Mass. Economic Warning: Insurance Market Short on Capital

Massachusetts is facing a shortage of insurance capital that could jeopardize the state’s entire economy, especially if a major storm hits the metropolitan Boston area, the Commonwealth’s insurance regulator is warning.

A major storm hitting the metropolitan Boston area would put a serious strain on the insurance system as it is now funded and have ramifications for banks and other businesses, according to Insurance Commissioner Julianne Bowler.

According to the Division of Insurance, there is about $32 billion in surplus supporting $980 million in direct written premiums in the state’s homeowners market, far less than in neighboring states. The figures are for the carriers writing 80 percent of the market. According to these calculations, every dollar of homeowners premium in Massachusetts is supported by about $33 in surplus funds. In Connecticut, the market has $86 surplus for every dollar in premium; in New Hampshire, $229; and in Rhode Island, $221.

Surplus Supporting Homeowners Market (80%)

State DWP Surplus Ratio
MA $980 M $32 B 32.9
CT $637 M $55 B 86.1
ME $193 M $41 B 212.7
NH $192 M $44 B 228.6
RI $162 M $36 B 220.8
VT $104 M $47 B 448.8
Source: Mass. DOI

But hurricane forecasters have warned that if a storm like the one that began in Long Island in 1938 were to again land in the metropolitan Boston area, this one storm alone would cause as much as $18 billion in damage, and that’s not taking into account increased population and building.

“So we do have a significant capital problem and that capital problem is going to have an impact not only on the insurance industry but also on the banking industry and ultimately on the entire state economy,” Bowler said.

Bowler said the homeowners insurance system could probably withstand a major storm on Cape Cod, but if a major storm were to travel north and inward, west of Boston and near Route 128, it would put a very serious strain on the market.

“If it (major storm) hits the Cape, we’ll probably have to shut the lights of a few insurance companies but pay every claim,” she predicted. “But if it travels more inward, we’ll have to shut the lights of a number of insurance companies and a few banks and not pay all the claims.”

She said she is particularly worried because, unlike in other states, the Bay State’s personal lines market is dominated by regional insurers with little geographical diversification and a fast-growing residual market.

Bowler maintains that while critics tend to focus on either the lack of competition in the highly-regulated auto insurance market or the troubles surrounding homeowners insurance for coastal properties on Cape Cod, the two issues are closely related and the problem is bigger than either of them by itself.

“We have historically thought of auto and the Cape problem as isolated events but we need to start thinking about the impact on our general economy not if, but when, we have a bad storm,” she said.

The Romney administration has been pressing for deregulation of the state’s auto insurance system, which now has only 18 insurers writing private passenger risks, in order to attract national carriers.

The commissioner insisted that the way to get more capital into the homeowners market is for the state to make its auto system “more rational” like those in other states. Large insurers with the capital the state needs are not interested in entering the state for the homeowners insurance market alone, she argued.

“The goal of auto insurance reform is not to fix auto for the sake of fixing auto. It’s to increase the personal lines market capital base,” she said.

“Massachusetts is a good market, if we open it up,” Bowler added.

Bowler presented her analysis at a Waltham breakfast meeting of insurance executives jointly sponsored by the Boston chapter of the Chartered Property Casualty Underwriters Society and the Mass. chapter of Risk and Insurance Management Society.

Topics Trends Carriers Auto Excess Surplus Massachusetts Homeowners Market