Program attracts insurers

Mar 28, 2008

Bill extends state-funded loans, helping companies boost capital reserves

Charlotte Business Editor
Sun-Herald--Mar. 28, 2008

TALLAHASSEE — After two consecutive quiet hurricane seasons, competition is gradually returning to Florida’s property insurance market.

A House council on Thursday approved a bill that would extend a state-funded loan program designed to help property insurers build up their capital reserves more quickly than they could on their own.

First authorized in 2006, the Insurance Capital Build-Up Incentive Program is also supposed to take some of the pressure off Citizens Property Insurance Corp., the state-created "insurer of last resort." Following the bad 2004 and 2005 hurricane seasons, Citizens ended up taking over thousands of homeowners policies in Florida’s riskiest coastal areas, as private insurers fled the state.

"We need to continue to move away from Citizens — and move toward an open and free market," said the bill’s chief advocate, Rep. Ron Reagan, R-Bradenton. Rather than being sponsored by an individual representative, the bill is coming directly from the House Jobs & Entrepreneurship Council, which Reagan chairs.

Reagan added that the capital program is one of the reasons Florida has 13 new property and casualty insurers, which have picked up a significant amount of the market from both overburdened Citizens and established insurers who have reduced their Florida risks.

The capital program will be extended until Sept. 1. It will allow both existing and new carriers to borrow up to $25 million from the state. This money will be repaid through a 20-year note, with interest set at the 10-year treasury note rate for unpaid principal. Insurers need pay interest only for the first three years.

The original 2006 program was funded at $250 million. The new bill adds another $100 million, which Citizens will have to provide out of its reserves.

But the leadership of Citizens isn’t exactly thrilled about the prospect of giving up $100 million. Sharon Binnun, chief financial officer, told lawmakers that Citizens is currently able to pay claims of up to $22 billion, in a worst-case scenario.

Considering that claims resulting from the bad 2004 and 2005 seasons totaled about $34 billion, the fact that Citizens could handle a payout of $22 billion may be a sign of recovery. But Binnun noted that Citizens would have to recoup a large share of its money by using its power to levy an assessment — basically a tax — on both its customers and those of other carriers.

Citizens isn’t currently using this power. But another state-created company, the Florida Hurricane Catastrophe Fund, is levying a small charge on thousands of policies. The Catastrophe Fund provides low-cost reinsurance to help other property insurers spread their risk.

"Appropriating Citizens’ surplus at this time could be problematic, especially as the 2008 hurricane season is coming," Binnun said.

Today, Citizens still has about 1.2 million policies, making it the state’s largest insurer, a role it was never intended to fill when created by the Legislature in 2002.

So-called "takeout companies" are gradually buying up blocks of Citizens policies, but the process is moving slowly. Citizens’ business is down from about 1.3 million policies at the end of 2007.

A staff analysis of the bill estimates that insurers participating in the capital program were able to purchase nearly 200,000 policies from Citizens. Also, about 480,000 policies were originated by these insurers — of which a large share would probably have gone into Citizens under other circumstances.

Extending the capital program got a wholehearted endorsement from the Florida Association of Insurance Agents, the trade organization representing independent agencies statewide.

"We think it’s a great program. It has provided new markets in our agents’ offices and ultimately more choices for consumers," said Kyle Ulrich, an FAIA lobbyist.