business owners who suffered a 268 percent
commercial rate increase. These increases for wind coverage provided by the MWUA
were necessary to assure the financial stability of this organization after the devastating
losses suffered from Katrina combined with increases in both the amount and price of
reinsurance bought by the windpool.
       Another measure taken in an attempt to attract insurers back into the market in
2006 was the adoption of building codes. Under House Bill 1406, five coastal counties,
Jackson, Harrison, Hancock, Stone and Pearl River, are required to enforce, on an
emergency basis, all of the wind and flood mitigation requirements of the 2003
International Building Code and the 2003 International Residential Code. By complying
with the building codes, some insurers may offer homeowners up to a 35 percent discount
for homeowners insurance.
   In March 2007, Governor Barbour signed into law House Bill 1500, which
established the Mississippi Economic Growth and Redevelopment Act. This bill
provided reform to the wind pool, including the creation of the MWUA Reinsurance
Assistance Fund. Among the modifications of this Bill, the following are included:




Economic Impact of Insurance Costs on MS Gulf Coast Development                      -3-
   •   MWUA can access the Reinsurance Assistance Fund to cover costs as necessary;
   •   The fund is capable of accumulating reserves up to $50 million with any excess
       amount deposited into the state’s general treasury;
   •   HB 1500 authorizes the wind pool to levy regular assessments against the wind
       pool association’s assessable insurers if a storm produces losses in excess of funds
       immediately available to the association; and
   •   As reimbursement to assessable insurers who paid the regular assessments, the
       insurance commissioner can implement a surcharge on property and casualty
       premiums, free of premium taxes and commissions within 120 days of the regular
       assessment.


   The bill provided for $80 million over the following four years to be transferred into
the MWUA Reinsurance Assistance fund. These funds came from the insurance
premium tax revenue collected by the State Tax Commission. Barbour also secured $30
million additional federal funding for commercial premium reduction. With the
additional funding, the wind pool reduced the fall 2006 commercial rate increase of 268
percent to 142 percent.


B. New Zones


       Rates from MWUA that became effective in 2008 introduced new zones for
insurance premiums in the six Mississippi coastal counties. Prior to 2008, the rates were
different for areas on the mainland south of I-10 and north of I-10. The new rate plan
took these two zones and created four.


                                Zones for MWUA Rates


       Zone A                 Beach to RR track
       Zone B                 South of I-10 to RR track
       Zone C                 North of I-10 to County Line
       Zone D                 Pearl River, Stone and George counties

Economic Impact of Insurance Costs on MS Gulf Coast Development                   -4-
       The rates differentiate for different types of construction and diminish as one
moves geographically away from the beachfront. As mentioned, the rates that became
effective on June 1, 2008 also allow the homeowner to purchase insurance with different
deductible percentage amounts for a Named Storm Deductible.


C. Mitigation Programs – HB 753


       In April of 2007, House Bill 753 created a mitigation program that would offer
grants to encourage single-family, site-built, owner-occupied, residential property owners
or commercial property owners to retrofit their properties to make them less vulnerable to
hurricane damage. The mitigation program develops and implements, upon availability
of funding, a comprehensive and coordinated approach for hurricane damage mitigation
that includes the following:


   •   Cost-benefit study on wind hazard mitigation construction measures;
   •   Wind certification and hurricane mitigation inspections;
   •   Financial grants to retrofit properties;
   •   Education and consumer awareness;
   •   Advisory council; and
   •   Rules and regulations.


       HB 753 requires that the 26 members of the Building Codes Council represent a
variety of professional organizations and must be state residents. The associations
represented include: American Institute of Architects of MS; Home Builders Association
of MS; Associated General Contractors of MS; American Council of Engineering
Companies of MS; Building Officials Association of MS; MS Municipal League; MS
Manufactured Housing Association; MS Fire Chiefs Association; MS Association of
Supervisors; the MS State Fire Marshal; State Board of Professional Geologists; and the
MS Gulf Coast Building and Construction Trade Council. The Governor appoints a
representative of the property/casualty insurance industry; a disabled person; a



