Market Withstands Hits From Two Hurricanes
No solvency issues raised by Charley and Frances; new building code does its job
Hurricanes Charley and Frances have more than tested the mettle of insurance and risk management mechanisms put into place after 1992′s Hurricane Andrew, and the verdict is in they are in fine fettle.
Robert Hartwig, senior vice president and chief economist for the Insurance Information Institute in New York, was among the chorus of observers who made that assessment last week, even as a third possible monster hurricane Ivan seemed to set its sights on a U.S. landfall as this edition went to press.
"What it means is that the Florida insurance market remains strong. We don't have any solvency issues," Mr Hartwig said. "We are not concerned about the massive dislocation in the Florida market like we were post-Andrew, where 11 insurers went bankrupt and insurers were looking to drop hundreds of thousands of policyholders simultaneously."
The two storms in the past month are not expected to approach the insured damage costs from Hurricane Andrew in 1992, which was a whopping $20.3 billion in 2003 dollars, but they will come too close to comfort for some.
On Sept. 8, the director of the Florida Hurricane Catastrophe Fund said the fund most likely will not have to tap any of its $8.85 billion in tax-exempt bonding authority to satisfy the expected demands of insurers.
Created after Hurricane Andrew, the fund compensates private residential insurers for losses above $5 billion in any single hurricane.
The fund's senior director, Jack Nicholson, said that industry estimates and computer models indicated that excess losses are unlikely to exceed the fund's cash on hand.
In addition, after Hurricane Andrew, the state created the Citizens Property Insurance Corp. as an insurer of the last resort. It is now the state's second-largest homeowners insurer.
This came about as the major national insurers pulled out of the coastal market following Andrew. And that fact, along with more sophisticated modeling techniques, has protected many of the Florida-only insurers from suffering the same bankruptcy fate that befell similar companies as a result of Andrew.
But Jay Gelb, an analyst with Newark, N.J.-based Prudential, asserted that the state's top provider of homeowners insurance State Farm has not fully learned those lessons. Its estimated $1.3 billion of losses from Charley stood in marked contrast to Allstate's $425 million, even taking into account their overall positions.
"Our hope is that significant losses for State Farm will keep the company focused on disciplined growth that will keep a favorable environment intact for personal lines insurers," Mr. Gelb wrote in a note to investors.
After Andrew, companies such as State Farm, Allstate and Nationwide set up Florida-only subsidiaries to wall off catastrophe exposure in Florida from the rest of the companies' operations.
"It remains to be seen the extent to which the larger, more capitalized companies will support these subsidiaries should they get into financial difficulty," said Michael Barry, an analyst with Fitch Ratings in New York. "However, even though they may not be legally required to support their Florida-only subsidiary, there is an implied obligation in that failure to do so would increase the reputation risk to the company in the marketplace."
Florida's toughened building code post-Andrew is also expected to come under a microscope in the wake of this season's storms. In fact, earlier this month the Florida Building Commission voted to close a loophole that would have let some of the more stringent wind-resistant requirements lapse.
"This oversight would have lessened the requirements for wind-resistant construction in the state's interior and made homes over a large area vulnerable to high winds similar to those of Hurricane Charley," said Tim Reinhold, vice president of the Institute for Business and Home Safety, an insurance industry sponsored group based in Tampa, Fla.
So far, the evidence indicates that new homes built under the new code are faring quite well, according to Mr. Rheinhold. (This verdict was backed up by AIR, a risk modeling firm in Boston. See page 36.)
In 1994, Broward and Miami-Dade counties adopted the nation's toughest wind-speed codes, forcing new construction to withstand winds up to 150 miles per hour. But building industry lobbyists helped to water down those requirements statewide and confine them primarily to the coasts.
Reproduced from National Underwriter Edition, September 9, 2004. Copyright 2004 by The National Underwriter Company in the serial publication. All rights reserved.Copyright in this article as an independent work may be held by the author.
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