Thanks to a string of very good luck — namely, four consecutive years of calm hurricane seasons — the Florida property insurance market appears able to absorb the blow of a large storm in addition to a series of smaller events this year. But there remain "elephants in the room"–natural and man-made threats that put the Sunshine State's long-term stability at risk, industry officials warn.
Claims will likely get paid in 2010 if there is just one major hurricane and perhaps even a few additional smaller events, but that could leave the market short of funds to pay for another major catastrophic loss later this year or even in future years, these players ominously add.
"We'll have to find a way to recharge after a large event or its equivalent. There will be a big hole," said Jack Nicholson, chief operating officer of the Florida Hurricane Catastrophe Fund.Even if the Sunshine State's luck holds up and its $2.46 trillion of insured coastal exposure is spared a major event once again in 2010, that doesn't mean a laundry list of non-weather related factors (sinkholes and reopened claims, for example) will disappear.
"The cost drivers in the system have not been capped," noted Florida Insurance Commissioner Kevin McCarty. "There are incurred losses in the pipelines because of these trends."The FHCF, which provides reinsurance to the marketplace, believe it can fully fund its current exposure, while Citizens Property Insurance Corp., the state's so-called last-resort carrier, has more cash on hand than ever before. But additional complications make the future of the Florida property insurance market problematic.
Veto Impact The industry supported it. The Florida Legislature passed it. But when S.B. 2044 landed on Gov. Charlie Crist's desk, he vetoed the omnibus property insurance bill that would have addressed at least some of the drivers behind Florida insurance companies reporting underwriting losses even without the wind blowing.
"The direction the market is going is not sustainable over the long term," according to William Stander, assistant vice president and regional manager with the Property Casualty Insurers Association of America.
Floridians are still paying for 2005′s Hurricane Wilma. Residents have five years to file a claim after a storm and public adjusters are not shy about letting homeowners know about it. As a result, claims are still rolling in to insurers.
The FHCF needed approval for another $700 million in bonds to cover the adverse development of reopened claims. The omnibus bill — among a few other provisos that the industry considered steps in the right direction for the market — would have alleviated such problems by shortening the length of time to file a claim to three years from five.
Florida insurance policyholders–commercial, home and auto–are assessed to pay back the debt.
"This all gets compounded if we get another storm," said Lynn McChristian, Florida representative for the Insurance Information Institute. "In Florida it's today's debt for future generations."
Yet even with no change in the residential property insurance market in 2010, here are the facts — or the "elephants in the room," as I.I.I. President Robert P. Hartwig calls them — that continue to loom large. o Exposure continues to grow. Insured coastal property increased 24 percent from 2004 and isn't stopping despite the stagnant economy. "Florida's demographics and land-use policies make it certain that catastrophe losses in the state will rise in the future," Hartwig noted in a recent report delivered at the Governor's Hurricane Conference in Florida. o Insured losses in Florida are nearly double that of any other state over the last 30 years, accounting for 19 percent of all U.S. losses from 1980 to 2008. o Mandated rate suppression in Florida for several years led to less competition, and the state still remains too dependent on the credit market to pay claims, Hartwig warned.
Still, the FHCF is as "strong as it's ever been," according to Nicholson. Once said to have a shortfall close to $20 billion, the fund boasts it now can fund and cover all of its obligations — if the prognosticators are correct, and it can sell a bit more than $9 billion in post-event bonds to reach its $25.5 billion total capacity.
Capital market experts, citing an improved bond market, actually said the FHCF can get nearly $16 billion in bonds following a storm, leaving a margin for error. That's for the worst-case scenario, something along the lines of a Hurricane Andrew-type event (which is a bit ironic since the FHCF was started after the 1992 storm).
Forecasters say there is less than a five percent chance of the state being hit with another Andrew-size event, but those odds might not give much comfort to local carriers, given that Andrew was Florida's costliest storm ever, causing $23.8 billion in insured losses (in 2008 dollars).
In saying the FHCF is the strongest it has been, Nicholson means it has access to a good amount of liquidity, about $9.5 billion, made up of about $6 billion in cash and $3.5 in pre-event bonds. A one-in-20-year storm would be needed to wipe this out. In addition, the local insurance industry has more than a $7 billion retention that must be eclipsed before the FHCF is triggered. That represents about a one-in-nine-year storm.
"We are still relying on a good bit of debt and the bond markets are volatile," Nicholson noted. Indeed, it may take awhile before the FHCF realizes it has to go to the bond market, and with the five-year rule unchanged for reopened claims, it is anyone's guess how that scenario might work out following another major storm.
"With the persistence of reopened claims, it doesn't bode well for the next hurricane," said Commissioner McCarty.