Economic Impact of Insurance Costs on MS Gulf Coast Development                    -5-
representative of the MS Minority Contractors Association; and a person with no interest
in the construction industry. In addition, the American Subcontractors Association
appoints a master mechanic, master plumber, and master electrician.
         Also in 2007, the wind pool approved two measures to help decrease premium
charges along the Gulf Coast. One measure gives new deductible options of 5, 10, 15 or
20 percent to homeowners. Another measure gives premium credits for using Fortified
construction techniques designed to lessen damages from hurricanes. Fortified homes are
built above and beyond what the local building codes require.
       Insurance rates have to be partially based on frequency and severity of expected
losses. In coastal areas, there is no way to prevent or decrease the frequency of major
storm or wind activity. To reduce the severity of losses from these perils, better
construction methods should be used. The Institute for Business and Home Safety
(IBHS) certifies buildings as being “Fortified” if it is equipped with special features.
Fortified buildings must have three areas of protection. The first area of protection is the
building envelope protection. All entry doors, windows, skylights, patio doors, and
garage doors must be installed to meet impact resistance and pressure standards or have a
protection system (storm shutter or screen) that meets the impact resistant standards from
wind-borne debris. The second Fortified building requirement is that buildings must
meet load path construction requirements. The load path from the roof to the foundation
of the home includes roof-to-wall straps, reinforced concrete block walls, wall anchors
and connections for exterior structures such as carports and porches that attach to the
main structure of a home. The third Fortified building guideline includes roof
construction measures. The roof framing, sheathing, and covering are constructed to
resist wind pressures by bracing gable ends, using thicker roof decking and more nails.
Sealing all roof deck joints helps prevent moisture penetration if the shingles do fail
(Disaster Safety).
         According to the Fortified Homes Protect Against Natural Disasters article, the
cost of a fortified house is generally 5-8 percent above conventional construction.
Although a homeowner cannot retrofit an existing house to achieve Fortified standards,
homes can be strengthened to lessen damage by future wind storms.



Economic Impact of Insurance Costs on MS Gulf Coast Development                       -6-
        According to a 2008 press release from the Mississippi Department of Insurance,
homeowner’s insurance on the Mississippi Gulf Coast for a masonry dwelling cost an
average of $679 per $100,000 of coverage prior to Hurricane Katrina. By 2006, the same
$100,000 of coverage cost $1,290. In June of 2008, similar coverage dropped to $1,189.
With Fortified home credits, homeowner rates can drop to $776, which is just $97 more
than pre-Katrina levels (Mississippi Insurance Department).
        In 2008, The Federal Alliance for Safe Homes, Inc. (FLASH) CEO and
President, Leslie Chapman-Henderson testified before the subcommittee on technology
and innovation at the U.S. House of Representatives. In this testimony, Chapman-
Henderson explained that by building “code-plus” residential homes, the average annual
expected insured losses from hurricanes could drop up to 78% per year. The mission of
FLASH is to “strengthen homes and safeguard families” from disasters of all kinds.
FLASH seeks to put into place a system of state-of the art, consistently enforced, model
building codes before windstorms strike. According to the testimony, using new
techniques and mitigation measures will help break the “build-destroy-rebuild” cycle that
is currently being used (Congressional Testimony, Chapman-Henderson 3-4).
       Since Hurricane Camille, Mississippi has taken on the challenge of providing
windstorm insurance to homeowners on the Mississippi Gulf Coast. Each year since
Katrina, new and helpful legislation has been introduced to bring some relief to the
homeowners. This study examines the effect of insurance on the rebuilding of our
Mississippi Gulf Coast.




Economic Impact of Insurance Costs on MS Gulf Coast Development                    -7-
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Economic Impact of Insurance Costs on MS Gulf Coast Development   -8-
II. Fair Access to Insurance Requirements (FAIR) Plans


       During this century, the increased level of storm activity has brought issues
related to coastal insurance back to the forefront. With predictions of high levels of
hurricane activity prevalent, these issues will not decrease in importance in the next few
years. The storms and disasters in recent years have resulted in countless homes and
businesses being lost to these events, and thousands of people have been displaced.
When residents and business owners return to these devastated areas and rebuild, they are
faced with having been categorized as “high risk” applicants when they look to purchase
insurance. The frequency and severity of hurricanes in the coastal regions of gulf coast
states has caused many private insurance companies to reduce or stop writing property
insurance in those areas. In these coastal regions the private insurers who will write
coverage typically exclude wind and hailstorm coverage.
       Private insurance companies are for-profit and cannot be forced to write insurance
coverage at a loss. For example, if the insurance premium on a $200,000 house in the
coastal region is $1,000 a year, and if the region experiences a catastrophic hurricane
every 15 years resulting in a total loss on this house, the insurance company will collect
$15,000 for every $200,000 they have to pay out. This for-profit principle requires
private companies deny applicants they statistically consider to be too susceptible to
catastrophic loss. Some are able to obtain coverage from Excess and Surplus Lines
carriers, but the premium is often significantly higher, and E & S carriers can also deny
coverage. Applicants that are denied private insurance are then forced into what is
termed a residual market.
       In the 1960s, the federal government established Fair Access to Insurance
Requirements (FAIR) plans to make property insurance more available to people who
live in these high-risk areas. Thirty-two states have set up “insurers of last resort” for
high-risk applicants, offering only basic coverage for a higher premium than the applicant
would have paid in the private market. FAIR plans are regulated by each state’s
insurance regulator, and policies are written through insurance agents who are licensed in
that state. All FAIR plans cover losses from fire, vandalism, riot, and windstorms.



