From Condos to Coastal Property: The State of Maryland’s P/C Market

In the 15 months since his appointment as Maryland’s top insurance regulator, Commissioner Ralph Tyler has had to deal with a number of issues. Among them: a court decision that reversed 25 years of standard practice for insuring condo associations, the looming problems of a coastal insurance meltdown and the ripples from the collapse of American International Group. In this exclusive interview with Insurance Journal’s Ken St. Onge, Tyler talks about his agency’s response to each of the problems and the future of Maryland’s property/casualty landscape.

What about the market for coastal property insurance in Maryland. How does that look and what are the problems or challenges that it faces?
Tyler: Well, like many coastal states on the East Coast, that has been an issue. We had one major carrier pull out of the market. We had a major legislative effort last year that led to the adoption of some coastal reform legislation. There are some. There is availability, but the cost is high. The broader question of course is to make sure that the price is fair given the actual risks. The people who live on the coast need to understand those risks and the people who don’t live on the coast should not be subsidizing that risk.

What do you see as your role in helping alleviate some of the problems in that market?
Tyler: Well, the way I see my entire role, to be honest with you, is I believe in what I say to people in the industry, what I say to our legislature and what I say to the staff of the agency. We’re in business for one purpose, and that’s consumer protection. We have other obligations to provide efficient service to the industry, but our job is to protect consumers.

So, that means financial solvency is critical. It means having affordable products and available products and a viable market and fair treatment of claims. All of that applies in the coastal area as well.

Do you think that there’s a need for some kind of national catastrophe plan? One that involves maybe a federal backstop or some other mechanism to insure against catastrophic losses?
Tyler: I honestly can’t say that I know a great deal about that and I certainly can’t say that our experience in Maryland really makes that case. Other parts of the country are certainly experiencing more serious problems. That’s a topic on which I would really need to be better informed before I really have much of an opinion.

The condo insurance market in Maryland has been a bit problematic lately. What’s going on there and what kind of changes do you see coming?
Tyler: As you indicated, the Maryland Court of Appeals, the highest court in our state, decided a case earlier this year, holding that the responsibility for insuring essentially the interior of condominiums rested with the unit holder and not with the association. That result, that conclusion, was different and is different than what the practice had been and what the expectation was of associations and unit holders.

So there certainly is some concern and confusion. There may well be a legislation introduced when our legislature comes into session in January to try and clarify the rules, maybe back to what people believed them to be.

My understanding, and I’ve met with condo associations and property managers and others, is that mostly the people are honoring the rules as they understood them to be, notwithstanding the court’s decision. I think where change or difficulties may well arise is upon renewal, and that is will the association buy the coverage or expect the unit owners to do so.

What kind of solution would you like to see in place?
Tyler: Well, I think it’s mostly a question for the real stakeholders, the condo associations, the property managers and the condo owners, to figure out. I certainly can understand that there will be great difficulties if, for example, the expectation is that the unit holders will all have adequate insurance if there is, for example, water damage and they don’t have adequate insurance. Then what does that do to the other condo owners? You, theoretically, of course could adopt rules in the association that would require people to have adequate coverage. Then, of course, you get into issues of enforcement and so on.

So, we, the agency, we supported a motion in the Court of Appeals after the decision to seek reconsideration of the decision because it was such a change in the rules, but the court declined to reconsider the case. So, I think a legislative solution or clarification is appropriate.

How does the status quo look right now in terms of condo association policies? Is there any kind of guidance you’re offering?
Tyler: We did. We issued a bulletin quite promptly after the court’s decision to be certain that people were aware of the decision and that agents were providing correct advice and information to their customers and clients so that, for example, that they understood that the law now is, is that the obligation to provide the insurance rests with the unit owner and not the association.

AIG is an issue that’s on the minds of most in the insurance industry. What does the $85 billion federal loan to the company mean and how is that going to trickle down to individual states?
Tyler: Well, certainly, in the last week, AIG, and more generally, the turmoil in the financial markets has been on the minds of people across the country and certainly in Maryland.

We, at the Maryland Insurance Administration, have gotten a lot of calls from consumers, including AIG policy holders. The good news is that as far as we can tell and we’re certainly tracking this, the insurance companies within AIG are solvent, that the problems were at the holding company level. It’s not to minimize them at all, but that’s where the problems seem to be.

Certainly, the hope is that the federal loan or investment, or however you characterize it, will stabilize things at the company and it will be able to either sell off parts of it or otherwise, recapitalize.

Do you have any sense of how many policy holders are affected by the AIG troubles?
Tyler: We don’t have a good grip on the numbers. We do know from the calls, the kinds of products that were sold in Maryland, including a number of annuity products which were marketed, and appropriately so, I believe, to Maryland school teachers as part of their retirement planning. It has property and casualty coverage in the state. So, it’s only a small part of our market but important.

What do you think the problems with AIG mean for the debate over federal versus state regulation?
Tyler: Well, I think one thing that state regulators can be proud of is that the insurance companies for which they are responsible are solvent and that speaks well for the job that state regulators have done and are doing. I think it is inevitable, and I would even say appropriate, that in light of everything that’s happening in the financial markets, that in the months and years ahead, we’re going to have a serious and important debate in the country about regulation of financial institutions, including insurance.

It would be important in that debate for state authorities to make the case of why state regulation has been effective and at the same time to recognize that the federal government needs to be better informed about insurance.

As you may well know, the National Association of Insurance Commissioner supported, for what it’s worth, I personally supported, the legislation to establish an Office of Insurance Information, believing that of course the federal government should get better informed about an important part of the economy.