Don Brown

Actuarial Opinions
by Jim Lynch
May 11, 2011

I should congratulate Paige St. John for winning a Pulitzer Prize for covering Florida’s property insurance market before pointing out that her article last week on the health of Florida’s state-run insurer, Citizens’ Property, indicates that her grasp on the insurance business remains tenuous.

So, congratulations. The Florida HO market is a mess, and solid reporting can help clean it up. And Ms. St. John has done some good work.

But the April 13 story, implying that Citizens’ Property is one of the state’s healthiest insurers, grossly oversimplifies the issues that confront the state. And it implies that the insurer is getting stronger when, by an important measure, it is more vulnerable than it was a year ago.
The story:

Recent financial statements show Citizens Property Insurance has accumulated a $5.1 billion surplus, more than double the money now set aside by all of the 57 companies that make up the bulk of Florida’s private market.

The growing surplus means Citizens, even carrying the increased risk of 1.3 million policyholders, is in a position to withstand a replay of the 2004 and 2005 storms without triggering the need for a bailout.

Yet lawmakers who want to dismantle the state-run insurer continue to call Citizens a financial time bomb, requiring huge rate increases and moves to force thousands of policyholders out of the company.

The whole article seems to imply that Citizens is a sort of property insurance Secretariat, outracing all the inferior, private carriers.

I’ve covered this territory before, so I’ll summarize here: Florida’s HO rates are too low. I know that sounds preposterous to Floridians who have to pay over $10K for one year of coverage. But if rates were even close to adequate, the state’s largest insurer would be somebody like Allstate or State Farm or Nationwide, not the state-run insurer. The big guys don’t run away from profitable business.

Right now, two types of insurers dominate the state:

•Small “take-out” companies that write a lot of risks but must protect themselves by buying reinsurance. These companies can’t charge the actuarially appropriate rate themselves – the state won’t let them – but must buy reinsurance at the actuarially appropriate rate. As a result, their profits get squeezed and their ability to grow a capital base is restricted.
•Citizens, a company that doesn’t need as much reinsurance because the state guarantees it will dun policyholders statewide for any underwriting shortfalls. So if there are no catastrophes, Citizens’ capital base grows.

And that’s what has happened – no major cats since 2005. So Citizens has grown its surplus to about $4.5 billion.

If this were a horse race, the state’s pony – Citizens – would be riding light. It doesn’t have to carry the burden of a sound underwriting policy.

It seems disingenuous to praise the financial health of Citizens without recognizing the enormous state subsidy it receives. If Citizens had to play the game the way the take-out companies must, it would have a similarly dismal outlook.

And it is a gross oversimplification to maintain that it is a healthy insurer just because it can withstand a moderately bad hurricane:

According to Citizens’ actuaries, even with 1.3 million policyholders, the state-run insurer now has the ability to absorb the hit of hurricane so powerful it is likely to hit only once in 25 years.

True enough, as I found by inspecting the last exhibit in Citizens’ operating budget summary (pdf).¹ The budget shows how increasingly severe hurricanes would affect the company’s financial statements. If a once-in-25-year storm hit, the carrier would post a net loss of $3.6 billion.

But the company has about $4.5 billion in capital! So the company is healthy!

OK, not really. In the cat reinsurance business, a once-in-25-year event is a yawner. It’s tragic for all the people at Ground Zero, but for a financially sound cat writer, it is not an event that would erode a company’s capital base. The company would lose money on the risks in that area, of course, but because those risks were diversified with other – profitable – catastrophe risks across the globe, the company would still post underwriting profits in the year a 1-in-25 event occurred.

To post a companywide loss for the year, you’d have to see a once-in-100-year event, or maybe a once-in-200-year event.

Right now, for example, reinsurers are posting loss estimates for first quarter 2011 – the Japanese earthquake, the New Zealand earthquake and the Australian floods – together a 1-in-100 event, maybe a 1-in-200. The events look likely to wipe out the year’s profits for some and for a very few it will be a “capital event” – one that eats into the capital base at year end.

A company that could lose 80% of its capital base from a 1-in-25 event would not be praised. In fact, it would be downgraded by any of the rating agencies.

But Citizens’ cat exposure is so great that even a 1-in-10 event would eat up about half of its capital (net loss for the year of $2.239B on an estimated surplus of $4.5B).