Economic Impact of Insurance Costs on MS Gulf Coast Development                       -9-
Mississippi, Texas, and South Carolina have specific plans called windstorm or
“windpool” plans in addition to their FAIR plans, which typically cover only damage
from wind or hailstorms. Alabama has a specific plan called the “Beach Pool”, and
Louisiana has a “Coastal Plan”. These plans have specific eligibility requirements, which
often include having periodic proof of denial from private carriers.
       All types of FAIR plans set up a pool to help finance the losses that occur in the
coverage area. Private property insurance companies that write insurance in a state with
a FAIR plan become a member (or assessable insurer) of the pool. Insurance companies,
including the state-run FAIR programs, take a percentage of premiums collected and hold
these as reserves to pay claims. When there is a catastrophic event in a FAIR plan
covered area, reserves of the pool are usually depleted to pay the claims, and then
member companies are assessed for the remainder of claims owed. Assessments are
typically made based on the private company’s market share within the state. Insurance
companies are often able to recoup the money they have to pay out in losses and
assessments by charging a higher rate or a surcharge to their private policyholders. In a
year when the FAIR Plan policy holders have significant losses, insurance rates may go
up all over the state, not just for those who live in the high-risk areas. Rate increases for
the FAIR plan covered area will often last longer than those for the private insurance
companies as the pool has to rebuild its reserve fund.
       FAIR plan insurers typically purchase reinsurance every year. Reinsurance is
insurance for insurance companies and allows the FAIR plan to transfer risk to the
reinsurer. This reduces the burden on the pool if the policyholders have major losses.
With greater amounts of reinsurance, FAIR plans are able to take on more risk than they
would otherwise. Reinsurance also gives room for the pool to need fewer reserves to pay
claims. Money for reinsurance costs comes out of premium payments and other revenues
for the FAIR plan, therefore the more reinsurance desired, the greater the amount of
dollars needed to purchase this reinsurance and transfer risk from the pool.
       In high-risk areas, it is not uncommon for residents to have three policies on their
home: a private homeowner’s policy which excludes flood, wind, and hailstorm damage,
a federal flood policy, and a FAIR plan policy. Many FAIR plans require the applicant



Economic Impact of Insurance Costs on MS Gulf Coast Development                       - 10 -
have a flood policy before wind and hail coverage will be written. The high cost of these
three policies has created a serious burden on people who choose to live in these areas.
The current rate of catastrophic events has also led to higher rates in non high-risk areas
allowing private companies to recoup their losses.


A. Texas FAIR Plan


        The Texas Windstorm Insurance Association (TWIA), established in 1971, covers
properties in the 14 coastal counties and parts of Harris County east of Highway 146.
The Association was formed in response to Hurricane Celia which struck the Texas coast
in 1970, and caused many private insurers to stop writing coverage on the coast. TWIA
provides wind and hail coverage when they are excluded from coastal homeowners’
policies. Coverage is available for commercial and residential property, as well as signs,
fences, swimming pools, and flags. The standard deductible is 1% with minimums, and
higher deductible options are available. When a hurricane enters the Gulf of Mexico,
TWIA implements “binding exception rules” that state no new or increased coverage can
be applied. These rules are in effect until the hurricane leaves the designated catastrophe
area.
        Texas also has the Texas FAIR Plan Association which provides insurance to
residential property owners who cannot obtain coverage in the private market.
Applicants must have been denied coverage by at least two private insurers, and cannot
have received an offer for coverage. Applicants must also reapply for coverage in the
private market every two years. The Texas FAIR plan can refuse an applicant if the
dwelling does not meet the Association’s underwriting standards. Available coverage
limits are as follows: dwelling, $1,000,000; other structures, 10% of dwelling amount;
and personal property, 50-70% of dwelling amount. The policy also covers liability and
medical payments, and loss of use.




Economic Impact of Insurance Costs on MS Gulf Coast Development                     - 11 -
B. Alabama FAIR Plan


       The Alabama Insurance Underwriting Association (AIUA), commonly called the
Beach Pool, was formed in 1971, specifically targeted to residents of Baldwin and
Mobile counties who are unable to obtain essential insurance in the private market.
There are two types of policies available from the AIUA, one being fire and extended
coverage of basic perils, the other being a wind and hail only policy, which is written in a
package policy by a private insurer who offers the other basic coverage. Vacant property,
farm property, and motor vehicles are ineligible for coverage. In the event of a hurricane,
the hurricane deductible applies; the usual deductible for all other perils is $500. In
certain zones designated by the Beach Pool, a flood policy is required to be in force
before a policy can be written through AIUA.
       The AIUA offers higher deductible options to reduce the annual premiums, and
will soon begin to participate in the Fortified home program, which gives credits to
existing property owners who build or retrofit to the accepted standards. Participation in
the AIUA is determined by the private company’s market share written in the state, and is
translated into a market share for the two coastal counties. Companies that voluntarily
write their share of property insurance on the coast typically have a smaller percentage or
even no participation in the AIUA.


