Big storm may spur insurance shortfall
May 20, 2008
Palm Beach Post--May 19, 2008
By RANDY DIAMOND
Palm Beach Post Staff Writer
The credit markets crunch could mean property insurers in Florida, and Citizens Property Insurance Corp. in particular, could have problems paying claims if a hurricane were to cause sizable damage, a major insurance rating agency said Monday.
The problem, according to A.M. Best Co., is that the Florida Hurricane Catastrophe Fund – which providescoverage known as reinsurance, insurance for insurance companies – could experience a shortfall of as much as $25.75 billion in the event of a severe hurricane.
The shortfall would mean that the fund couldn’t reimburse insurers for claims, raising the possibility the companies could run out of money, the Oldwick, N.J.-based rating service said.
State officials were relying on Wall Street to provide funding in the form of a bond issue that would be paid back with surcharges on insurance bills, but A.M. Best said such funding is questionable.
”Turmoil in the credit markets could leave policyholders in limbo if a major hurricane strikes the Unites States this year, as investors show a limited appetite for capital-market offerings designed to raise cash for claims payments," the report said.
Jack Nicholson, the senior officer for the Florida Hurricane Catastrophe Fund, said Monday the A.M. Best analysis is accurate. ”There certainly is a risk," he said.
Nicholson said the catastrophe fund is exploring other ways of raising capital, including buying reinsurance in the private marketplace, but conceded such a purchase might be too costly.
Nevertheless, the fund would have at least $6 billion on hand to immediately reimburse insurers, he said.
The A.M. Best report expresses particular concern about state-sponsored Citizens, where 40 percent of the catastrophe fund’s coverage goes. ”In today’s difficult investment climate, that could mean delay for policyholders and even no payment at all if a storm of significant wrath were to exhaust the cash on hand,” A.M. Best said.
Bruce Douglas, chairman of the Citizens board, took issue with the Best report. Citizens has $10 billion in liquid funds, he said. ”It would have to be a pretty severe storm for us not be to be able to pay claims,” Douglas said.
The report adds new fuel to a debate that started in January 2007, when the Florida Legislature and GOP Gov. Charlie Crist approved a $12 billion expansion of the catastrophe fund. The expansion allowed the fund to sell $28 million in discounted reinsurance to insurance companies.
Insurers were supposed to lower rates by 24 percent in return, but reductions were less than expected in most cases. Bob Hartwig, who headsthe Insurance Information Institute, said the state overestimated insurer reductions. The plan relied on Wall Street for a never-certain $20 billion bond issue.
Ultimately, insurance policyholders throughout Florida, even if the fund were to successfully float the bond issue, would be on the hook to repay the catastrophe fund. Every homeowner, auto, boat and other insurance policyholder would have to pay a 4.9 percent surcharge on each policy for 30 years, the report said.
That would be in addition to surcharges that could be issued by Citizens if the insurer ran out of money.