Big Fla. Storm Assessments Could Exceed $50 Billion: Report

If a 1-in-250-year storm were to hit Florida, policyholder assessments to support the state's hurricane catastrophe fund and its insurer of last resort could total $53 billion, a reinsurance broker reported this week.

Paul Kneuer, senior vice president and chief reinsurance strategist for Holborn Corp., a New York-based reinsurance broker, one of the authors of a new white paper on the Florida property insurance market, said the $53 billion figure represents the burden of such a storm on Florida homeowners--and ultimately, perhaps on the federal government.

Mr. Kneuer said that one key step in developing the assessment estimate was to calculate the market share of the state's residual market insurer, Citizens Property Insurance Company.

He believes that the report, titled "Florida 2007 Update: Law Changes and Market Responses," is the first to reveal Citizens' market share, which he put at about 23 percent for 2006, and at 31.2 percent for 2007. He estimates the share will rise above 35 percent in 2008.

"There's really no public data," said Mr. Kneuer.

In his view, state politicians are "trying very hard not to talk about" how big Citizens and the Florida Hurricane Catastrophe Fund have gotten and "what the potential downside is to the state," Mr. Kneuer said in an interview yesterday.

However, one official has sounded something of a warning. The state's Chief Financial Officer Adelaide "Alex" Sink told an NCCI conference in May that the state is "crossing its fingers" that no big storm will hit and that Citizens is writing actuarially unsound policies.

The politicians in Florida, said Mr. Kneuer, "are definitely whistling past the graveyard."

Legislators there "entirely view this as something they can just punt to the federal government," he said, referencing a remark made earlier this year by a former Florida state senator, who said when Florida lawmakers increased the size of the Florida Hurricane Catastrophe Fund in January, one intent was to "create a large funnel" for the federal government to "pour money into." (See NU Online News Service, May 16.)

Holborn's white paper is not the first to estimate the dollar impact of a 1-in-250-year event on Floridians. Last month, Milliman, in a report commissioned by the Property Casualty Insurers Association, put a $69 billion price tag on such a storm, also attaching a $26 billion figure to a 1-in-25-year storm.

According to Holborn, its estimate of $53 billion in assessments equates to about $3,000, or one month's average take-home pay, for every person in the state.

Breaking down the $53 billion figure, Mr. Kneuer estimated:

o $23 billion in assessments from total limits losses to the Florida Hurricane Catastrophe Fund.

o $25 billion in assessments to shore up the operating deficit at Citizens.

o At least $5 billion in guaranty fund assessments, assuming that a 1-in-250-year storm would bankrupt all "limited apportionment companies"--small companies that write the majority of their business in Florida.

The $23 billion estimate for the Cat Fund exposure, he explained, includes exposure to a $12 billion layer of coverage that--as a result of the insurance reforms signed into law in January--sits above an existing $15.9 billion layer.

The Cat Fund's ability to pay claims is backed by state bonding authority. The bonds, in turn, are serviced by policyholder assessments collected by voluntary carriers for most lines of insurance, including auto, at a maximum rate of 10 percent, according to the white paper.

Mr. Kneuer noted Citizens' market shares presented in the report and used to calculate Citizens' portion of a $147 billion 1-in-250-year loss are conservative. The 31 percent share figure for 2007, for example, is based on an assumption that exposures in the voluntary market "won't grow." But they're likely to shrink, he said.

"We've seen USAA say they expect to lose 10 percent. [And] our medium-sized clients that dabble in Florida all have very deliberate shrinkage strategies," he said.

"We visited a homeowners company yesterday that is getting rid of half its Florida volume," he reported.

Mr. Kneuer detailed some alternative assumptions for defining the overall market that could easily put Citizens' share at 40 percent by the end of the year, driving the assessment calculation even higher.

The 46-page white paper, which describes the prior law, this year's law changes and provides maps showing exposures to hurricane wind speeds along the Southeast coast, as well as population density, will be available soon on the broker's Web site at www.holborn.com.