Insurer says rates reflect real storm threat

John "Jack" Golembeski, 63, is the chief executive of the Massachusetts Fair Plan, the state's home insurer of last resort. The Fair Plan insures 41 percent of the homes on the Cape and islands, up from 3 percent in 2000. State regulators last August approved a 25 percent increase in the Fair Plan's base annual premium and another 25 percent increase is in the works. Golembeski spoke to Globe reporter Bruce Mohl.

Q Insurers say premiums are going up because of the threat of a hurricane hitting the Cape. Is the threat real?

A New England is due. It's not a matter of if; it's when.

Q Why are rates on the Cape going up so much faster than other coastal areas in the state?

A When modelers look at the Cape and the way the Cape is situated out in the ocean, it's almost like Florida. A storm coming into the Cape, even a moderate to a strong Category 3 storm, is going to do catastrophic damage. Insurers are unwilling to bet the survival of their companies on writing business in that coastal area.

Q As insurers withdraw from the Cape, what role does the Fair Plan play?

A We are a creature of government in partnership with the insurance industry to provide a safety valve for property insurance. Our operation does everything that a normal insurance company does, with one exception. We do not have a marketing department. We do not go out and solicit business. The business comes to us through independent insurance agents when they have no market with which to place the business.

Q What specifically is driving rates up on the Cape?

A Rates are based on historical loss data, expenses, wind damage, and cost of reinsurance. Those numbers, once they're calculated, determine what the amount of the increase should be. In our rate request, we have tempered those requests, particularly in the coastal communities. Based on the analysis we've done, we're still 10 to 12 percentage points below what the rate request should be.

Q Where do wind damage projections come from?

A From models that have been refined and become much more sophisticated over the last several years, mainly because of the number of hurricanes that have happened elsewhere in the United States and around the world. We use the models. We use two of them. We average those models.

Q Do the two leading modeling companies, Risk Management Solutions and AIR (Applied Insurance Research) agree on the risks?

A If you look elsewhere in the country, say Florida, they are fairly close. But on the Cape, one of the models [ RMS] believes that the damage, particularly in the coastal region of Cape Cod, will be more significant. No one seems to know which one is right.

Q This year, you're planning to buy $80 million of reinsurance, the insurance that insurers buy to protect them financially in case a catastrophic event occurs. Why so much?

A It is primarily purchased from foreign organizations in Bermuda and London. There is no regulatory control. Those organizations can charge whatever the market will bear. That cost has risen dramatically as a result of the 2004-2005 hurricanes, with increases in 2006 as high as 300 percent.

Q How do your premiums compare to other insurers operating on the Cape?

A The Fair Plan's prices are the lowest among the major insurers that write business there.

Q Is there a coastal home insurance crisis?

A There's a crisis of affordability. On a short-term basis, we need to get pricing to a level where it reflects the cost of the product. If pricing becomes adequate, companies will again enter the market and begin to take business away from the Fair Plan. If you looked back at the last two or three years, we know the financial experience in our industry has been very good. We've been profitable for the last two years.

Q Did you say you're turning a profit?

A Yes; three years in a row. In the most recent fiscal year, it was $48 million. We have been holding those profits in an investment account and they will be used in the event we have a catastrophic event.