Last year, legislation was signed to reduce the $12 billion exposure of an optional layer of reinsurance available from the cat fund. The layer is now at $10 billion, and will be reduced $2 billion each year until it is dissolved.
In the meantime, premiums for this layer will increase to make it less attractive to insurers. It seems to have worked in the first year, as many insurers chose not to tap the optional layer, or chose to buy less from it. (Citizens did not buy any.)
"There were more risk transfers to the private reinsurance market, which was robust this year," McCarty reported.
Citizens remains the largest property insurer in Florida, with more than one million policies extending about $405 billion of coverage to Floridians. But Citizens says it is in the best financial shape ever, thanks to Mother Nature, which has not struck the state with a major windstorm since 2005.
As a result, Citizens estimates its claims-paying capacity at $14 billion, meaning it "requires no outside liquidity for the first time in Citizens' history" for its personal and commercial accounts, according to a presentation to the Florida Insurance Council by Christine Turner-Ashburn, director of legislative and external affairs for the carrier.
If there is a deficit, the state-run insurer has the power to assess its policyholders. (The 2010 projected assessment base is $33.5 billion.)
A rate freeze on Citizens has been lifted. It is now permitted to raise premiums, but by no more than 10 percent per policy, which is much less than needed to be actuarially sound, industry observers point out. A rate hike request is under review by the Office of Insurance Regulation.
Thanks to a depopulation program, Citizens' exposure had declined, but there's a possibility it is getting back some policies once removed by take-out companies, liquidated carriers and State Farm Florida under an agreement to keep the insurer and its capital in the state.
Citizens Executive Vice President Susanne Murphy said the insurer received about 55,000 new business applications since the first week of May from former policyholders of now defunct Magnolia Insurance Company and Northern Capital Insurance Company. "The most immediate impact is in terms of processing times and policy issuance standards," Murphy said. "Adding these policies will not affect our claims-paying ability."
Other policies may come from intact domestic carriers that once took accounts from Citizens and had to keep them for three years to receive incentives to stick around that no longer exist, leaving companies with policies that "skewed their books of business," according to McCarty.
"Their [probable maximum loss] got out of whack and it became difficult to buy reinsurance," McCarty said. Allowing companies to shed some policies is a "solvency enhancement," he added. They can recalibrate their books to make reinsurance costs — one of the reasons insurers say they are struggling in Florida — more affordable, he explained.
Meanwhile, the catastrophe fund and state-run insurer may be in good shape for a large storm, but that "doesn't guarantee there will be no insolvencies" following a significant event, warned McCarty.
The commissioner's office performed an intensive review of the industry at the start of the year and found about the half of insurers were reporting underwriting losses, driven by reinsurance costs, fraud, sinkhole claims, mitigation credits and replacement cost methodology.
The reviews also resulted in disciplinary actions against several carriers–much to do with their relationships with affiliated holding companies and managing general agents. The Florida Office of Insurance Regulation will do "more financial reviews in the future," according to McCarty, who sought additional oversight for his office in the vetoed S.B. 2044. "It'll just be a little more labor-intensive on our part."
The commissioner's office is counting on insurers to take part in their own risk assessments, getting rid of the one-size-fits-all standard of preparing for probable maximum losses from a one-in-100-year storm. The idea is that the frequency of storms, not the severity of one, could bankrupt companies quicker than a large but single event.
Insurers are quick to point out the average rate per $1,000 of exposure has dropped 30 percent since 2007, while the average non-hurricane loss per policy, per year has gone up 65 percent since the start of 2007 as both frequency and severity have increased. The Insurance Information Institute said the average homeowners premium in Florida is down 14 percent since March 2007, saving policyholders an average of $274.
There needs to be a "refocus on rate adequacy to keep retention levels fully funded" for the storms that do not hit reinsurance retentions, meaning insurers maintain all the losses, according to Bob Warren, client services manager with Demotech Inc., a financial analysis firm.
"There is no guarantee any [company] will survive without severity and frequency at the right severity/frequency level," Warren said. Demotech noted that 13 companies modified their reinsurance programs to address concerns the firm had about multiple event scenarios and retention, for example.
"How long can we keep kicking the can down the road? Florida needs to get ahead of these problems," warned McChristian of I.I.I.
"The industry as a whole is strong–financially stable," said PCI's Stander. "I do believe the industry is capable of handling a storm this season.But we don't know," he continued. "It has not been tested. That is the real scare. And after some good years — some opportunity to improve the market — Florida could find itself in a terrible situation."
Chad Hemenway is an Assistant Editor with National Underwriter, part of Summit Business Media's P&C Group, which includes Florida Underwriter.

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