Honors Theses

Date of Award

2012

Document Type

Undergraduate Thesis

Department

Management

First Advisor

Andre Liebenberg

Relational Format

Dissertation/Thesis

Abstract

As hurricanes are some of the most devastating natural catastrophes in the United States, property insurance for coastal home and business owners is a consistently evolving market. The southeast, specifically the Gulf of Mexico region, is where most hurricanes are concentrated and has accumulated a large amount of losses over the past few decades. After Hurricane Katrina struck in 2005, less private insurers have offered windstorm coverage for coastal property owners and the state wind pools have increased their amounts of risk exposure. This thesis analyzes the use of wind pools in the Gulf of Mexico, specifically Mississippi, and other residual market tools to offer windstorm and flooding coverage for policyholders who aren’t able to find coverage in the private market. It offers suggestions for improvement of the residual markets and for increased participation by the private insurance market. Coastal insurers have difficulty in charging rates that reflect the true cost of risk of a hurricane occurring due to rate regulation. The NFIP also has similar issues of paying out more in claims than it makes in premium, leaving it with an annual underwriting loss. The state wind pools also tend to operate at underwriting losses. depending on the state and the program’s structure. They also spread the hurricane risk throughout the state to policyholders that aren’t affected by windstorms or flood. To diffuse these problems, this thesis offers three solutions. First would be to create a regional wind pool that would operate in the five Gulf of Mexico states: Alabama, Mississippi, Florida, Louisiana and Texas. There should also be a federal government agency created to oversee and operate this wind pool. Secondly, the flood 111 and windstorm markets should be merged to reduce wind versus water litigation. This would involve reform of the current NFIP. Third, risk mitigation standards should be structured through the government agency and transparent to policyholders. These changes could improve coverage for policyholders and motivate more insurers to enter the hurricane insurance market. IV

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