By VIRGINIA BRIDGES
Staff Reporter
Mobile Press-Register
Some Alabama coastal governments are being asked to put up millions of dollars to back a for-profit company meant to help area businesses get the insurance that more and more hurricane-wary firms are refusing to write.
The South Alabama Regional Planning Commission Executive Director Russ Wimberly and former Foley Mayor Tim Russell are urging Mobile and Baldwin counties, along with coastal cities, to invest a total of at least $20 million to set up a “captive” that could effectively cover the risk for commercial properties in the area.
A captive insurance company is one formed by like entities that pool their resources to negotiate with the worldwide reinsurance market. Alabama law requires that captive insurance companies be for-profit entities. They may insure commercial and institutional properties only.
So far, the captive pitch is falling on receptive ears.
After a Tuesday presentation to the Baldwin County Commission, Vice Chairman Frank Burt said: “How quick can we get it going?”
State Sen. Bradley Byrne, R-Montrose, said he is working with Russell and the commission to help in any way he can.
“I am convinced it is a good option,” Byrne said.
The Alabama Department of Insurance, meanwhile, has no concerns about the proposal at this point, said Ragan Ingram, an agency spokesman.
“Basically they are trying to create a mechanism to cover an area that other people won’t cover,” Ingram said.
While the Legislature set up the state’s captive law last year and the regional planning commission consulted county and city leaders during its study of captives, this past week marked the first time Russell and the commission sought support from a government body. On Tuesday, Russell and Wimberly made a presentation on the proposed captive to the Baldwin County Commission.
Mobile County Commissioner Mike Dean said that body is waiting to learn about the approach from the regional planning commission, so that commissioners can have an open discussion and research the proposal.
To raise startup money, the commission and Russell are recommending that governments issue tax improvement district bonds. Revenue from the captive would pay off the debt, Russell said.
The captive itself would be financed like any other insurance company, through premiums on the properties it insures. It would use the money provided by the governments as startup capital and to help pay off claims.
A reinsurer, such as Lloyd’s of London, would assume part of the risk and help the captive stay afloat in the case of catastrophes the size of hurricanes Katrina and Ivan.
The structure of the insurance coverage will differ, depending on the property. In some cases, for example, the captive may cover the first $1 million in claims over the deductible, and in others it may divide the risk with the reinsurer on a percentage basis.
Unlike Florida’s state-run insurance entity, the Baldwin and Mobile captive would be unique as governments on multiple levels — city, county and possibly state — would contribute and oversee the captive.
“There is not a model like this anywhere in the world,” Wimberly said.
Proponents say the captive concept is the best way to ease south Alabama insurance woes as traditional insurance companies are reducing their local policies and residents are being forced to pay significantly more to companies not regulated by the state.
Reliable and affordable insurance, advocates say, would in turn protect city, county and state revenues by preventing property values from decreasing and by helping development now hindered by high insurance costs.
Skeptics, however, point out that insuring just coastal Alabama — not spreading out the risk over a larger, less vulnerable area — is a gamble that could face financial challenges if a large storm were to hit.
The Alabama Department of Insurance regulates captives along with standard licensed insurance companies. Unlike those standard companies, however, the state doesn’t approve captive insurance rates or forms.
That flexibility allows the captive to assess a property’s risk and negotiate with various reinsurers to establish better rates, Russell said.
“A captive is almost like a small Lloyd’s of London where on each listing the rates are calculated on the merits of that risk,” said Russell, who resigned from the Foley mayor’s position to pursue the captive proposal. He is not compensated for his work, Russell said.
The first few steps
According to Wimberly and Russell, steps required to get the captive up and running include:
Incorporating the company.
While a chief operating officer would run the company, it would be overseen by the South Alabama Regional Planning Commission and some elected officials from governments that invest in the captive would be asked to serve on the company’s board.
Gaining commitments from governments and establishing tax improvement districts to offset the debt incurred by those entities.
A rough estimate based on assessed commercial property value indicates that Baldwin County and some of its cities will be asked to put up a total of $12 million. Mobile County and some of its cities would be asked to put up a total of $8 million.
The tax improvement districts would allow governments to tax entities served by the captive in order to cover the debt and build capital, Russell said. The current proposal would allow the captive to add on to a state premium tax that is lower for captives than it is for standard policies.
The tax improvement districts would allow governments to tax entities served by the captive in order to cover the debt and build capital, Russell said. The current proposal would allow the captive to add on to a state premium tax that is lower for captives than it is for standard policies.
The state’s tax rate is 3.6 percent on standard policies and 0.4 percent on captive policies. Under the proposal, parties in tax improvement districts which are insured by the captive would pay 3.6 percent with 0.4 percent going to the state and 3.2 percent to the captive.
“We hope to start issuing policies in one year, the biggest holdup is raising the capital by doing these tax improvement districts,” Wimberly said.
The captive would have to receive a license from the Department of Insurance, which will also set the dollar value of premiums it could write based on its capital base.
After the captive is established, businesses would be invited to obtain insurance, but they would have to contribute to the captive’s capital based on the project’s insurance risk.
Eventually, the captive could serve businesses and cites throughout the state, they said.
Concerns
Carol Jordan, Troy University’s eminent scholar for its Risk Management & Insurance Program, said she has reservations about the proposed captive.
Jordan, who also teaches underwriters and brokers at Lloyd’s of London every summer, said she isn’t sure the reinsurance market would be eager to cover the captive.
“What they tell me about Alabama, is that Alabama needs to think of a way to make their property more insurable,” she said, referring to building stronger structures not too close to the beach.
Also, the captive might not be able to receive needed funding from the tax improvement districts after a storm because the businesses could be destroyed or downgraded, she said.
Russell, who has been in the insurance business for 35 years, said the captive is just one part of a three-prong effort to address the insurance issue. Other steps include pushing for stronger building codes and bringing reinsurers in to evaluate the area, he said.
Russell said he and other proponents have spent hundreds of hours talking to reinsurers about the proposal. They even brought in five of the top worldwide reinsurance brokers to evaluate the area, he said.
“They were all very supportive, all five said they want to handle the reinsurance,” he said, adding that the company ultimately could only use one reinsurer.
Coastal Alabama doesn’t have that many options, Russell said.
The state doesn’t have the leverage with insurance companies that many may assume it does, Russell said.
Russell said he and Gov. Bob Riley met with an executive with one of the U.S.’ largest insurance companies recently to ask him to reconsider some policy cancellations.
After a firm discussion, Riley asked the executive what the company would do if he mandated that it insure 10 percent of the coastal exposure in Alabama.
“The executive looked him right in the eye and said ‘We would pull out of your state,'” Russell said.
Russell and Wimberly said after the meeting with Baldwin County commissioners that they will meet with other governments, then make a second round of calls.
Baldwin County Commission Chairman Wayne Gruenloh said the captive is needed to protect the county’s economic engine.
“If we don’t give it a try, we are going to see the systematic value of our property go down and our revenue go down,” he said.
INFO: The forum will only address issues concerning condominium associations, commercial properties and municipalities. For information, call the Alabama Gulf Coast Area Chamber of Commerce 251-968-6904.
