New Windstorm Policies Limit Premiums for Multiple Borrowers

MBA (3/20/2008 ) Murray, Michael
Lenders and servicers could soon find large amounts of windstorm insurance with reduced deductibles and lower rates formultiple borrowerson one policy.

In these new windstorm insurance policies, all borrowers who sign up share the same policy limit—$100 million, for example—when a loss occurs. Generally, these windstorm policies are in the Southeast region of the United States.

“This scenario is tolerable if there are only a few policyholders and the reasonable expectation of a worst-case loss would not exhaust the limit,” said Bernard Brown, president of Insurance Advisors, Stamford, Conn.

The program itself consists of a large limit and deductibles at 2 percent rather than the market norm of 3 percent to 5 percent. The policy includes significantly lower premium rates and appeals to borrowers in windstorm-prone areas, including Florida .

“In this era of single-purpose borrowing entities, borrowers are crossing their fingers and have made the conscious choice to save current premium dollars and hope for the best as long as their lender accepts their insurance certificate,” Brown said. “Lenders and servicers, on the other hand, may not understand the limitations of such an insurance program and are naively accepting them without weighing all the facts.”

While lenders and servicers could find comfort that a borrower has windstorm insurance in the Southeast, with a highly rated insurer and acceptable premiums and deductibles, they might not be aware that multiple borrowers are on the policy.

“Lenders, for the most part, haven’t been able to discern exactly how those programs work,” Brown said. “They don’t know that there are numerous policyholders on the program.”

In reviewing a portfolio of locations in states such as Florida, Insurance Advisors would give an opinion as to whether the insurance limits purchased by a single borrower under a blanket program are reasonable, given the values at risk.

“Such an analysis is fairly straightforward and a lender can make an informed decision about the adequacy of wind insurance,” Brown said. “If, however, there are dozens of policyholders with hundreds of locations that have not been disclosed, then there becomes a serious likelihood that there may be insufficient insurance to go around if and when a large loss occurs.”