Mississippi Rebuilds Its Insurance Markets

Wind Pool Modernization, Better Building Code Enforcement and Carrier Recruitment Efforts Begin to Pay Off

Back in January, when Mike Chaney was getting ready to be sworn in as Mississippi insurance commissioner after his November victory at the polls, he had to do more than just show up. “[T]hey told me, to be sworn in, I had to fill out an ethics form and had to look at my stock portfolios and all those sort of things. So it was trying. The first day was really trying. And I knew a lot about the insurance business, but I just didn’t realize just how detailed it was to be sworn in as an elected commissioner,” Chaney recalls.

His new job demands a lot more than just showing up, too. In this recent interview with Insurance Journal‘s Ken St. Onge at the National Association of Insurance Commissioners annual meeting, Chaney discusses the challenges he has been facing in Mississippi, what’s he is doing to lure carriers to the state and how intertwined insurance is with the rest of the economy.

What are some of the bigger property/casualty insurance issues right now in Mississippi?
Chaney: Well, I took over as insurance commissioner on January the second of 2008, and the biggest issue I faced was the availability, affordability, and accountability of insurance on the Mississippi Gulf Coast after Katrina. Katrina, of course, was the worst natural disaster ever to occur in these United States in recorded history. It cut a swath of destruction 90 miles wide, as far inland as 60 to 70 miles, hurricane damage as far inland as 200 miles. Just a huge, catastrophic event. We were very fortunate that — many more lives could have been lost. But we’re just fortunate that God graced us a little bit and we were able to get people out.

The issue, for us, was finding property and casualty insurance that was affordable, getting claims paid that existed from Katrina, and trying to stabilize the market and put some predictability back into it. I took over at a time when lawsuits were very prevalent in the tort market on the Gulf Coast, when insurance companies were being put down as being very, very bad corporate citizens.

So the real charge, as insurance commissioner, is simple. If you’re the insurance commissioner for the state of Mississippi, your charge is to make sure you have a viable market, that the companies are able to make a profit, but yet, if you make an error, you err on the side of the consumer. The consumer has to be protected from exorbitant rates. Rates have to be fair. The companies still need to make a profit, but you’ve got to have a viable market.

Without insurance, you can’t finance a project. If you can’t finance it, you can’t build it. It doesn’t matter what part of life you’re in, insurance is the lock key that makes everything work in this government. And it’s the lock key for economic development. No insurance — no people, no houses, no economic development, no jobs, no economy, no tax base. So insurance is crucial to us.

That kind of begs the question of where were the various state commissioners and superintendents on the AIG issue? The AIG issue was a tremendous issue for us, and this happened in the early part of September, when AIG made some bad investments. They were not insurance-related. Of the 71 entities that they control, all are insurance companies that are very solid, on very solid ground. AIG is important to my state because they write over $400 million in premium in our state. That does not include the surplus lines that they own. So they’re crucial to our development.

If we had, as commissioners, let a holding company of AIG take the dollars out of these various entities, they would have been unstable and probably folded. And the people that get taken in the end are the policyholders.

So our job, as commissioners — and this speaks volumes about why you need state regulators and not federal intervention. The feds might have let them take the money out, but the various state commissioners said, “No, we think the companies need to be viable.” There are gold nuggets hidden in all the mud, as someone has said.

They did not cause you troubles at AIG. AIG’s troubles were because they weren’t… doing risk management with the mortgages that they were buying and reinsuring, but what they were doing was gambling.

If you’ve got a risk pool of health-insurance people, say in my state of Mississippi, with 200,000 people in it, you know somebody’s going to have a heart attack, somebody’s going to get cancer, somebody’s going to have major surgery — but not all 200,000 at one time. But in AIG’s case, with the mortgages that they had insured and issued, if one gets cancer or has a heart attack and dies, all 200,000 die at one time. And that’s what brought them down.

What do you make of the federal response to AIG? Was the $85 billion bailout the right decision?
Chaney: I think it’s the right decision, for two or three reasons. .. [I]t’s the right decision because it stabilized the market worldwide… and it prevented a catastrophe at the lower level, where people have invested their monies, especially in annuities. If I have $100 million in premium on annuities in my state, somebody’s going to take a hit if they take the money out, and it’s going to be the people who have their life savings in an annuity.

Let’s talk about coastal insurance.
Chaney: One of the things that has happened with the state-run wind pool —it was created after Camille, back in the late ’60s, ’69 actually — was that they needed to be modernized. I was in the state legislature when we modernized the wind-pool bills and gave them the ability to do cat bonds if they were needed. We shored up the plan and made it solvent, actuarially sound, contrary to what was done in other various states.

I don’t want to pick on any state, but we didn’t want to go the route that Florida had gone, or go the route that Louisiana had headed towards. So we took our own ship and fixed it. We’re running very well. We’ve had our reinsurers down on the Gulf Coast, spent four days touring what they were reinsuring for the state-run wind pool. Very pleased. Actually, we think we’ll see another reduction in rates.

Now, by educating the reinsurers, we went from a proposed 56 percent increase in premiums on the Gulf Coast to 11 percent average reductions — some reductions as high as 22 percent. So we’ve done some things right. When you, as the commissioner, can announce a rate reduction in property and casualty, buddy, you’ve done something. So we think we’re doing the right thing.

