Blog: State OKs hurricane risk projections that boost insurance premiums
Sep 21, 2011
The following article was posted to the House Keys blog on September 21, 2011:
State Oks hurricane risk projections that boost insurance premiums
By Julie Patel
A state panel on Wednesday approved allowing insurers to use a hurricane risk projection method that effectively boosts premiums.
The Florida Commission on Hurricane Loss Projection Methodology OKed a controversial method developed by Risk Management Solutions. Property insurers are only allowed to use methods approved by the state when projecting potential losses from hurricanes and in turn, when calculating their rates.
Some insurers reported earlier this year that reinsurers – companies not regulated by the state that sell backup catastrophe coverage to insurers – were already using the new method to come up with much higher rates.
That could create a double whammy for consumers: Insurers can now charge more for reinsurance because of higher prices and they can buy more of it now that the state will allow them to use the new method.
Another proposed change could also boost premiums: The state Senate’s insurance panel asked the Florida Hurricane Catastrophe Fund on Wednesday to develop recommendations to shrink the program.
The program sells cheaper reinsurance to insurers so they can pass the savings to consumers. Jack Nicholson, the chief operating officer of the fund, said rates are about 25 percent less because of it.
He said the fund sold more than $18 billion in coverage this year. It has more than $7 billion in cash and it would need to borrow $11 billion in a worst-case scenario after a major hurricane. Nicholson said he’s unsure if that much can be borrowed.
Sen. Alan Hays, R-Umatilla, said “it’s fraud” for the state to offer coverage it may not be able to pay. He said when he was young, he was told, ” ‘Don’t let your big old alligator mouth write a check that your little Tweetie bird butt can’t cash.’ And I think that’s what we’ve done with the cat fund.”
Nicholson agreed: “It scares me to death…The cat fund is on very shaky ground.”
The committee asked him to come up with a proposal to either raise more cash or “right-size” the fund. If it’s shrunk, insurers would have to buy more private reinsurance, triggering rate hikes.