C. South Carolina FAIR Plan


       The FAIR plan in South Carolina is called the South Carolina Wind and Hail
Underwriting Association (SCWHUA), and covers the coastal areas in the state. Wind
and hail are the only perils covered by the plan. Coverage is divided into two zones.
Many types of property are ineligible for coverage, including farm property, motor
vehicles, structures located in whole or in part on water at any time, including property
subject to tidal wave wash. Structures can be written on actual cash value or replacement
cost coverage. For a dwelling to have replacement cost coverage, the home must be
owner occupied.



Economic Impact of Insurance Costs on MS Gulf Coast Development                      - 12 -
       Recent updates to the SCWHUA include requiring applicants to have flood
insurance before they can be eligible for replacement cost coverage from the Association.
Flood insurance must be purchased even if the dwelling is not in a special flood hazard
area. South Carolina is attempting to implement a Single Adjuster Program to combat the
problem of having different agents handling the three types of insurance necessary.
South Carolina is also participating in the Fortified home credit program, where premium
credits are given on insurance to homes that meet the Fortified standards.


D. Louisiana FAIR Plan


       In 2003, Louisiana Citizens Property Insurance Corporation (Louisiana Citizens)
was created to cover the state’s FAIR Plan. This state-run entity handles the market of
last resort for commercial and residential property insurance. All private insurers in
Louisiana are members of the FAIR plan, and regular assessments on these private
companies are made based on their market share of written premium within the state.
There is no state government financial support for Louisiana Citizens; in the event there
is a deficit greater than the premiums and assessments taken in, the board can call for
emergency assessments for as many years as necessary. Legislation requires that
Louisiana Citizen’s rates are 10% higher than the rates in the voluntary insurance market.
       There are two separate coverage plans in Louisiana. The first is the Louisiana
Citizens FAIR Plan, which offers coverage across the state north of the Intercoastal
Waterway. The second plan is the Louisiana Citizens Coastal Plan, which provides
coverage south of the Intercoastal Waterway in the most high-risk hurricane area. The
standard hurricane deductible is $500, and there are optional 2% and 5% deductibles
which can result in decreased premium cost.
       The 2007 reinsurance model for Louisiana Citizens is as follows: in the event of a
catastrophe, LA Citizens would pay the first 100 million dollars in losses, and
reinsurance would pay $0.90 for each dollar over the next 400 million in losses.
Assessments on private insurance companies account for the remainder of loss coverage,
which are passed on to their policyholders. Policyholders can then claim the increased



Economic Impact of Insurance Costs on MS Gulf Coast Development                    - 13 -
amount they are charged as a credit on their Louisiana state income taxes. If emergency
assessments are needed, LA Citizens can issue revenue assessment bonds. After the 2005
hurricanes, LA Citizens issued $978 million in Revenue Assessment Bonds, which they
began to pay off in 2007 and will continue to pay until 2025.


E. Florida FAIR Plan


       Prior to 2002, Florida had two separate FAIR plan entities: the Florida Residential
Property and Casualty Joint Underwriting Association (FRPCJUA), which provided
homeowners property coverage statewide, and the Florida Windstorm Underwriting
Association (FWUA), which provided wind-only coverage in designated coastal areas.
The merger resulted in the Citizens Property Insurance Corporation (Citizens). Citizens
gives discounts up to 45% on residences that have implemented hurricane mitigation
features, including having a hip-shaped roof with an approved covering, hurricane clips
or straps on the roof-wall connection, and having secondary water resistance on the roof.
These discounts are only applicable to the wind portion of the policy. Many of these
mitigation features became standard Florida construction practices after 2002.
       Citizens is Florida’s largest property insurer, having 1.2 million policies in 2008.
Like other insurers of last resort, Citizens was required to charge rates above the highest
price charged by the top 20 home insurers in Florida. However, in 2007, the Florida
legislature allowed Citizens to be competitive with private insurance companies, and also
allowed Citizens to start writing policies for businesses.
       Citizens offers two types of polices: the multi-peril and the wind/hurricane only.
Both are offered as personal residential policies or as commercial residential policies.
Rates for plans through Citizens are frozen through December 31, 2009, for both
commercial and personal insurance. Beginning January 1, 2009, residential properties
located in the wind-eligible coverage area will no longer be able to obtain insurance from
Citizens if the replacement cost is $2,000,000 or more. However, Citizens will cover
these properties if the owner has been rejected from at least one private insurer and three
surplus lines insurers. Florida Building Codes are in place for new residential



