Property insurers face low funding

Nov 11, 2008

Gainesville Sun–November 11, 2008

By Anthony Clark
Sun Business Editor

Florida property insurers are hoping they won’t have to say “we told you so” before hurricane season ends officially Nov. 30.

Because of the global financial meltdown, the state catastrophe fund would have trouble borrowing the final $10 billion to $15 billion of its $29 billion obligation to cover state and private insurers if a large storm hits, the fund’s advisory council said.

That would likely slow insurers’ ability to pay claims to home and business owners.

Insurers had warned of a shortfall when the “cat fund” was expanded by the state Legislature in January 2007, requiring insurers to purchase the discounted reinsurance and pass an average 15 percent in savings to customers in response to rising rates after the hurricane seasons of 2004 and 2005.

Reinsurance is insurance bought by insurance companies to cover a portion of their claims.

The problem is that the state reinsurance is not backed by cash, just promises that the state could borrow unprecedented amounts of cash on the private bond market, according to the Florida Insurance Council trade group.

To lower rates in 2007, $12 billion in optional coverage was added to the fund, but that expires at the end of the year.

If Florida escapes the last weeks of hurricane season unscathed, the Legislature would have until next hurricane season starting June 30 to make any changes to the cat fund.

If the state does nothing, insurers would have to buy more reinsurance from the private market to make up the shortfall in the cat fund to cover possible claims, according to Don Matz, president of Gainesville-based Tower Hill Insurance Group.

But private reinsurance costs more and the increased demand from Florida would further raise those costs, he said.

Insurers would try to recoup those costs from policy premiums charged to customers.

The state has not approved insurer property rate increases in two years, however, despite pleas from insurers about their ability to cover claims.

If rate increases are approved, Matz said some customers would likely drop insurance.

“If folks are choosing between groceries and insurance, I know which they’ll choose,” he said. “It’s a difficult scenario all the way around.”

Without approval to recoup costs, private insurers would try to shed policies, pushing more customers into the state-owned Citizens Property Insurance Corp., already the largest buyer of cat fund reinsurance.

And if Citizens comes up short after a major storm, the cost is passed to consumers.

“If Citizens doesn’t have the money, it becomes a huge assessment on all the other policyholders of the state,” Matz said.

State Chief Financial Officer Alex Sink warned last year that the sub prime mortgage crisis could hamper the state’s ability to borrow, and urged lawmakers to scale back the cat fund.

According to the insurance council, lawmakers were unwilling to allow the increase in premiums that would have resulted during an election year.

Sink will likely reintroduce a similar proposal this year in a more welcome climate with legislators “keenly aware of the state of the market” and not facing election, according to Michael Carlson, Sink’s director of legislative affairs.

Sink also is interested in moving reinsurance decisions from the Legislature to the governor and cabinet.

That way, the state could get involved in the reinsurance market early in the global reinsurance buying process, giving insurers stronger footing to negotiate better rates, instead of waiting for the spring legislative session, he said.

Legislators balked at ceding control of reinsurance last year.

Tower Hill Preferred Insurance Company and Tower Hill Prime Insurance Company were among the seven state insurers that are rated by A.M. Best Co. to be placed “under review with negative implications” Oct. 29, meaning their financial stability is at risk through the rest of hurricane season because of concerns about the cat fund’s borrowing potential.

While that just applies to the seven companies rated by A.M. Best, Matz said it has implications for all Florida property insurers.

Despite the anticipated shortage, Matz said Tower Hill’s companies are “fairly comfortable” through the remainder of hurricane season because a significant amount of private reinsurance, cash and the cat fund’s limited bonding ability.