The Weird World Of Economics

How To Make Profit From A Non-profit Insurance Company

Most insurance executives look at the lavish houses and condominiums along the Florida coasts and cannot help thinking: hurricanes, wreckage, financial ruin.

But Ross J. Buchmueller sees opportunity. As most big insurers are cutting back coverage in Florida and other coastal states after a string of catastrophic hurricanes, Mr. Buchmueller has started a company offering policies that hardly anyone else wants to sell — and at as little as half the going rates.

His strategy, he says, is not as daring as it seems. By studying industry statistics, he has found that big, expensive houses have fared the best in hurricanes. And his company will sell only to owners of those homes.

To be covered, a home must be worth more than $1 million. It must be fairly new, solidly built and equipped with the strongest shutters, or such high-grade windows that flying debris merely bounces off them.

Mr. Buchmueller said that to further reduce his risk, sales in the first year will be limited to a few thousand policies and he will buy insurance from big international insurance companies, known as reinsurers, that will cover 75 percent of his potential losses.

The cost of the reinsurance will sharply lower his profit. But Mr. Buchmueller, 41, has set up his company, Privilege Underwriters Reciprocal Exchange, as a nonprofit concern, owned by its policyholders. His reward, Mr. Buchmueller says, will come from a management fee, which should rise as the company grows and expands into a national business.

Mr. Buchmueller has been quietly selling policies for several weeks and plans to announce the opening of his new company formally today.

Some insurance experts say the venture may inspire other entrepreneurs — or groups of property owners, like condominium associations — to create similar arrangements. Doing so could help break the crippling pattern in which big, established insurers reduce coverage, and investors in new companies chase ever-higher premium prices.

But others are skeptical. “It’s a creative approach,” said Michael Koziol, a public policy specialist at the Property Casualty Insurers Association of America, a large insurance trade group, “but like any new company, there’s a certain risk. More new companies go under than old companies.”

Robert P. Hartwig, the president and chief economist at the Insurance Information Institute, a trade group in New York, said that even with insurance premium prices at a record high in Florida, they were still not high enough to offset all the potential damage that many weather analysts expect over the next decade or so.

Mr. Buchmueller says his company will have considerably more capital than most Florida start-ups — an estimated $45 million by the end of the year. And he says that he is confident that he has found a gap in the market where the going prices are higher than the actual risk. “Everyone in Florida thinks they’re paying too much for insurance,” he said, “and some of them are right.”

Florida has been hit by a number of hurricanes in the last few years. Insurers have paid billions of dollars in claims, and the price of coverage for homes in the state is the highest in the nation. Some people are paying almost as much for insurance as for mortgage payments. And every week, 15,000 homeowners in Florida are requesting bare-bones coverage from the state-run insurance agency because no one else will sell it to them — at any price.

In January, Florida’s Legislature went into special session to deal with the insurance crisis and decided to force down prices for all companies, including Mr. Buchmueller’s, by perhaps 20 percent.

But many insurance experts say that if hurricane damage is heavy in the next few years, the state will probably have to make up for the price cut and possibly a lot more in claims costs by issuing bonds and passing on potentially enormous expenses to all policyholders.

Florida regulators welcomed Mr. Buchmueller’s company as a new source of coverage. They approved his plan in mid-January, and he has started selling policies through independent agents across the state. Mr. Buchmueller previously spent about 20 years working for the Chubb Corporation and the American International Group.

Charles Kilvert, the owner of the Claude D. Reese insurance agency in Palm Beach, said the first question he hears is: “Are these guys going to pay their claims?”

“I tell them, ‘These guys are top-flight industry insiders,’ ” he said. “And they’re very conservative. Whereas the state allows an insurance company to take in $10 of premium for every dollar it’s got for paying claims, these guys are coming in at less than one to one.”

One of Mr. Buchmueller’s first customers, Ellis Kern, owns a two-story pale yellow Mediterranean-style home on a golf course several miles inland from West Palm Beach. Mr. Kern, a manufacturing executive, said he had been paying $15,175.86 a year for $1.2 million in coverage from a unit of Lloyd’s of London. He is now paying $6,845 to Mr. Buchmueller’s company for $1.7 million in coverage.

“Obviously,” he said, “the first thing was that there was a savings.”

But Mr. Kern said he was also drawn to the company by its business plan. “They were limiting their risk, being selective in who they were taking,” he said.

Patrick Lacy, a manager at the Plastridge Insurance Agency in Delray Beach, said he had been talking to a homeowner who had been paying $32,637 for $2.8 million in coverage. From the new company, Mr. Lacy said, the same coverage would cost $18,812.

Customers of the new company are required to make an additional one-time payment equal to half their first-year premium into a fund for paying claims. Even then, costs are often lower than before. At the end of each year, Mr. Buchmueller said, any company money left over from claims and other expenses is to go into holding accounts for the policyholders, from which they can collect if they decide to drop their coverage.

In the meantime, putting money that would otherwise be termed profit into special accounts will add to the company’s ability to pay claims and also provide tax benefits.

The structure Mr. Buchmueller chose has been used by groups of professionals — doctors, lawyers and architects — and some industries, including pharmaceutical manufacturers, when coverage they need has become scarce and extremely high priced. One of the biggest, most successful insurance companies in the country, USAA, is organized along the same lines. But recent start-ups have been structured to yield high profits as quickly as possible.

One quirk of Mr. Buchmueller’s company is that his rates, as approved by regulators, are about the same or higher than those of other insurers catering to the rich, like Chubb. A big difference is that the others routinely refuse to sell new coverage. And the few companies willing to provide the coverage can charge much higher rates.

“It’s like going to the butcher,” Mr. Buchmueller said, “and he tells you that rib-eye sells for $1 a pound. But you go to buy it, and you can’t have it.”

NYTimes.Com

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