Economic Impact of Insurance Costs on MS Gulf Coast Development                     - 14 -
construction, requiring protections on all openings on the home. Homestead designations
do not apply to coverage obtained from Citizens, and there is no non-homestead
assessment.
       After the 2004 hurricane season, Citizens was left with a $516 million deficit,
which caused all Florida property policyholders to pay $68 per every $1,000 of premium
they pay as an assessment. The 2005 hurricane season was also hard on Citizens, leaving
the insurer with a $1.7 billion deficit. Florida property policyholders partially
compensated for that deficit with a one-time $20.70 per $1,000 in premium.
Policyholders will also pay $10 for every $1,000 in premium for the next 10 years to help
pay for that deficit. The 2007 legislature also allowed Citizens to assess auto insurance
policyholders to help cover deficits.
       Florida state legislators have created a task force to review options on how to
return Citizens to an insurer of last resort, beginning with the effects of increasing the
premiums for Citizens insurance. Because Citizens is now in the competitive market and
not required to have higher rates than private companies, they are sometimes seen as a
better, safer option for homeowners insurance. With reserves on hand and pre-event
financing, Citizens can withstand about $11 billion in losses, but even this amount would
likely not be enough to cover the losses resulting from a major hurricane. With almost
15% of the Florida market share of property insurance, Citizens looks to see major
changes in 2009.
The preceding discussion shows some of the methods developed to handle severe risks
faced by businesses and homeowners in coastal areas. In many cases, private insurers
have deemed these risks not feasible for them to provide coverage. FAIR plans in states
all over the country have been created to offer residual coverage where private insurers
have made the decision to not provide coverage. Due to the high risks resulting from
high frequency or the severity of losses, insurance rates provided by FAIR plans can be
relatively high. These high rates increase the cost of home ownership and the cost of
doing business in these areas covered by FAIR plans.




Economic Impact of Insurance Costs on MS Gulf Coast Development                       - 15 -
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Economic Impact of Insurance Costs on MS Gulf Coast Development   - 16 -
III. Cost of Home Ownership for Mississippi Coastal Areas


       In this section we examine the cost of homeowner’s insurance on a hypothetical
family living in one of the six coastal counties in Mississippi. For many homeowners in
these counties, their homeowner’s insurance consists of 3 parts: homeowner’s insurance
excluding wind coverage, flood insurance, and wind and hail coverage provided through
the Mississippi Windpool. The following examples show the impact of high insurance
costs on the family budget and how insurance costs that are higher in the six coastal
counties than in North Mississippi reduce the value of the home our hypothetical Johnson
family can afford.




        Percentages based on information taken from the National Federation for
             Consumer Credit and the Consumer Credit Counseling Service




Economic Impact of Insurance Costs on MS Gulf Coast Development                    - 17 -
       The household budget percentages above combine information from the National
Federation for Consumer Credit and the Consumer Credit Counseling Service to provide
an example of percentages that could comprise a typical household budget. Obviously,
percentages will vary for different households.
       Based on the above percentages of household expenditures, the chart below shows
the dollar amounts typically spent on each category each year. This example is based on a
household that has two wage earners with a combined gross income of $60,000. Our
hypothetical family, the Johnsons, have 30% of their gross income going to taxes and
other nondiscretionary expenses, leaving net discretionary income of $42,000.
For our example, the $10,500 amount for housing includes principal repayment, taxes,
interest, and insurance costs.




Economic Impact of Insurance Costs on MS Gulf Coast Development                  - 18 -
                                                                        WIND POOL
                                                                        COVERAGE
                                                                          $1883




       For our family living in one of the six coastal counties of Mississippi, they would
possibly have to buy wind coverage separate from their homeowner’s policy at a
potential cost of $1883. This cost is calculated on a $146,000 house with wind coverage
from the MS Wind Pool. This amount could vary based on the construction of the home,
location and any rate changes by the MWUA. A discount from their private insurer
providing the homeowner’s policy should reduce the impact of this increase. The
discount for excluding wind coverage from the homeowner’s policy would vary by
insurer.




Economic Impact of Insurance Costs on MS Gulf Coast Development                   - 19 -
        In this example, the Johnsons spend 25% of their income on housing, which
would be a payment of $875 per month. Considering a 6% mortgage rate, this couple
could purchase a home in North Mississippi with a value of $146,000.
        In the coastal counties, this $146,000 house could generate a wind insurance
premium of $1,883 per year or $156.95 per month. This additional insurance charge
could reduce the value of the home the Johnsons would be able to afford to
approximately $120,000. These home values would be adjusted for escrow payments.
The maximum value of the home purchased would depend on a number of factors
including the wind premium and the reduced value of homeowner’s insurance excluding
wind.




Economic Impact of Insurance Costs on MS Gulf Coast Development                   - 20 -
                   Homeowner Insurance Costs in Mississippi


       The information below shows the most expensive states for homeowner insurance
using data from the National Association of Insurance Commissioners for 2005. Obvious
from this information, states with high occurrences of natural disasters have higher costs
for homeowner’s insurance. Unfortunately, more current data were not available from
the NAIC. Although we might propose that Mississippi might have moved higher in the
rankings below after Katrina, other states listed below have experienced serious losses
from natural disasters also.




