So if the "Big One" finally hits Florida, how much will it cost the average homeowner?

A lot, according to an analysis developed by Citizens Property Insurance Corp.

The state-created insurance carrier was asked to draw up detailed numbers for Gov. Rick Scott and members of the Florida Cabinet that would spell out just how much more policyholders—those in and out of Citizens—would have to pay if a large hurricane strikes.

Those homeowners with Citizens' policies could find themselves paying $1,000 more in the first year following a 1-in-100 year storm. That's the amount that they would pay between increased charges on both their property insurance policy and other assessments that can be placed on other types of coverage, including auto insurance policies. Those not insured by Citizens could still wind up paying as much as $323 more in assessments.

The study shows that Floridians could be paying an additional $39 to $47 per year on auto insurance policies after that first year for the next 29 years.

"Someone is going to pay the piper here,'' said Cabinet member and Chief Financial Officer Jeff Atwater.

Scott and the Cabinet asked for the analysis as part of an effort to understand the consequences if Citizens had to pay out huge claims associated with a large hurricane.

Since his days on the campaign trail the governor has been advocating making changes to Citizens to transform it once again into the state's insurer of last resort. Citizens right now is the state's largest property insurer with 1.35 million policyholders and a total exposure of $460 billion.

Lawmakers did not make any substantial changes to Citizens this past session, and Scott says that he wants more done to reduce its exposure.

"I don't think we'll be there until we have a robust system again and when Citizens is the insurance company of last resort,'' Scott said.

Sizable Assets
It's not that Citizens doesn't have a fair amount of resources to tap into if a storm hits.

Because Florida has had 5 hurricane-free years, the company has built up a decent-sized amount of surplus. The new numbers show that Citizens expects to have a total surplus of more than $5.7 billion by the end of 2011.

The company also has $2.9 billion worth of bond proceeds it can tap into, as well as $575 million worth of private reinsurance coverage and another $6.59 billion worth of reinsurance coverage from the state-created Florida Hurricane Catastrophe Fund. The carrier is also seeking to borrow an additional $900 million heading into this storm season.

The analysis conducted by Citizens shows that the carrier could easily withstand a 1-in-5 year storm similar to Hurricane Frances in 2004 or even a storm of a 1-in-25 year magnitude. That cushion, however, would be lost with a major storm.

A 1-in-50 year storm similar to 1992's Hurricane Andrew would occasion the need for nearly $3 billion worth of surcharges and assessments on insurance bills in Florida. A 1-in-100 year storm would trigger nearly $12 billion worth of additional charges.

The way these charges and surcharges work is somewhat complicated, and involves three separate accounts that the carrier manages.

Citizens' policyholders are grouped in one of three accounts: a personal lines account that provides residential multi-peril accounts; a commercial lines account that covers apartment buildings, condominium associations and office buildings; a coastal account that provides both wind-only coverage and multi-peril coverage along the state's high-risk areas closest to the water. A deficit in any of the three accounts can trigger one of three assessments on insurance bills. The first assessment that is charged is called a Citizens' policyholder surcharge and it is paid only by Citizens' customers. However, the surcharge can be up to 15 percent for each account for 12 months. That means in the event of a truly large storm the surcharge could hike Citizens' policyholder bills by as much as 45 percent.

The second type of assessment is called a regular assessment. It is charged to non-Citizens' policyholders, including all property insurance and auto insurance policies in the state. (Worker's compensation, medical malpractice, and federal flood insurance policies are exempt.) This assessment can be up to 6 percent of premium or 6 percent of the deficit for one year.

Then there is an emergency assessment, which can be up to 10 percent of premium and can be collected for any length of time, even as long as 30 years. Floridians right now are still paying off an emergency assessment of 1 percent triggered by 2005 storms.

However, the problem isn't just Citizens' ability to deal with the Big One.

A series of smaller storms in one year—similar to what happened in 2004 and 2005—could also trigger surcharges and assessments.

"Forget about the Andrews and Katrinas. We got in this decade a proven track record of multiple small to medium sized storms,'' said Agriculture Commissioner Adam Putnam during the Citizens' presentation.

Citizens' officials have acknowledged that is a concern. Earlier in the year Citizens did a presentation to state legislators that suggested two 1-in-10 year storms could trigger both the policyholder surcharge and the regular assessment.

Building Up Resources
This concern about multiple storms was one of the chief reasons Citizens took steps to shore up its finances heading into this year's hurricane season.

After a contentious debate, the board that oversees the carrier agreed in late May to borrow up to $900 million this year and spend $125 million to purchase $575 million worth of private reinsurance coverage.

By law, Citizens must purchase mandatory coverage from the Florida Hurricane Catastrophe Fund. However, the Citizens' board has usually not purchased additional private reinsurance.

Some of the board members questioned the expense of private reinsurance and said it should only be purchased in the event of a second storm. They noted that the odds were extremely low that losses would be high enough to even trigger a reimbursement.

But Sharon Binnun, the chief financial officer for Citizens, justified the purchase of private reinsurance as a way of "transferring the risk out of Florida." She said having private insurance would lessen the need to turn to Floridians to help cover massive losses.

The major difference between the bonds and the reinsurance is that the bonds will give Citizens access to cash that can be used as a bridge to help pay off claims right after a storm. By contrast, Citizens will only get a return on its reinsurance premiums in the event that losses are so high that it is forced to make a claim. The reinsurance policies are also only good for one year.

Special Reports /

New Figures Disclose Citizens Property Insurance Corp.’s Strengths, Weaknesses

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