And a 1-in-100 event would leave it with a negative surplus of around $13 billion. That’s not a racehorse. That’s a plow horse.

How much is that? Well, the state’s 6% general sales tax raises around $19 billion a year. And when that bankrupting hurricane hits, those ‘weaker’ takeout companies will honor their obligations without dunning their own and every other policyholder in the state.

One final note: The article makes it sound like Citizens is getting healthier, since it can withstand a 1-in-25 storm. But that’s a bit of a statistical burp, as it is less able to withstand a 1-in-100 storm than it was a year earlier. And it’s at the 1-in-100 level that you start to learn something about an insurer’s health.

In 2010, a 1-in-100 storm would have led to a $14 billion net loss, eating up all the company’s capital three times over. This year, a 1-in-100 storm would lead to an $18.3 billion net loss, eating up all the company’s capital four times over.

It’s just that the sickly Citizens would succumb long before that.

http://actuarialopinions.wordpress.com/2011/04/19/citizens-property-a-plow-horse-as-sick-as-ever/

The Miami Herald
The Associated Press
May 11, 2011

TALLAHASSEE, Fla. — Florida’s state-backed property insurance company is shoring up its ability to pay claims to home and business owners should a major hurricane or series of storms hit the state this year.

For the first time in five years, the governing board of Citizens Property Insurance Corp. voted Wednesday to spend a small percentage of its surplus to purchase roughly a half billion dollars of reinsurance in the private market.

Citizens’ solvency has been at question for several years. The company was created nearly a decade ago as the insurer of last resort, but instead grew to become the largest property insurer in Florida with over 1.3 million policyholders.

Meanwhile, Gov. Rick Scott’s office said it received the property insurance overhaul (SB 408) passed last week by the Legislature.

http://www.miamiherald.com/2011/05/11/2212818/state-backed-insurer-purchases.html

The Florida Times-Union
by Kevin Turner
May 8, 2011

Thousands of Jacksonville-area residents whose homes aren’t required to have flood insurance could find themselves swamped if the area receives a direct hit from a hurricane — even a Category 1.

About 5,846 — just more than 4 percent — of Clay, Duval, Nassau and St. Johns county homes are in a “Special Flood Hazard Area” designated by the Federal Emergency Management Agency where flood insurance coverage is required if they have federally backed mortgages.

But thousands more are susceptible to surges, in which severe storms force a swell of ocean water into rivers and wetlands, forcing waterways out of their banks and into populated areas.

A direct hit from a Category 1 storm today would damage 16,246 homes and wreak $3.5 billion in damage, according to an estimate released last week. That amounts to about 10,400 homes for which flood insurance isn’t required by law, according to the report by CoreLogic, a Santa Ana, Calif.-based data and analytics company. A Category 1 storm would flood the Nassau River area, the mouth of the St. Johns River to the western end of the Trout River and the Intracoastal Waterway, as well as sections of the Jacksonville Beaches, Ponte Vedra Beach and St. Augustine.

A worst-case scenario storm surge — as much as a Category 5 hurricane could throw at the area — would send water into as much as 79 percent of all the homes on the First Coast, the report indicated.

Flood damage could climb to $19.6 billion, CoreLogic estimated, based on the values of properties that would be damaged. The most monetary damage would be in Ponte Vedra Beach, with $2.8 billion. Much of the Northside, the Westside, Nassau County, St. Augustine, Ponte Vedra Beach and the Jacksonville Beaches would be inundated with water, the report shows.

CoreLogic’s estimates for the range of storm surge damage sounds close to the mark to Steve Letro, meteorologist in charge of the National Weather Service at Jacksonville International Airport.

“The basic message they’re trying to get across is the same thing that we would probably say, ” he said.

Billions of dollars of losses likely would not be covered by traditional homeowner or commercial insurance policies. That’s because only freshwater floods triggered by rainfall are considered in FEMA flood insurance requirements, which many people don’t realize, Letro said.

“The flood insurance zones that FEMA uses have nothing to do with storm surge, ” he said. “We run into this all of the time.”

The FEMA maps account for a “100-year flood” which FEMA calculates as having a 1 percent chance of occurring in any given year. If a home’s chances of flooding are considered to be outside the 100-year probability mark, FEMA assigns it a zone “X” rating. But those zone ratings don’t take surges into account, even though rising waters from a surge could damage thousands of homes considered safe from rainfall-caused floods, Letro said.

