Blame your Florida Legislators; don’t expect to get paid if there’s a really bad hurricane season

By Eli Lehrer
June 14, 2012

Mother Nature didn’t get the memo about the official start of hurricane season. Tropical storms Alberto and Beryl crashed the party before it started.

In contrast, Florida’s costliest natural disaster — Hurricane Andrew — was the first storm of the 1992 season and did not come ashore in Florida until Aug. 24. The approach of Andrew’s 20th anniversary reminds us that while each storm season is different, one thing remains the same: Florida still has a huge problem with property insurance.

Moreover, when the Legislature this year without reforming the state’s Hurricane Catastrophe Fund, it left the state in a dangerous position. Indeed, because of the Legislature’s inaction, a total collapse of Florida’s insurance market seems possible if the state’s luck runs out and its six-year hurricane-free spell ends. If this happens, the Legislature and some statewide officials will deserve a huge share of the blame.

Some background: The Cat Fund, as it’s popularly called, provides reinsurance coverage for all of the state’s property insurers, including Citizens Property Insurance Corp., the state agency that sells more insurance in the state than any private company.

Reinsurance is insurance for insurance companies. Unlike private reinsurance, for which companies negotiate in private transactions, every insurer in the state is required to buy Cat Fund coverage. Also unlike private reinsurers — legally required to have enough resources to pay claims they could reasonably expect to receive — the Cat Fund simply does not.

Indeed, the fund’s own managers say that a single bad hurricane season could leave it almost $3.25 billion in the hole — and there are reasons to think this is a conservative estimate.

If this happens, Florida Insurance Commissioner Kevin McCarty says almost half of the state’s 50 largest insurers would lack resources to pay customer claims and would have to enter an “administrative supervision” process, akin to bankruptcy restructuring.

It gets worse. Citizens buys its reinsurance almost entirely from the Cat Fund, unlike most large private insurers, which have at least some private reinsurance. Even though some recently passed reforms of Citizens may help, its finances still have problems.

Leaving aside these technical concerns, the fundamental question on the minds of property owners is this: Will my insurance company be able to pay me if I suffer damage?

The answer, unfortunately, is “not necessarily.” If the insurers, including Citizens, simultaneously encountered problems, more than half of all Florida residents could end up not getting paid for valid insurance claims, leaving them unable to rebuild their homes, businesses and lives.

This situation led almost everyone — insurance groups, the governor, consumer advocates, free-market organizations, a bipartisan majority of state senators and the state’s insurance commissioner — to support a set of modest reforms proposed by the Cat Fund’s chief operating officer. These reforms would reduce reliance on the fund so it could reasonably expect to pay its claims.

When the legislative session began, the bill seemed likely to pass easily. Unfortunately, it encountered one roadblock after another, finally dying in the House when it was removed from the Economic Affairs Committee agenda.

The problem is simple: The state has gone six years without being hit by a major hurricane, and most forecasters believe that the chances of this lull’s continuing are less than one out of 100.

The run of luck can’t continue forever. Eventually a major storm is going to strike the state. If this happens, Florida’s state government could be in enormous financial trouble, and many legitimate insurance claims could end up going unpaid. The 2012 Legislature’s failure to act will deserve a huge share of the blame.

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Q&A with: Jack Nicholson

The Florida Current
By Gray Rohrer
June 11, 2012

Jack Nicholson has held the position of chief operating officer of the Florida Hurricane Catastrophe Fund since its inception in 1994. Before that he was in the Department of Insurance for eight years. He has a doctorate in risk management insurance from the University of Georgia and has taught at his alma mater as well as at the University of Iowa and Florida State University.

What happened to the insurance market after Hurricane Andrew that led to the Cat Fund’s creation?

What happened is that Hurricane Andrew was kind of a wake-up call because prior to Hurricane Andrew causing all the damage, insurance companies didn’t think they could have this type of damage from a hurricane.

A lot of the companies realized they had way too much risk, they cancelled policies. At one point we had companies threatening to cancel 670,000 policies – I think Allstate alone was threatening to cancel 500,000 policies.

But the state said to the insurance companies, “We’re going to limit your exit to the state but we’re going to create a catastrophe fund to provide you with reinsurance,” because that was one of the reasons they were leaving the state is they didn’t have reinsurance because the reinsurers recognized they were way overexposed, too.

How was the Cat Fund affected by higher insurance rates after the 2004 and 2005 hurricanes? How did it get as large as it is today, covering a maximum $17.3 billion?

So we had the 2006 elections where all the people running for office in Florida had too many objectives to lower property taxes – that was a big issue – and then also lower insurance rates.

That was done by expanding the Cat Fund. You know if it works, which everybody agreed, it was kind of like a model for the nation back in 2006. And in 2007 they said, “We’ll let’s just expand it by $12 billion. A little bit is good, let’s just create more!”

A recent bond capacity report showed that the Cat Fund would need to borrow nearly $8.76 billion to pay its maximum potential claims this year, but it’s only estimated to be able to bond for $7 billion. How does the current global climate play into the fund’s bond capacity and its fiscal soundness?