              Average homeowner costs for different states - 2005
       Rank            Most expensive                        avg HO premium
       1               Texas                                        1372
       2               Louisiana                                    1144
       3               Florida                                      1083
       4               Oklahoma                                       996
       5               D.C.                                           963
       6               Mississippi                                    939
       7               California                                     895


                                       Source: NAIC




Economic Impact of Insurance Costs on MS Gulf Coast Development                    - 21 -
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Economic Impact of Insurance Costs on MS Gulf Coast Development   - 22 -
IV. Mississippi Wind Pool Information


       The MWUA was created to be an insurer of last resort. After Katrina, every
aspect of the Windpool has grown significantly. Private insurers were assessed millions
of dollars to cover losses of the Windpool from Katrina and had no means to recoup
these losses or assessments prior to the enactment of HB 1500. As a result they quit
writing wind/hail coverage in many parts of the six MS coastal counties, particularly
South of I-10.
       This resulted in significant growth in the number of policies written by the
MWUA. The number increased from 13,312 in 2003 to over 36,000 in 2008. This also
increased the amount of insurance provided by the Windpool from $1.4 billion in 2003 to
over $6 billion in 2008. As can be seen from the following tables, the Windpool has
evolved from a residual insurer to the only insurer in many cases.
       The MWUA has taken steps to provide additional coverage for policyholders in
case of another Katrina sized event by increasing the amount of reinsurance. This
increased amount of reinsurance combined with changing rates in the reinsurance market
has increased the amount spent on reinsurance by the Windpool by nearly $60 million
dollars from 2003 to 2007.
       The increase in reinsurance and the changes initiated by HB 1500 enable the
Windpool to be better prepared for a Katrina sized event. However as the number of
policies have increased, the amount of insurance provided increased and the amount of
reinsurance purchased increased, the total amount of premiums collected by the
Windpool have increased by a multiple of six since 2003. While the amount of premiums
collected by the Windpool has increased significantly accompanied by increases in rates,
the majority of this money has gone to the purchase of reinsurance. In 2006, premiums
collected from homeowners were significantly less than the amount of premium paid for
reinsurance. This reversed in 2007 with premiums collected by the Windpool
approximately $7.4 million greater than the cost of reinsurance paid in 2007. Although
reinsurance does allow the Windpool to transfer risk to the reinsurer, it does not cover all




Economic Impact of Insurance Costs on MS Gulf Coast Development                     - 23 -
 losses as the Windpool retains the first layer of losses. To cover this first layer of losses,
 the Windpool does require a reserve account to pay these losses.
           The following graphs and tables also show the high percentage of policies written
 by the Windpool for the three coastal counties with beachfront. The three counties of
 Hancock, Harrison and Jackson do have a larger percent of population and business
 activity than George, Pearl River and Stone, but these figures provide at least anecdotal
 information that availability of private insurance is better for the three counties without
 beachfront. The proximity to the Gulf is definitely a factor in availability and pricing.
 The high losses on and close to the beachfront are a strong disincentive for both private
 insurance companies and reinsurance organizations. The possibility and probability of
 catastrophic losses near the Gulf make it very difficult for a for-profit organization to
 justify assuming the risk of the property holder. If risk transfer is available, the cost is
 extremely high as the possibility of a total loss on the property is extremely high.


                     Policies written by the Windpool for the three
                            coastal counties with beachfront


                           2003             2004             2005           2006                2007
Premium
earned                 9,268,971      11,564,448        13,282,881    29,355,009        68,855,666


loss and exp             738,036       3,828,565       649,084,525    43,630,601      10,149,435*
Reinsurance Pr         4,594,708       6,850,354         8,817,760    57,796,922        61,429,793


Grant revenue                                                         30,000,000        50,000,000
# of policies             13,312          14,796           15,252          30,962          35,962
$ limits           1,429,658,000 1,631,720,000 1,872,999,000 5,369,509,000 5,722,603,000
Assessments                            2,992,578       295,000,000   250,000,007
*approximately 10,000,000 of this related to Katrina


  Information obtained from the Mississippi Windstorm Underwriting Association reports.


 Economic Impact of Insurance Costs on MS Gulf Coast Development                        - 24 -
  Mississippi Windpool Underwriting Association’s Reinsurance Program




                                                                            8/15/2008
                                                                            MWUA




Chart data from the Mississippi Windstorm Underwriting Association, as of June 1, 2008




Economic Impact of Insurance Costs on MS Gulf Coast Development                - 25 -
                           Number of Policies in Force
                50,000



                40,000



                30,000



                20,000



                10,000



                      0
                           2003     2004     2005     2006      2007     2008
      Number of Policies   13,312   14,796   15,252   30,962   35,962    36,098




    Information obtained from the Mississippi Windstorm Underwriting Association




Economic Impact of Insurance Costs on MS Gulf Coast Development              - 26 -
              Commercial versus Residential Policies
                                                                        Commercial
                                                                          Policies
                                                                           1,974
                                                                           5.47%




              Residential
               Policies
                34,124
                94.53%

.




