Paige St. John: Disasters drive up Florida insurance rates

The Tokyo earthquake, three quakes in New Zealand, floods in Australia and tornadoes in the Midwest gave reinsurers their worst spring ever, pushing up the cost of hurricane coverage, a critical purchase for Florida insurers who cannot stay in business without it.

At the same time, a new hurricane computer model used by the industry has tripled risk estimates for areas once considered safe, while reducing the credit given to newer homes.

The double hit means Florida carriers must pay more for reinsurance, and must buy more of it, to insure houses they covered for much less just last year.

Ultimately, insurance executives say, it will be consumers who pay.

“It will lead to rate increases, there’s no question of that,” said John Auer, president of the American Strategic Insurance group, whose companies will shell out an added $250 million to buy hurricane coverage for 2011.

Florida’s rising insurance costs demonstrate how the state’s growing dependence on global reinsurance puts it at the mercy of events far beyond its borders.

With the retreat of Allstate, State Farm and other well-funded national carriers, Florida now relies on smaller, leveraged carriers that purchase hurricane protection from the largely offshore reinsurance industry, whose rates are unregulated and are notoriously volatile.

This spring, a number of Florida insurance companies were hard-pressed to find and afford adequate protection in a state that historic averages show is overdue for storms.

Documents obtained by the Herald-Tribune show the bill is straining already fragile carriers, leaving some short of the long-standing criteria that they be able to survive and pay claims from a 100-year storm.

The full price tag for insurance companies and consumers will not be evident for months.

Brokers and insurance executives say Florida reinsurance prices spiked 10 to 15 percent, but the cost to insurers depends on how greatly they were also affected by the changed computer risk model.

Consumers can expect to see increased bills in late fall, after carriers file for rate hikes.

Florida lawmakers in May sought to make it easier for insurers to pass on reinsurance spikes to consumers. The new legislation requires that regulators expedite approval for increases as high as 15 percent in as little as 45 days.

The bill’s most vocal opponent, Sen. Mike Fasano, R-New Port Richey, said the law has actually encouraged rate increases by signaling to reinsurers how big an increase state regulators would approve.

“It’s why they were pushing so hard to get the bill passed and sent to the governor,” Fasano said. “Now we’re paying the consequences.”

‘Blood in the water’

The price and availability of reinsurance is notoriously volatile, fluctuating with financial markets and disasters.

For the past two largely uneventful years, Florida’s reinsurance prices were steady, if not falling. But this spring the global reinsurance industry suffered its worst first quarter ever. Disasters around the world — the Japan quake and tsunami, three earthquakes in New Zealand and multiple tornadoes in the American Midwest and South — caused an estimated $48 billion in insured losses.

The toll was twice what reinsurers counted on losing for the entire year and erased half the world’s excess reinsurance capacity.

The situation left the insurance industry wary of its biggest annual gamble — a Southeast hurricane.

After months of assurances that reinsurance rates would not rise, they did just that, spiking in May as Florida carriers entered the market to negotiate their 2011 contracts. The shift put some Florida carriers in a bind as they attempted to negotiate with reinsurers who knew they had captive buyers.

“Reinsurers smelled blood in the water,” said Locke Burt, a former state senator who is president of Jacksonville-based Security First Insurance.

The spate of disasters has changed the psychology of the market, said Neill Currie, the chief executive of Florida’s largest provider of hurricane reinsurance, the Bermuda-based Renaissance Reinsurance.

Speaking at a New York investment conference earlier this month, Currie said both insurers and reinsurers are braced for larger losses, even as reduced capital makes the remaining money a more precious commodity.

“Never underrate fear or greed,” Currie said. “It’s a shame for the human tragedy, but fear is a pretty good thing to focus the mind and make people want to charge the right amount for taking on exposure or make people want to buy additional coverage.”

RenRe is capitalizing on the opportunity, just as it did after Hurricane Katrina triggered market shortages in 2006.

This month it raised an added $100 million to expand DaVinci Reinsurance, a venture it co-owns with State Farm. DaVinci, whose customers include Florida’s weakest carriers, now has the ability to sell additional reinsurance while others pull back — and prices rise.

Having to buy in that market puts Florida insurers in a tight spot, said Burt of Security First. His said his company must now set aside $43 for every $100 in premium to pay for reinsurance, up from $37 last year.

‘Geeks in the back’

While reinsurance prices trouble Florida carriers, it is the computer model that determines how much coverage they must buy that aggravates them most. It will probably be the biggest factor behind rate hikes passed down to consumers.

The RiskLink program, created by California-based Risk Management System, is one of the most widely used catastrophe models, especially among Bermuda reinsurers who use it to price Florida coverage and indicate where to limit sales.

Ratings agencies also use the program to tell insurers how much reinsurance they need to keep a sound financial rating.

RMS’ February upgrade factored in data from recent storms, including Hurricane Ike, which strafed Texas in 2008 and caused flooding as far east as the Florida Panhandle.

Based on that data, RMS increased the expected strength of hurricanes as they move inland and reduced the benefits of new building codes.

The result of the computer model is that hurricane risk is now 300 percent higher in Orlando and other inland reaches of Florida. Meanwhile, the state’s hottest coastal strips saw risk decrease, including a 65 percent drop in Key West, where few private insurers will write a policy.

The results run contrary to the business plans of Florida’s most cautious insurers, which had sought to limit risk by insuring new homes built far away from the coast.

“The companies with the worst book of business got hit the least,” said Auer, whose own company saw hurricane risks increase by 90 percent.

Insurance executives who spoke with the Herald-Tribune contended the software contains the largest increase yet in Florida hurricane risk, and that its numbers are flawed.

“You need to buy 50 percent more (reinsurance) because the geeks in the back room changed their mind,” Burt said.

While RMS had warned Florida insurers to expect risk increases of 25 percent, a brokerage report shows the hurricane exposure for many Florida insurers rose 50 percent. Individual carriers reported their risk had nearly doubled.

Among them is Old Dominion, which told state regulators this month its potential hurricane loss has jumped from $126 million to nearly $200 million.

It will take years for insurers to adjust where and who they insure. In the meantime, they can only buy more reinsurance.

American Strategic and Security First are among the companies challenging the RMS model. Auer said RMS’ response so far has been “cautious.” The company released a statement to a trade journal acknowledging only that acceptance of the new software has been slow.

“We don’t think it’s completely right,” Auer said. “My frustration is that the old models were based on over 100 years of history. Why would they change the assumptions so drastically based on a couple of storms?”