It’s the retail and the bond funds that are basically our investment base right now. It used to be the banks too. But the banks, once the subprime (mortgage crisis) hit and the economy started to compress, they started looking very carefully at municipalities and knowing how their revenues could be affected.

It’s the whole aftermath of what happened with the subprime (mortgage crisis). It’s the whole mentality of now having to do a lot more research and analysis on municipal debt. The concern of buying something that investors don’t understand …. analysts began to be held accountable for that investment.

So how dire is the outlook for the Cat Fund?

A lot of people write about this. Some of the people that write about it represent the reinsurance industry and want to characterize it a certain way so it looks like the Cat Fund is failing. Or some other people have characterized the Cat Fund a certain way because they don’t like assessments. The fact is there can only be a shortfall at the time of an event. We’ve never had a shortfall.

The number that we used this year was $15.56 billion, which is less than the coverage that we potentially offered this year. Actually it turned out, based on coverage selections and everything, that the maximum we would have to pay under the law or that we could pay under the law was $17.2 billion.

Given the problems passing legislative reforms to the Cat Fund, will it take another storm or the calming of the bond market to provide stability?

Forget about the bond market stabilizing, OK? The economy’s never going to stabilize, so we’re always going to have that risk, so forget about it.

The other part is whether there’ll be a political appetite to do anything for the Cat Fund and I guess Citizens as well – we’re all in the mix of dealing with the insurance problems. Since these guys haven’t been elected yet, I don’t know.

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Don’t expect others to bail out Florida

Tampa Bay Times
By Thomas C. Feeney
June 11, 2012

In response to this op-ed, it is delusional to believe that leaders from 49 other states would willingly raise taxes on their own citizens to pay for Florida’s hurricane risk. While Associated Industries of Florida agrees our state and the country should be better prepared financially for natural disasters, Florida’s taxpayers are already saddled with underfunded government-run insurance entities. We don’t need a new federal insurance program that promises to be self-funding but, in reality, will burden taxpayers everywhere with additional debt. We need real-world solutions that will cover our state and our citizens in the event of a major storm.

Floridians know how easy it is for political influences to interfere, resulting in government insurers that charge inappropriate and actuarially unsound rates. Through both Citizens Property Insurance Corp. and the Florida Hurricane Catastrophe Fund, the state has placed a huge amount of risk on the backs of all Florida business owners, homeowners, renters, churches and charitable organizations while subsidizing a select group of homeowners at everyone else’s expense.

Leaders of our state-run insurance entities are working to fix the issues facing the state as they realize the negative consequences associated with the current system. Cat Fund chief operating officer Jack Nicholson wants to “right-size” the fund. Tom Grady, Citizens interim president, is telling Florida consumers, “Don’t buy my product” as the premium is essentially just a “down payment” on the actual cost of the policy.

Given the country’s current unstable economic condition, Florida needs to wake up from its collective dream that the rest of the country is willing to bail us out. We need to accept the facts and begin to get our financial house in order before a devastating hurricane destroys our way of life.

Thomas C. Feeney III, president and CEO, Associated Industries of Florida

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R Street report card ranks Vermont best, Florida worst regulatory environments for insurance

R Street
By R. J. Lehmann
June 4, 2012

The R Street Institute published its first research project as an independent institution today, a report card of the insurance regulatory environments in each of the 50 states. The report card builds on a series of annual reports my colleague Eli Lehrer previously conducted for the Heartland Institute’s Center on Finance, Insurance and Real Estate, and we plan to make it one of our flagship annual reports as well….

Based on the metrics we used, Vermont, Illinois and Ohio had the best property and casualty insurance regulatory environments in the U.S. this year, all rating more than two standard deviations above the mean. The best state, Vermont, scored 26 out of a maximum possible score of 55. Only one state, Florida, received a failing grade, falling more than two standard deviations below the mean. Other states falling more than one standard deviation below the mean include Alaska, Michigan, New York, California, Massachusetts and Texas….

To read the full story and for a link to the “Report Card”, go to:

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Feud over Citizens insurance is becoming a North v. South fight

The Miami Herald Blog
By Mary Ellen Klas
June 4, 2012

It’s deja vu all over again. The latest election year fight over the future of Citizens Property Insurance is coming down to a war between politicians representing the interior and North Florida counties, whose Citizens rates are low and whose constituents don’t rely on the state-subsidized insurer, and politicians who represent the coastal and sinkhole counties who are dependent on the insurer.

Consider a letter sent today to the interim head of Citizens, Tom Grady, from 23 members of the state House and three state senators urging the insurer to move forward with its controversial plans to raise rates by as much as 30 percent in some areas. There’s not a South Florida legislator in the bunch….

To read the full story, go to:

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Florida Cat Fund’s Financial Condition Triggers A.M. Best Review of Insurer Ratings

Insurance Journal
June 4, 2012

Insurers writing homeowners coverage in Florida could see a revision in their financial ratings after one of the nation’s top rating companies announced it will reconsider them in light of the financial problems faced by the state-back reinsurance facility.