What is being done in Mississippi to reinvigorate the private market?
Chaney: Well, what we have done is we’ve brought property and casualty and catastrophic insurers into the Gulf Coast and said, “This is what we’ve done.” We’ve enforced building codes — when I was a member of the Legislature I helped write the building code bill. I’ve been a proponent of building codes for years, so when Katrina came along it was the impetus for us to get building codes approved. I’m enforcing building codes and I’m saying to folks, “If you want wind pool insurance and the state-run wind pool, you have to have standardized building code. If it’s been built since the hurricane it has to be built to the IBC-IRC code, and you can get additional discounts if you build to the Fortified Home Standards.”

The second thing that we’ve done is an educational pact for folks on the Gulf Coast, saying, “If you will come in and write insurance, this is what we are doing with all of the consumers on the Gulf Coast to train them about building codes, rebuilding to the right elevation, proper use of land.” It’s a whole host…you don’t have just one silver bullet to try to solve the problem. It takes a lot of people working together.

How do you feel about a national catastrophe plan?
Chaney: Well, I’m for a catastrophe plan that would be similar to the Terrorism Reinsurance Act. I don’t think the federal government needs to be the number one carrier on, let’s say, a wind policy. The idea here is that a consumer can go and have a policy written by one company. We’ve got companies now that are doing that in Mississippi. They’ll write the wind insurance for you through the state-run wind pool, they’ll write the national flood insurance for you through their companies, and they may do the fire and casualty and auto and theft and everything else. We’ve been able to work that out so those rates are lower than the state-run wind pool, when you put them all together. … The federal government needs to be the second-tier safety net. Not first tier — the second tier.

What about building codes? How do you convince homeowners to make improvements to protect against a catastrophe?
Chaney: I make a lot of speeches and I do a lot of slide presentations — they’ve gotten pretty long. All the civic clubs that have asked me to speak on the Gulf Coast and throughout the state laugh and say, “When you get the commissioner down here, expect 30 minutes of slides, and he speaks very fast telling you why you need building codes.” We’ve got a lot of people on board. We educated the local political entities like the boards of supervisors, the mayors and the aldermen, and the various city councils.

What you want is uniform enforcement throughout your area where you’re trying to have building codes. We have mandatory building codes in the lower three counties and the next two tier counties up, on the Gulf Coast. You want uniform enforcement. You want uniform standards…that’s why we use the International Building Code and the International Residential Code: one’s commercial, one’s for residential. You want consistent inspection and you want a mitigation program that will help folks go in and retrofit their homes.

Now, the most important part is, you get discounts if you do that. Not only do you protect lives and property, save lives and save property, but you get a discount on your insurance. … I’ve got at least three major companies before the end of the year that will give discounts up to 35 percent for building back or retrofitting an existing home to building codes. They’re sliding scales. If you put straps down, you may get 5 percent. If you fix your roof sheathing, you may get another 5 percent. All the things you do — impact windows, shutters on the windows — it builds up.

Then, in addition to that, if you put all your eggs in one basket with that company, where you may have your automobile in addition to all of the other things that you insure, then you can stack those discounts and get as much as 50 percent discount…

It sounds like carriers have been very willing to work with both regulators and with policy owners to find better ways to incentivize protecting their homes.
Chaney: They have in Mississippi. We’ll be the first state to probably have these discounts that are effective like we’ve got them. Florida’s been trying to do this. Alabama’s tried to do some, and I know Jim Donelon in Louisiana has done a great deal of it too. He’s been very active and a good mentor for me.

What about the worker’s compensation market in Mississippi?
Chaney: The challenges are always the same. Back when I was in business I started a worker’s comp group in 1991, with the Mississippi Manufacturers Association. Worker’s comp had tripled — tripled! — in one week and my carrier called me and said, “You need to do something.”

I got two other manufacturers and we started a worker’s comp group, and that worker’s comp group, from 105 employees in three companies, now covers over 25,000 people and has 250 member companies in the worker’s comp group.

But worker’s comp is always a challenge. The issue with worker’s comp is to properly take care of the worker but prevent fraud in the insurance business. You have a lot of people that think they can get a free lunch by saying, “I hurt my back,” or, “I’m hurt.” I’m not saying everybody’s like that, but you have one or two bad apples that can spoil all the good barrels of apples.

Our job is to prevent that from happening and, number two, is to be certain that claims are paid properly, that there’s not a lot of hassle. If someone has a valid claim, it’s paid very timely and paid correctly. We’re doing that in Mississippi.

Is there anything else that you have on your agenda for the next year or so in Mississippi?
Chaney: What we have been doing is recruiting new companies to come to the state. We have kind of a dog-and-pony show. It’s a very profitable state to write business in, and we’ve been successful. We’ve signed up over 40 new companies the first year I’ve been commissioner — I haven’t been commissioner a full year yet — and that’s not because I’ve done anything magic. I knew a lot of these folks from my days in the state Legislature. Former Commissioner George Dale is a good friend of mine, and he’s been very helpful and been able to give me a great deal of advice of who I can go see and other companies I can recruit.

I’ve worked with other commissioners throughout the southern states. We have the southeast zone, we communicate quite frequently. As an example, during Ike and Gustav I worked with Jim Donelon to offer our help where it’s needed through our mobile claim centers that we had for our wind pool. We do the same thing for Alabama and for Florida and for Georgia and for South Carolina and North Carolina. We work together. We all have common interests.

I think the biggest challenge for us as a nation is to realize that over 50 percent of the people in this country live within 50 miles of the coastline, and you’ve got to address the issue of what do you do about catastrophic events such as hurricanes. Then you compound that problem with the idea that you have earthquakes in this country.

Topics Florida Catastrophe Trends Carriers Workers' Compensation Reinsurance Property Mississippi Property Casualty AIG Casualty