The second in a four-part series on the Annual Home Insurance Report
This is the second part of a four-part look at the Commissioner’s Annual Report on Home Insurance in Massachusetts. Since 1996, the DOI has been required to produce a home insurance report pursuant to M.G.L. c. 175 Sec. 4A & 4B. Unlike private passenger auto insurance, in Massachusetts, there are no laws requiring that a property owner have home insurance.
This year’s Report cites a 2.1% increase in the overall number of home insurance policies in the Commonwealth between the years 2013 to 2014. The increase is a reverse of previous years, in particular from 2012 to 2013, which saw slight decreases in the overall number.
This week, we review the Commissioner’s findings on the MA FAIR Plan. While the MA FAIR Plan continues to write a majority of the home insurance in the Commonwealth, particularly on the Cape and Islands, it has substantially decreased its number from the levels seen in 2007.
What is the FAIR Plan and what does it do in Massachusetts?
For those homes which cannot obtain coverage from a traditional homeowner’s insurance company, the home’s owner may apply to the Massachusetts Property and Underwriting Association, commonly referred to as the FAIR Plan, which is required by statute to obtain a homeowner’s policy with a replacement cost of up to $1 million dollars. For those homes, traditionally waterfront properties, that may have a value of more than $1 million dollars, a homeowner must seek coverage via the surplus lines market.
FAIR Plan continues to write the largest amount of homeowner’s insurance in Mass.
According to the Home Insurance Annual Report, the proportion of FAIR Plan policies varies greatly by area. Even though the total enrollment in the FAIR Plan decreased by 24 policies in 2014 (as compared to 2013), it continues to write 11.6% of the total amount of home insurance premium in the Commonwealth.
On the Cape and Islands (which comprises Barnstable, Dukes, and Nantucket counties), however, the FAIR Plan writes approximately 43.3% of all homeowner’s policies there, making it by far the largest insurer in this area. In comparison, in Suffolk country, the FAIR Plan only writes approximately 18.1%, while in the rest of the remaining counties in Massachusetts, it writes less than 13%.
While the total market share of the FAIR Plan is only .1% greater than MAPRE’s total market share of 11.5%, it’s still enough to rank the MA FAIR Plan as the largest homeowner’s “insurer” in Massachusetts. The following two charts highlight the 2014 Share of the Market, first with the MA FAIR Plan included, and then without it.
The rise and fall of FAIR Plan policies over the past decade
In the past decade, the total amount of FAIR Plan business grew and now appears to be slowly decreasing. In 2014, for example, the Commissioner’s Report notes that the FAIR Plan’s business actually decreased by a total of 24 policies from 2013 to 2014 to a total of 187,889. While in 2004, the FAIR Plan had only 135,000 total policies in force, both the years 2004 and 2014 should be compared to 2007 when the FAIR Plan’s business comprised a total of 204,101 policies.
This ten-year graph tracks the trend in FAIR Plan policies from 2004 to 2014 and provides a clearer picture of the current trend in FAIR Plan Policies.
Once in, few leave the FAIR Plan
The Division notes the failure of consumers to leave the FAIR Plan once they are assigned to it. The failure of consumers to shop around for other homeowner’s coverage meant that in 2014, only 83 policyholders of the 187,889 total policies in force in the FAIR Plan took advantage of the FAIR Plan’s Market Assistance Plan. This program offers the applicant’s FAIR Plan coverage to other insurers writing in the market.
2014 Overall Loss Ratio for all policies including the FAIR Plan
In insurance metrics, loss ratio is an industry-accepted method of measuring the underwriting success or failure a property insurer. To obtain a loss ratio, losses incurred must be divided by earned premium. As the Division notes,
The higher the cost to the company of reinsurance and other expenses, the lower the company’s loss ratio must be for it to continue to operate. The higher the loss ratio, the more likely companies will have overall losses after paying for administrative expenses.
With that said, we turn to the overall loss ratios for homeowner insurance companies in Massachusetts, including the FAIR Plan. For 2014, the overall loss ratio was 40.3% across all types of insured residences (homes, condos, and rentals. This number while higher than in 2013, when it was 40.0% and in 2012, when it was 37.8%, is still lower than n 2011 when it rose to 87.3%.
The total home insurance loss ratios in Massachusetts over the past ten years
2014 FAIR Plan Financial Results
In 2014, the MA FAIR Plan had a total underwriting profit of $25,967,007, based upon its calendar year of October 1st until September 30th. The number is qualified as the FAIR Plan’s “contribution to surplus” since the FAIR Plan cannot be technically categorized as an insurance company. The Division notes that the FAIR plan has not experienced an underwriting loss for the past three years. The last one to occur, was in 2011.
When calculated per policy, this means that in 2014 , the underwriting gain per policy was $138, approximately $122 more than in 2013, when the contribution to surplus was just $16. Over a ten year period, however, the $138 is more in line with the FAIR Plan’s contribution to surplus per policy than as compared to 2013. As for loss per policy, only in 2011 did the FAIR Plan experience a loss per policy of -$1.19. The Division calculates the FAIR Plan’s Gain (Loss) per policy by dividing the fiscal year’s underwriting profit (or loss) by the number of fiscal year owner, condo or tenant policies issued.
FAIR Plan Home Insurance Rates Retrospective
The year 2013 was the last year in which the FAIR Plan submitted an overall statewide rate increase of 6.8%. In 2014, the Commissioner denied the rate increase, stating that the FAIR Plan had failed to meet its burden of support in demonstrating that its rate increase satisfied the statutory requirements. The last time that a rate increase was approved was in 2005, when the FAIR Plan was granted a 12.42% statewide increase in rates, along with a 25.0% increase in Barnstable, Dukes and Nantucket.
The following chart is a ten-year retrospective the Division created representing FAIR Plan Home Insurance Rate Changes.
More to come on the Annual Home Insurance Report in the coming weeks
Next week, Agency Checklists will review take a look at the amount of home insurance policies by county followed by further articles on the impact of auto insurance and flood insurance on this market as well as financial results from the report.