A.M. Best said earlier this year it would reevaluate its treatment of insurers’ reinsurance capacity when the Florida Hurricane Catastrophe Fund indicated it would likely have trouble meeting its statutory obligations….

To read the full story, go to:

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Citizens is a bargain with an expensive bite

The Fort Meade Leader
June 3, 2012

Citizens Property Insurance Interim President Tom Grady is on a listening tour of Florida, but he also has an unusual message from the CEO of a multi-billion dollar insurance company: Don’t buy my product….

To read the full story, go to:

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Florida Worry Season Starts

Wall Street Journal
By Leslie Scism
June 3, 2012

Thanks to six straight years without a hurricane and a welcoming market for so-called catastrophe bonds, Florida’s state-run insurance program started the storm season in better shape than in past seasons to pay damage claims.

But some Florida officials are concerned that even one highly destructive storm could batter the unusual program and the state’s struggling economy, despite forecasts of a gentler-than-normal hurricane season.

Florida has more vulnerable beachfront than any other U.S. state.

Since Hurricane Andrew barreled through in 1992, Florida has been a laboratory for officials eager to hold down the cost of insurance even as private-sector insurers retreat.

Under Florida’s program, two big, state-run insurance entities might need to sell billions of dollars of bonds after a storm. Such bonds would be paid off through assessments on property-casualty policyholders of all insurers in Florida and many other types of insurance. Businesses would also bear a burden.

But critics say Florida shouldn’t count on massive bond sales when future market conditions are unknowable.

“It would take a pretty bad storm to trigger all that, but we could have a real mess on our hands,” said Sam Miller, executive vice president of the Florida Insurance Council trade group. Some insurers might collapse if the bond sales went badly.

Colorado State University experts are predicting 13 tropical storms, five hurricanes and two major storms with winds of at least 111 miles per hour during the season that began Friday. A hurricane has winds of at least 74 mph.

Florida officials acknowledge the need to shrink the state-run insurance program, citing the recent sale of $750 million in catastrophe bonds as a milestone.

That was one of the biggest such deals in U.S. history and the first by Florida, said Sharon Binnun, chief financial officer of Citizens Property Insurance Corp.

The state program insures about 1.5 million homes and businesses, or about one-fourth of the market, with $505 billion in risk exposure.

Bond investors could be wiped out if a major hurricane hits.

According to risk modelers cited by Standard & Poor’s, Andrew and an unnamed 1926 storm would have caused the loss of all principal.

Paul Schultz, chief executive of Aon Benfield Securities, said demand for catastrophe bonds has been strong this year as pension funds seek investments with performance that isn’t tied to other markets.

Citizens, which has a surplus of about $6 billion, also recently purchased $750 million of private-sector reinsurance.

Earlier this year, Citizens was adding thousands of new policyholders every week. The torrid growth has eased as executives try to make its policies less attractive.

Officials are increasing rates by the maximum amount allowed by law and have capped coastal homeowner coverage at $1 million, among other moves.

If a major storm strikes, most of the bond sales would be the responsibility of the Florida Hurricane Catastrophe Fund. The entity provides a type of low-cost reinsurance to Citizens and more than 165 other insurers in Florida.

This hurricane season, the fund could be responsible for as much as $17.3 billion in payments.

In the event of a major hurricane, the fund might need to sell up to $8.76 billion of bonds to supplement its reserves. Yet its 12-month capacity for such sales is about $7 billion, based on the average of four estimates from Wall Street firms obtained in May by Raymond James Financial Inc., the fund’s financial adviser.

Earlier this year, Florida Hurricane Catastrophe Fund Chief Operating Officer Jack Nicholson unsuccessfully pushed for legislation that would have shrunk the entity, given the unpredictability of credit markets.

He is concerned about a repeat of the frozen financial markets of 2008.

“What would have been the financial impact on insurers and the state’s economy?” he said. “This is what keeps me up at night.”

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One word explanation for growth of Citizens Insurance – politics
By Brent Batten
June 3, 2012

In case you were wondering how Citizens Property Insurance Co. went from being an insurer of last resort with high rates to being an insurer of first resort with relatively low rates and a portfolio that threatens both customers and non-customers with gargantuan risks, here’s what happened:

Politicians got involved…..

To read the full story, go to:

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Insurers brace for storms, both real and financial

Tampa Bay Online
by Ted Jackovics
June 2, 2012

The wind and rain beating against the Grand Hyatt Tampa Bay conference hall seemed particularly appropriate Friday. After all, it was the first day of hurricane season, and the hotel was packed with insurance industry representatives and elected officials tackling Florida’s property insurance crisis.

The weather also prompted State Rep. Dean Cannon, a Winter Park Republican, to remind the group of Tallahassee’s Plan B the past half-dozen years:

“Pray we don’t have a hurricane,” he said….

To read the full story, go to:

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