Florida Hurricane Fund Has $3.2 Billion Shortfall

Insurance Journal
October 20th, 2011

Florida’s hurricane fund is confronting a potential $3.2 billion shortfall, financial experts said in a new estimate of the money available to the pool intended to help insurers make disaster payments.

The fund was created after Hurricane Andrew devastated South Florida in 1992. Insurers get help to pay homeowners if a storm results in widespread damages.

But the fund doesn’t have enough cash on hand to meet all of its obligations in the event of a big storm, or just as bad, a series of hurricanes. So the fund must go out and borrow what it needs.

Financial experts for the fund, however, have drawn up new estimates that contend that turmoil in financial markets and a weak economy have made it unlikely that the fund would have enough money to help insurers after a hurricane.

This year the fund is providing $18.4 billion worth of coverage. It should have more than $7 billion of cash on hand by the end of the year, but it would still need to borrow another $11 billion if a storm were to strike.

The new estimates, which were to be presented to a state panel Tuesday, suggest the fund could borrow just $8 billion over a 12-month period.

The new figures, however, do suggest that the fund — formally known as the Florida Hurricane Catastrophe Fund — could borrow an additional $6 billion during a period one to two years following a major storm.

The news that the fund’s financial strength has eroded isn’t completely unexpected.

Last month Jack Nicholson, the chief operating officer of the fund, told state legislators that the fund is on “shaky ground.”

“I think we are dangerously overexposed considering the current reality of the marketplace,” Nicholson said at the time. “… It scares me to death where we are.”

Nicholson wants state lawmakers to scale back the size of the fund. That would likely cause insurance premiums to rise but it has the backing of many key Republicans, including Gov. Rick Scott.

Every insurer currently in Florida is required to purchase coverage from the “Cat Fund” as it also called. The fund provides a backstop to insurers at a rate that is generally cheaper than reinsurance sold by private companies. Nicholson estimated that this low-cost option probably results in insurance premiums being about 25 percent cheaper.

If a storm causes enough damages the insurer can ask for reimbursements from the fund. But if the hurricane fund runs out of cash due to a large storm, it borrows money to pay insurers.

The state pays off its debts with an assessment, or what some call a “hurricane tax,” that is placed on nearly every insurance policy in the state, including auto insurance policies. Right now, homeowners and drivers in Florida are paying off charges due primarily to Hurricane Wilma.

-By Gary Fineout

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Florida Lawmakers Contemplate the Future of Citizens

Insurance Journal
Thursday – October 6, 2011

With four months to go before Florida’s legislative session, lawmakers are already considering the future of the state’s largest homeowners’ insurer. However, there are few easy answers in sight.

Citizens Property and Casualty Insurance Corp. Chief Financial Officer Sharon Binnun painted a picture of an insurer that continues to dominate the market. The insurer now covers 1.4 million state residents, representing more than 20 percent of Florida’s market.

“We are growing by a 1,000 policies a day, sometimes even more,” said Binnun at a Senate committee hearing.

Binnun said the majority of that growth is coming in the insurer’s personal lines account, which now represents 946,000 homeowners. By comparison, just two years ago, there were 607,000 policyholders in that account. The insurer’s coastal account currently has around 440,000 policyholders, with the remaining policies in the commercial account.

She said the reasons for that growth include that the insurer’s rates remain competitive or lower than the private market, many agents do not have another market, and Citizens’ underwriting is less stringent than that of many private companies.

That could change, she said, but not without some significant action by lawmakers and regulators. “You don’t have to recreate the wheel,” she said. “But it is difficult to make difficult choices.”

Senator Don Gaetz (R-Destin) said that the insurer is undermining the entire market given its current regulatory scheme. He said this represents a significant burden on Florida residents, many of whom are not even aware of the possible financial repercussions.

“When is it time to go back to being an insurer of last resort as opposed to being a malignant force that sucks up a 1,000 unsuspecting customers a day,” he questioned.

Binnun did say there are some reforms that could help stem the tide of policies flowing into Citizens. Namely, a bill considered by lawmakers earlier this year that, among other things, would have allowed the insurer to increase its rates beyond the current 10 percent annual cap.

That bill, however, proved to be a political non-starter and the bill’s sponsor indicated he would likely not introduce it next year.

“We have a legislative duty to the citizens of Florida to pass that bill,” said Senator Alan Hays (R-Deland). “But at the same time unless there is a significant appetite among my colleagues, I’m not going to beat my head against the wall.”

