FIC Report Questions Citizens’ Solvency

Apr 8, 2008

National Underwriter--April 8, 2008


Florida ’s residual market insurer Citizens’ ability to pay claims if a once-in-100-years storm struck the state is doubtful, according to a study by an insurers association.

The Florida Insurance Council released a report outlining difficulties at the current state insurance programs, Citizens Property Insurance Corporation and the state’s Hurricane Catastrophe Fund, which provides reinsurance to both Citizens and other insurers.

The report, from the Tallahassee, Fla.-based association, said the solvency of Citizens is dependent upon the Cat Fund’s ability to borrow money through the bond market.

The bond market has seen a reluctance on the part of investors to purchase bonds due to the credit crisis bought on by subprime mortgage market failures.

Recently the state legislature increased Citizens’ liability for hurricane losses from $16 billion to $28 billion. The FCI said under current market conditions the Cat Fund would be unable to come close to borrowing that amount, affecting the claims paying ability of Citizens and other insurers who have purchased reinsurance from the Cat Fund.

The report also said rates are inadequate for ongoing risk, and it faults the state legislature for continuing to freeze Citizens’ rates, making it unable to bring in premium capital that would help insure its ability to pay future claims.

“The expanded intrusion of government in the insurance business is unwarranted,” the report said. “The private industry is better equipped at servicing consumers through established practices and claims adjusting.”

The report says Citizens has been unable to “efficiently handle its claims and has been plagued with customer service problems.”

After the 2004 and 2005 hurricane seasons, which produced more than $70 billion in losses industrywide, there was a contraction of insurance capacity and rates rose sharply on Florida homeowners wind coverage.

In reaction, the governor and legislature set out to lower residents’ insurance rates. After his election in 2007, Florida Gov. Charlie Crist brought lawmakers together to pass legislation allowing Citizens to assume more risk and make reinsurance more readily available through the Hurricane Catastrophe Fund.

Citizens did not immediately respond to a request for comment.