Fla. Mega-Cat Assessment May Top $50B

If a one-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 has warned.

Paul Kneuer, senior vice president and chief reinsurance strategist for Holborn Corp. (a New York-based reinsurance broker, and 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 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 his report--"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 31.2 percent for 2007. He estimates the share will rise above 35 percent in 2008.

"There's really no public data," according to 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.

However, one official has sounded something of a warning. The state's chief financial officer, Adelaide "Alex" Sink, told a National Council on Compensation Insurance conference in May that the state is "crossing its fingers" 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."

Florida legislators "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 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."

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

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

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

The catastrophe 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, including auto, at a maximum rate of 10 percent, according to the white paper.

Mr. Kneuer noted that Citizens' market shares presented in the report--used to calculate Citizens' portion of a $147 billion, one-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 year's end, driving the assessment calculation even higher.

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

In the event of a one-in-250-year storm in Florida, policyholder assessments for the state's cat fund and insurer of last resort could hit $53 billion under the following scenario, noted Paul Kneuer, chief reinsurance strategist for Holborn Corp.

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 one-in-250-year storm would bankrupt all "limited apportionment companies"--small insurers writing the bulk of their business in Florida.