State ‘financially unprepared’

Insurance claims could go unpaid

By JIM SAUNDERS
Tallahassee Bureau Chief
News-Journal--May 25, 2008

TALLAHASSEE — State lawmakers had one major focus when they gathered in January 2007: Stop rising property-insurance rates that were digging into the checkbooks of Florida homeowners.

The effort succeeded, at least in part. Lawmakers passed a bill that forced private insurers to lower rates and also blocked increases for customers of the state’s Citizens Property Insurance Corp.

But as Florida gets ready for this year’s hurricane season to start June 1, many state, business and insurance-industry officials are worried.

To hold down rates for homeowners, the state agreed to take on billions of dollars in additional insurance risks.

And now, with the subprime housing crisis causing problems on Wall Street, the state faces questions about whether it could borrow enough money to meet its obligations if a major hurricane hits.

That might mean residents would face delays in getting claims paid as they try to rebuild homes after a storm. Even if the state could borrow enough money through issuing bonds, homeowners and business people throughout Florida would have to pay extra for years to cover the debts.

“We are financially unprepared for a hurricane in Florida,” said David Daniel, a Florida Chamber of Commerce vice president who lobbies on property-insurance issues.

Some state officials raise the possibility of needing to seek financial help from the federal government if Florida couldn’t come up with enough money on the bond market after a mega-storm.

“We (would) have to turn to the federal government,” said House Jobs & Entrepreneurship Chairman Ron Reagan, a Bradenton Republican who is a key player on insurance issues. “That’s all there is to it.”

The issue centers primarily on the Florida Hurricane Catastrophe Fund, a program created in the 1990s after Hurricane Andrew slammed South Florida.

The program, commonly known as the Cat Fund, sells low-cost reinsurance to private insurers and to Citizens Property Insurance. Reinsurance is an important type of backup coverage that insurers buy — from the state and from private reinsurance companies — to help pay hurricane claims.

After eight hurricanes hit Florida in 2004 and 2005, private reinsurance costs soared. That led insurers to try to pass on the additional costs to policyholders through increased premiums.

Facing political pressure, lawmakers held a special session in January 2007 and approved a bill that increased the maximum amount of Cat Fund coverage from $16 billion to about $28 billion.

The rationale: If insurers could buy coverage cheaper from the state than from private reinsurance companies, the savings would trickle down to homeowners.

Lawmakers required insurers to reduce rates. Though the savings were not as large as lawmakers hoped, many companies still passed along double-digit reductions.

But with the subprime housing crisis making it increasingly difficult to borrow money, state and industry officials have raised repeated concerns in recent months about the ability of the state to meet its obligations.

In a worst-case scenario, the Cat Fund might have to borrow as much as $25.5 billion to go along with cash it is accumulating. At the same time, Citizens Property Insurance also might have to borrow money if it faced deficits in paying claims.

“The credit markets are a mess, and I think it’s problematical whether all those bonds could be sold,” said Locke Burt, a former state senator from Ormond Beach who is president of Royal Palm Insurance and Security First Insurance, which sell homeowners policies.

The financial-rating agency A.M. Best issued a report last week that raised further questions about whether problems in the bond market could delay payment of claims in Florida.

“Claims would go unpaid for years, in my opinion, lots of claims, because there wouldn’t be any money to pay them,” said Richard Brown, president of Hayward Brown Inc., a Daytona Beach insurance agency.

Burt said insurance companies are trying to make other financing arrangements to make sure they can pay claims if the Cat Fund cannot provide money fast enough. That includes a type of financing similar to a line of credit that could be tapped after a storm.

The Cat Fund and Citizens have each been accumulating money that they would use to pay claims before needing to issue bonds. Also, the Cat Fund is looking at ways to line up additional financing before a hurricane hits and could make a report to the state Cabinet in June.

Bob Milligan, interim executive director of the State Board of Administration, said the Cat Fund could handle a storm similar to Hurricane Wilma, which hit South Florida in 2005. But a larger storm might be more difficult financially.

“If we had an Andrew, then we are obviously in a different ballgame,” said Milligan, whose agency oversees the Cat Fund.

Concerned about the potential liability, state Chief Financial Officer Alex Sink asked lawmakers this spring to reduce the size of the Cat Fund by about $3 billion.

But the proposal died at the end of the session, at least in part, because lawmakers feared homeowners’ rates might increase if the state reduced the amount of cheap reinsurance it provided. Reagan said lawmakers did not want to take such a step in an election year.

“It lost its footing from a political standpoint,” said Reagan, who backed the measure.