Florida’s property market has undergone a significant change in the last half dozen years. For example, in 2004, national companies represented 28 percent of the state’s market and their Florida only “pup” companies, 35 percent. Now, those national companies only represent 19 percent of the market and the pup companies 16 percent. The state is largely dependent upon Citizens and Florida domestic insurers that now represent 44 percent of the market.

Senator Mike Fasano (R-New Port Richey), who recently led the fight against Citizens proposed triple-digit increase in sinkhole rates, questioned why private companies have not returned to those sinkhole-prone areas even though an overwhelming number of residents have opted not to buy the coverage.

Binnun said there were several issues when it comes to private companies re-entering the market in those sinkhole prone areas. While being optimistic about the sinkhole provisions in this year’s property bill, she said that many companies might see Citizens as a test case to see how well those reforms actually work.

She added that the almost annual attempts by the legislature to reform the market also have an effect. “If you guarantee private companies they don’t have to write sinkhole coverage, they ask ‘for how long, and will that change next year.’”

One thing about Citizens size is that it does give it more capacity to pay claims in the event of a hurricane. The insurer has a total surplus of $5.7 billion, that along with $6.6 billion in coverage from the Florida Hurricane Catastrophe Fund, private reinsurance, and pre-event bonding gives it a total claims paying capacity of $16.7 billion.

In the event Citizens exhausts those monies, it could also levy a variety of assessments on Citizens’ policyholders and statewide on all lines of property and casualty insurance with the exception of workers’ compensation and medical malpractice.

Binnun said that given the insurer’s resources, it could withstand several storms before it needed to access funds from elsewhere.

“We are so big now it would take a lot of losses to even have to access the Cat Fund,” she said.

By Michael Adams

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Florida Insurance Commissioner gets praise for limiting sinkhole rate hikes

10NEWS – WTSP
Tuesday – September 20, 2011

Tallahassee, Florida – Customers of Citizens Property Insurance Corporation with sinkhole coverage are breathing a sigh of relief.

Florida Insurance Commissioner Kevin McCarty has rejected the huge rate increases that Citizens wanted. McCarty says the company did not justify its request.

Citizens had asked McCarty to approve premium increases of more than 2,000 percent in some areas, including Tampa. Some customers would have faced rate hikes of $6,000 a year.

McCarty approved a rate hike averaging about 33 percent statewide – less than one-tenth of the 447 percent average increase that Citizens requested.

McCarty said he tried to give the company sinkhole rates that were more actuarially sound. But he limited the increase because he said a new law passed this year should help reduce sinkhole fraud and bogus claims.

“The Legislature while uncapping the rates, contemporaneous with that, they put in a very comprehensive reform having to do with sinkholes and we think that will have a moderating effect on rates going forward.”

Citizens paid out nearly $250 million in sinkhole claims last year, while collecting only $32 million in premiums.

Sen. Mike Fasano, who pushed McCarty to hold a public hearing on the issue in Tampa, said people’s input made a difference in the case.

“We had a sign-waving rally opposing the rate increases where hundreds of people turned out. We encouraged many to write letters and e-mails and phone calls to the Office of Insurance Regulation. I know for fact hundreds did that and I also believe the message was heard loud and clear up here in Tallahassee.”

Sean Shaw of Policyholders of Florida echoed Sen. Fasano’s comments, saying people showed they can make a difference.

“I think that’s what this showed. I mean, we had rallies. We had press conferences. We had people showing up to the rate hearing, the rate hearing was moved to Tampa. A lot of politicians switched course that voted for (SB) 408 and subsequently said, ‘Ya’ know, that’s a big rate increase. People can’t afford this.’ So I think it does show if you rise up and you get involved, I think you can make a difference and that’s a wonderful development.”

Florida Chief Financial Officer Jeff Atwater called it a “solid ruling.” He praised McCarty for deciding Citizens’ request was too aggressive.

“I’m really pleased with what the commissioner did and his staff did in very, very short order. It’s what the people of Florida needed for some relief from what was coming. That was an inappropriate rate filing and didn’t take into consideration what the Legislature had done to keep down those rates. So it was well done.”

Gov. Rick Scott repeated his longstanding position on rates for Citizens Property Insurance Corp., saying he wants the company to be financially viable but fair to customers.

“We’ve got to make sure the rates are as fair as we can have to consumers but they want to have a product that they can rely on, a company they can rely if God forbid we have a hurricane, that it can pay the claims.”

The new rates will take effect in 2012.

-By Dave Heller