                               Dollar Limits on Policies
           $7,000,000

           $6,000,000

           $5,000,000

           $4,000,000

           $3,000,000

           $2,000,000

           $1,000,000

                  $-
                              2003         2004         2005         2006         2007
        Dollar Limits (in   $1,429,658   $1,631,720   $1,872,999   $5,369,509   $5,722,603
        thousands)




Information obtained from the Mississippi Windstorm Underwriting Association reports.




Economic Impact of Insurance Costs on MS Gulf Coast Development                          - 27 -
Information obtained from the Mississippi Windstorm Underwriting Association reports.




Economic Impact of Insurance Costs on MS Gulf Coast Development              - 28 -
Information obtained from the Mississippi Windstorm Underwriting Association reports.




Economic Impact of Insurance Costs on MS Gulf Coast Development              - 29 -
               Total Insurance in Force by County (in
                             Millions)
                      3,500
                      3,000
                      2,500
                      2,000
                      1,500
                      1,000
                        500
                         -
                                                  Pearl                     Harriso
                                 George   Stone           Hancock Jackson
                                                  River                        n
           Dollars in Millions     57      61     266       910    1,710     2,882




Information obtained from the Mississippi Windstorm Underwriting Association reports.




Economic Impact of Insurance Costs on MS Gulf Coast Development                       - 30 -
V. Homeowner Premiums for North and Coastal Mississippi




             Sample Homeowner Premium Quotes for Similar
                              Construction
               North Mississippi vs. Mississippi Gulf Coast


    $6,000



    $5,000



    $4,000



    $3,000



    $2,000



    $1,000



       $0
               $122,000 Masonry Construction   $385,000 Masonry Construction




                       North Mississippi        Mississippi Gulf Coast




Economic Impact of Insurance Costs on MS Gulf Coast Development                - 31 -
         Effects of Building codes on Losses and Insurance Costs




     Information obtained from Verbal Testimony of Leslie Chapman-Henderson.




Economic Impact of Insurance Costs on MS Gulf Coast Development           - 32 -
         Information obtained from the Mississippi Department of Insurance.




Economic Impact of Insurance Costs on MS Gulf Coast Development               - 33 -
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Economic Impact of Insurance Costs on MS Gulf Coast Development   - 34 -
VI. Multiplier Effect


                  Increase in Discretionary Income Multiplier Effect


       If a $20 million grant to the Mississippi Windpool is completely passed through
as a rate reduction to the policyholders, this would create a multiplier effect on spending.
The final impact would be based on the amount spent versus the amount saved and other
leakages out of the spending cycle.
       The higher the propensity to consume by the policyholders, the greater will be the
economic stimulus by a rate reduction in insurance costs. This basic idea can be applied
in the opposite direction and show how increased insurance costs take extra discretionary
income from households and this could lead to a multiplier effect in reduced spending.
By reducing insurance costs for households, consumers are left with a higher percent of
income for other purchases.
       The multiplier is calculated as MPC/(1-MPC) where MPC is the marginal
propensity to consume. If 80% of every dollar of increased discretionary income is spent,
the total impact on spending could be a multiple of 4 times the initial increase. For
example, a $20 million increase in discretionary income for the six coastal counties could
increase spending by $80 million with a MPC of 80%.


Increase in                           MPC                     Potential Increased
discretionary income                  MPC                     Spending


$20,000,000                           .90                     $180,000,000
                                      .80                     $80,000,000
                                      .75                     $60,000,000
                                      .70                     $46,666,667


       The numbers above show the importance and potential strength of the multiplier
effect. The key is obviously how much of an increase in income the consumer spends.



Economic Impact of Insurance Costs on MS Gulf Coast Development                     - 35 -
The initial spending by consumer A becomes income for Consumer B and so on creating
the huge increase in spending. The increased spending should also lead to job creation
and increased housing demand.




Economic Impact of Insurance Costs on MS Gulf Coast Development                  - 36 -
VII. Summary Information


       The following table summarizes the potential impact of reducing insurance costs
on the Mississippi Gulf Coast. As can be seen from the table, the economic impact can
come from a combination of many different areas including:


   •   A positive impact on sale of existing homes,
   •   Positive impact on construction of new homes and
   •   A potential multiplier impact from reduced insurance costs/increased
       discretionary income.


