The captive created to distribute funds to help homeowners impacted by the ‘crumbling foundations’ issue began accepting applications on 10 January
The captive created to distribute funds to help homeowners impacted by the ‘crumbling foundations’ issue began accepting applications on 10 January
“By the time this captive has fulfilled its mission it will be the largest captive insurance company ever formed in the history of the movement, in terms of paid claims,” says Michael Maglaras, the man at the helm of the Connecticut state funded non-profit captive which is aiming to help homeowners impacted by the ‘crumbling foundations’ issue.
Maglaras, superintendent of the Connecticut Foundation Solutions Indemnity Company (CFSIC) and president of Michael Maglaras & Company, adds: “If this captive completes its mission, paid losses will likely be between $1.2 billion and $2 billion. It’s going to be larger than the world trade centre captive, it is going to be the largest captive ever formed in terms of actual claim payments.”
Speaking to the captive insurance veteran, who has 42 years of industry experience under his belt, seven months after we published our first feature on the issue, it is clear that while the process is further along, the magnitude of the task remains.
A complex issue
CFSIC’s worst case scenario estimation is that there could be 30,000 homes in the state impacted by the forming of web-like cracks in their foundations, which can do irreversible damage. The issue is caused by the mineral pyrrhotite in the concrete foundations of buildings, which when exposed to oxygen and water causes the cracks to form.
Commercial insurers generally denied coverage responsibility for the issue and, so, with residents in desperate need of a solution, the state government launched the Crumbling Foundations Assistance Fund to help impacted homeowners and launched CFSIC to distribute the remediation funds.
Resolving the issue is no easy repair process. It requires lifting a house off its foundations with a crane, knocking the foundations down, and then replacing all parts of the foundation, reattaching all the utilities and dropping the house back on top of its new foundation.
“It is very complex,” notes Maglaras, “it is very expensive, it is very time consuming, but we are very, very close to the first of those repairs happening.”
The timeline
CFSIC is now accepting claims through its third party administration firm, ESIS Proclaim, having officially opened its doors on 10 January—a point which has been greatly anticipated since the state passed legislation authorising the formation of a non-profit captive as part of the 2018/19 state budget in June 2017.
The ball really began rolling in February 2018, when the Connecticut State Bond Commission approved $350,000 in funding to form the captive. Michael Maglaras and Company were selected as CFSIC superintendent in April 2018, and the board of directors was appointed in July. The nine-person all volunteer board, which was selected in accordance with the enabling legislation, included industry representatives, affected homeowners and government figures.
Prior to the launch, Maglaras and CFSIC also amassed a “very, very solid group” of service providers. These industry hard-hitters include Crowe as auditor, Marsh as captive manager, and Milliman as actuary.
The original launch date for CFSIC was set for 15 November, however, due an unexpectedly high volume of responses during the 30-day public comment period, it was delayed.
Steven Werbner, president of CFSIC and the representative of the municipal government on the board, says this public input may have pushed back the start of the programme but was “extremely invaluable”.
He explains: “Michael Maglaras received some 500 to 600 different comments that we as a board sifted through the majority of. They allowed us to make refinements to our underwriting guidelines to address a number of those comments and concerns.”
The application process for homeowners can be completed electronically online or completed by hand and then either scanned in and emailed to ESIS Proclaim, or posted to ESIS Proclaim.
Homeowners are required to indicate whether they’re applying for financial assistance for a foundation replacement (a type one claim) or for reimbursement for the costs of a previous replacement (a type two claim). For type one applications, there are additional distinctions necessary on what class of severity the claim is, one, two or three.
Speaking prior to the 10 January launch date, Maglaras predicted “a massive flood of applications”, while Werbner suggested they would receive between 400 and 700 applications initially.
Werbner added that, as the average cost of remediation of the foundations was running between $175,000 and $250,000, if his prediction is correct they “will quickly exceed the revenue that we currently have, so we are going to have to monitor that concern in terms of what the activity is for applications versus available dollars.”
Finances
Currently, the state legislature has guaranteed $100 million in funding in annual $20 million installments over the next five years. Additionally, effective January 2019, a surcharge has been added to homeowner insurance policies in Connecticut to provide extra funding to the captive. Werbner estimates that this could provide an additional $33 million over the five-year period.
He says: “If we receive the full payment, that would be around $133 million over five years, when, in fact, we may need over $1 billion.”
CFSIC is under no false illusions about finances, and Maglaras has targeted a number of potential sources for funding. He explains: “I am going to be making more requests to the state government, requests to the US Department of Housing and Urban Development, requests to the Federal Emergency Management Agency, and a very direct request to President Trump.”
Maglaras has also targeted the commercial insurance sector for funding. He says: “I am not trying to get commercial insurers to rethink declinations because that is not my job.”
“But businesses will be able to make contributions to us to help restore people’s lives, and I want the insurance industry to recognise this as an enormously important public relations opportunity.” Clearly, this opportunity has been realised by parts of the commercial insurance sector, as three insurers have agreed to provide supplemental financial assistance to current and former policyholders receiving assistance from CFSIC.
The Hartford pledged $3.5 million, Liberty Mutual Insurance pledged $7 million, and travelers pledged $5 million.
Proof in the pudding
Both Maglaras and Werbner are in agreement that it will be more effective to go back to the legislature for more funding further down the line once the issue can be better understood and real data produced.
Werbner states: “Initially we are hopefully going to get a better understanding of what the need is in terms of the number of applications. We will then be able to create data that we can go back to the legislature with.”
Maglaras adds: “We have to open our doors and we have to adjust the first hundred claims. We can talk about the number of claimants, we can talk about the average value of the loss.
We can get Milliman to project and project but if you let me get 100 claims under my belt, I will know exactly where I am going because we’ll begin to see averages, how we can control construction costs and construction value. We will get to see all those things that are critical and important.” He remains confident that the captive will be successful and that he can find the further funding it needs.
“When we cut cheques and rebuild foundations we rebuild people’s lives. People have lost the most important piece of the equity they own, their homes”, he says, “if I can rebuild 100 foundations, if I can rebuild 100 lives, I will get that funding from the state, I will get it from the US federal government, I will get it from contributions from the insurance industry. I will get it because the proof will be in the pudding.”
