The SunSentinel
by Julie Patel
May 12, 2011
State-backed Citizens Property Insurance will spend more than half a billion dollars this year on public and private reinsurance, or catastrophe insurance for insurers.
That’s more than 11 percent of the roughly $5 billion it has in claims-paying reserves. A small portion of that would be recouped from policyholders’ rates in 2012 because premium increases are capped at 10 percent a year, according to Citizens Spokeswoman Christine Ashburn.
Citizens is required to buy coverage from the state’s Florida Hurricane Catastrophe Fund, and this year, it will plans to spend $460 million for $6.5 billion worth of coverage.
It could spend three to six times more per dollar of coverage for private reinsurance this year. Citizens board on Wednesday approved spending up to $125 million to buy $300 million to $580 million worth of coverage. Part of that coverage would only kick in if after a major hurricane, if Citizens’ losses exceeded $6.3 billion.
If a major hurricane strikes, private reinsurance can help pay claims – reducing fees that would be charged to all automobile and property insurance policyholders in the state to help offset Citizens’ deficits. Sharon Binnun, chief financial officer of Citizens, noted shifting risk to private reinsurers would help address goals expressed by some state leaders, including Gov. Rick Scott, to reduce the financial risk posed by Citizens.
Citizens’ reinsurance purchases paid off in 2005 when three hurricanes hit the state: It paid $53 million in premiums to private reinsurers that year, and received $134 million in claims payouts.
But if there isn’t a hurricane, Citizens doesn’t get a dime. What’s more, most private reinsurance companies are offshore and their rates are not regulated by the state.
“Buy reinsurance and the wind doesn’t blow, then we blew it; Don’t buy reinsurance and the wind blows, then we blew it,” former Citizens board member Jay Odom said in 2008, the last time Citizens bought private reinsurance. It spent $105 million.
The wind did not blow that year.
An insurance expert and consumer advocate said Wednesday they support Citizens’ decision.
“Citizens seems to be making a wise decision here,” said John Rollins, an insurance consultant who is a former vice president of AIR Worldwide, which provides risk modeling services to hundreds of insurance and reinsurance companies. Rollins, who is a former Citizens actuary, added in a statement that the private reinsurance portion would only increase rates next year by “at most a couple of percentage points” for policyholders with windstorm coverage.
Bill Newton, executive director of the Florida Consumer Action Network, said private reinsurance would allow Citizens to “spread the risk” to investors around the world. “Reinsurance also puts Citizens in a position to assess its exposure based on the cold, calculating opinion of the marketplace. This is far more realistic than heated rhetoric about financial disasters, and will allow decision makers to make data driven choices,” he wrote.