       Obviously these numbers only offer the potential economic impact, but it is
widely accepted that increases in discretionary income will lead to increased spending
and further increases in spending resulting in a magnified impact.
       Real estate is a significant percent of the Mississippi economy. The construction
of new homes will result in new jobs, additional sales tax and income taxes. The sale of
existing homes does not have as strong of an impact on job creation as new construction,
but does generate income that can also result in a multiplier impact and job creation.
       Homeowner’s insurance is a significant cost for homeowners on the Mississippi
Gulf Coast and as shown in earlier graphs much higher than for homeowners in
noncoastal areas of Mississippi. Reductions in insurance costs can easily make home
ownership more obtainable and provide a stimulus for the real estate industry and related
industries. The summary table shows that the potential exists for money from the State
Treasury used to decrease rates from the MWUA can create an economic impact that
could generate taxes in excess of the funding provided by the State.




Economic Impact of Insurance Costs on MS Gulf Coast Development                    - 37 -
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Economic Impact of Insurance Costs on MS Gulf Coast Development   - 38 -
VIII. The Mississippi Gulf Coast


       In early 2009, much talk is being devoted to different type of stimulus packages
as a result of the sharp economic downturn of the latter part of 2008. However, the
Mississippi Gulf Coast is still rebuilding and renewing from August 2005. Unfortunate
for the coastal counties, as they began to see improvement in parts of their economy after
Hurricane Katrina, the national economy has gone into a deep recession. It is important
to the Mississippi economy that steps be taken to boost the State economy and
particularly the Coastal economy. Although improvement has been made since 2005,
many areas of the coast are far from a complete recovery.
       In particular, areas south of I-10 and particularly close to the beachfront struggle
to bring their economy back to pre-Katrina levels. Data show that businesses on the
beachfront in Gulfport have only rebuilt at approximately 25% of the level of business
activity prior to Katrina. These vacant properties do not generate the same property tax
revenue and particularly the same amount of sales tax revenue as before. With the
massive catastrophic losses of Katrina and the fear of future losses, the private insurance
market does not have an appetite for these exposures close to the Gulf. As we have seen,
the MWUA has greatly increased its exposure since Katrina with a large number of its
policies being written in the three coastal counties. Basic common sense tells us that high
insurance costs or any type of increased cost is a disincentive for business rebuilding and
business expansion. Any steps taken to provide more affordable and available insurance
for the coastal area could easily provide an economic stimulus for these areas. The
question is what is the best method to reduce the cost of insurance? As stated earlier,
insurance is simply risk transfer. If the risk is perceived as high or catastrophic, the cost
of transfer will be high and possibly transfer through typical insurance methods not
available. This scenario requires strong steps taken by government to make insurance
available and affordable. As can be seen in this report, the cost of insurance provided by
the MWUA is strongly influenced by reinsurance rates. Even with the state government
taking steps to improve the insurance environment for the Mississippi Gulf Coast, private
markets play an important role.



Economic Impact of Insurance Costs on MS Gulf Coast Development                       - 39 -
       The Gulf Coast area is an important and large part of the Mississippi economy.
Tax revenues from this area constitute a significant percentage of the overall State
budget. The hope and idea is that funding from the State budget used to reduce insurance
costs will stimulate and grow the economy of the six coastal counties and generate tax
revenues more than enough to offset expenditures from the State. With the condition of
the overall economy and the need to boost the coast economy, strong and deliberate steps
should be taken quickly.




Economic Impact of Insurance Costs on MS Gulf Coast Development                    - 40 -
Gulf Coast Projections

Sale of Existing homes                                                                        Economic Impact
                                                                Income and Revenues per       from sale of 1500
                                                                         home                     existing homes                  Taxes generated
                  Real estate related activities                $   12,609                    $     18,913,500                    $    945,675
 Additional expenditures on consumer items                      $    5,171                    $       7,756,500                   $    542,955
                 Additional home construction                   $   17,513                    $     26,269,500                    $   1,576,170
                                                                                              $     52,939,500                    $   3,064,800

Multiplier Impact from sales of existing homes
                                                                                                                    Potential
                                                                      Multipliers*                                   impact       Taxes generated
                                 Output multiplier                                    1.399   $     52,939,500     $ 74,062,361   $   5,184,365
                               Earnings multiplier                                   0.1612   $     52,939,500     $ 8,533,847    $    426,692
                                     Job creation                                      13.5   $     52,939,500             715    $   1,020,050
                                                                                                                                  $   6,631,108

Multiplier effect from reduction in insurance rates


$      20,000,000          $18,000,000           $ 72,000,000                                                                     $   5,040,000



Impact of construction of 1000 new homes                                                                                          $ 12,214,685



Total tax impact                                                                                                                  $ 26,950,593


* Multipliers obtained from:
"The Impact of Real Estate on the Florida Economy"
published by Shimberg Center for Affordable Housing
University of Florida




Economic Impact of Insurance Costs on MS Gulf Coast Development                                       41
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