Florida Homeowners' Market Still Fragile

Two years ago Gov. Charlie Crist put a prayer inside a crack of the famed Western or Wailing Wall in Jerusalem asking that God spare Florida from hurricanes. A year ago, State Sen. Nan Rich (D-Sunrise), followed suit on her trip to Israel.

While standing next to Crist recently, Rich joked to the governor about whether or not someone should fly back to Jerusalem before the kick-off of the 2009 hurricane season and once again ask for divine protection.

Joking or not, Florida may need it. Despite some changes put in place this year by state lawmakers, Florida's homeowners' insurance market is as fragile as ever. Heading into this hurricane season, the overriding problems are familiar ones: Citizens, the Cat Fund, and capacity.

Citizens Property Insurance Corp. remains overexposed for risk, while the state's largest private insurer, State Farm Florida Insurance Co., wants to shutter its property insurance business and move out. The ongoing credit crunch continues to present serious challenges for the Florida Hurricane Catastrophe Fund (Cat Fund), the state-created reinsurance fund, and the price of private reinsurance is also higher this year. The board of Citizens voted in May to forgo purchasing any private reinsurance because of the cost.

The bottom line is that Florida's insurance market has yet to recover fully from the damage done by the eight storms that pounded the state in 2004 and 2005. And while Florida has avoided hurricanes the last two seasons, there is an ongoing fear about the next storm.

The most recent hurricane forecast from Colorado State University shows an average forecast for the Atlantic, with 12 named storms for the season. The forecasters predict that six of these storms will reach hurricane strength, with two of them becoming major hurricanes. There is a 32 percent chance that one major storm will strike somewhere on the eastern coast of the United States, which includes Florida.

“We have been very, very blessed since 2005 when the last group of storms hit,” said Ron Reagan, a state legislator and an independent insurance agent in Bradenton. “Every year it starts all over again. We have the same odds this year we had last year.”

Troubling Times Continue

Citizens remains the state's largest carrier with over one million policies and an exposure of $414 billion statewide. Even with its current budget surplus, a 1-in-100-year storm event could result in nearly $22 billion worth of claims — at least $5 billion short of what the company could afford to pay. Such a storm would likely trigger assessments to Citizens' policyholders and other insurance customers throughout the state.

While lawmakers this year did authorize an end to the Citizens' rate freeze, it will not take effect until 2010 — too late to help the balance sheet for this hurricane season.

State Farm Florida, the state's largest private property insurance carrier, says that while it has a surplus now, it cannot sustain itself economically after state regulators turned down a nearly 50 percent rate hike request.

The company announced plans to pull out of the Florida market months ago, but it has not received permission from state regulators as to when that process may start. That means the carrier will not drop anyone prior to or during this hurricane season, since there is a six-month notice provision.

Justin Glover, a spokesman for State Farm, said the company was already projecting insolvency by 2011 even without the prospect of any major storms coming ashore.

“That is an optimistic view,” said Glover. “If you have hurricanes this year it could speed up this process.”

While smaller companies have expanded into the Florida market over the last few years, concerns remain about their viability. Coral Insurance of Hollywood was placed into receivership in April. Another company — People's Trust Insurance Co. — was ordered in March to temporarily stop writing policies after regulators raised concerns, including whether the company was writing policies beyond its claims-paying abilities.

A growing issue for the smaller companies is reinsurance. The Cat Fund, the state-created reinsurance fund that is required for all companies writing business in Florida, has a capacity shortfall that raises doubts about its ability to pay. One of the actuary rating agencies used by smaller carriers has begun discussing downgrading some carriers in Florida if they do not have adequate backup financing plans.

Lawmakers agreed to whittle back part of the Cat Fund exposure during the recently concluded session, but the legislation also required companies to pay more into the fund to build up its level of the cash.

“The increased costs of public and private reinsurance and reduced reinsurance capacity will continue to present financial challenges to many companies,” said Locke Burt, president of Security First Insurance Co., a Florida-based homeowners' carrier.

McCarty Extols Growth

Insurance Commissioner Kevin McCarty agrees that it is a “challenging, to say the least, economic environment” for property insurance. But McCarty contends that critics are refusing to recognize there has been new growth in Florida.

His office has produced data showing that a combination of newly licensed carriers, including surplus lines carriers, has brought in $10 billion worth of capital between 2006 and the end of 2008.

“How many other markets in mature industries point to new growth?” said McCarty in an eight-page overview of the Florida property insurance market. “…Granted, the new entrants are not of the size of the old-line, major property insurers; but then again new firms do not generally start out as behemoths — they grow into it.”

McCarty also said that Citizens and the Cat Fund provide a balance for both consumers and the industry. He pointed out that Citizens' size had peaked before changes were made to it in 2007, and that most carriers themselves choose to have the maximum amount of coverage under the Cat Fund even though they could purchase less.

According to McCarty, those who think getting rid of Citizens and the Cat Fund would “magically bring a stable equilibrium” are wrong.

Budget Woes

However, some of the very steps that state officials took to improve Florida's property insurance market and reduce exposure have been scuttled due to the severe recession and its impact on state finances.

In January, lawmakers directed that all money paid back to the state as part of its insurance capital incentive build-up program go back into the state's general accounts instead of staying in the program itself. That decision means the build-up program, which started with $250 million to lend out to insurers willing to write new policies in Florida, is essentially dead.

Financial woes have also impacted the My Safe Florida Home program, which sought to encourage home mitigation and thus help owners lower their insurance costs. Despite intense lobbying by Chief Financial Officer Alex Sink, the Legislature refused to give the program additional money or even allow it to roll over any of the roughly $30 million to $40 million still unspent.

Another popular consumer program, the sales tax holiday that gave people a break on sales taxes if they purchased certain hurricane-related materials, is now a distant memory. The tax break was in place for three straight hurricane seasons, but lawmakers have refused to reinstate it for the last two years.