While thousands of homeowners outside of FEMA-designated flood zones should have flood insurance, it is a difficult argument to make — especially in a down economy, said Kerry Earnest, a representative with Bacon Insurance Agency in Jacksonville.

“We haven’t had any activity since [Hurricane] Dora, ” she said. “People know that. They don’t want to spend the extra money. We have a lot of people who aren’t interested in the coverage.”

Basic homeowners insurance alone doesn’t cover “rising waters” or “wave wash, ” she explained.

Although millions saw memorable images of people awaiting rescue on the roofs of their homes New Orleans when it was struck by Hurricane Katrina, they may not know many of those homes had damage that basic homeowner policies did not cover.

“No window damage, no roof damage — just rising water, ” she said. “That’s sad.”

Flood insurance premiums for people outside the FEMA zones might cost $355 a year to cover a home and its contents, while within a FEMA zone, rates vary based on elevation, insurance representatives said. Typically, it might cost $1,200 to $1,500 a year to cover a house, but not its contents. It can cost as much as about $3,000 a year.

Usually, homeowner policies will cover damage wrought by high winds, and many seem to conclude that’s enough insurance for them.

Despite the risks, most who are outside FEMA flood zones generally pass on getting flood insurance, said Harden & Associates account manager Kim Pittman.

“They should, ” she said. “Twenty-five percent of the floods that occur [in Florida] are not in high-risk flood zones.”

Her firm recommends flood insurance for anybody who buys a home located east of the Intracoastal Waterway, for example. But because much of that area is excluded from FEMA flood zones, most of those property owners opt not to take it. The same is true for other area residents living near water, she said.

Commercial customers have the same tendency to not buy flood insurance if not required to, said Harden Vice President Jeremy Miller.

“The decision to get insurance in an ‘X’ zone [outside the FEMA-designated flood zone] is typically driven by a lender or a third-party investor outside the company, ” he said. “Our experience is that the majority do not purchase flood insurance.”

Larger companies might have their facilities insured under broader insurance programs, he said.

CoreLogic uses FEMA data and its own models for analysis about storms and floods, said Howard Botts, executive vice president and director of database development. To calculate monetary damage from storms, the company uses its data for market values of individual homes, he said.

Across the U.S., other coastal cities stand to lose more in a direct hit from a Category 5 hurricane: Long Island, N.Y. is most exposed to the risk, at $99 billion; Miami is next at $44.9 billion; Virginia Beach, Va. would lose $44.6 billion; New Orleans would lose $39 billion; Tampa would lose $27 billion; Houston would lose slightly more than Jacksonville at $20 billion. The three coastal cities that would lose less than Jacksonville in a catastrophic storm surge were Charleston, S.C., with $17.7 billion; Corpus Christi, Texas, with $4.7 billion; and Mobile, Ala., which would incur $3 billion in damage, according to the report.

http://jacksonville.com/news/metro/2011-05-08/story/hurricane-surge-most-first-coast-homes-wont-be-insured

Reuters
by Sarah Mortimer
May 6, 2011

London (Reuters) – Governments are looking for new ways to meet the spiraling costs of disaster relief and the private sector is willing to get involved because of the new investment opportunities such schemes offer.

Swiss Re (RUKN.VX) said it has seen an increase in governments looking to transfer the risk of costly natural catastrophes to the private market via insurance-linked solutions and derivative instruments, rather than relying on one-off disaster levies for after the event.

The world’s second-biggest reinsurer said that in the 1980s, the economic cost of global natural disasters totaled about $25 billion, in the 1990s costs rose to $95 billion a year, and in the last decade economic damage has reached an annual average of $130 billion.

Since Jan.1, the insurance industry has suffered $10 billion in losses from the quake in New Zealand, still untold losses from floods in Australia and most recently, an estimated bill of up to $34 billion from Japan’s massive earthquake on March 11.

In the past, governments with no reinsurance programmes have had to dip into their own coffers to pay for the cost of regeneration after a natural disaster.

“Fiscally, it is not sustainable to ignore the cost of natural disasters,” said Guillermo Collich, senior financial sector specialist at the Inter-American Development Bank.

Data from the IBD said losses associated with earthquakes, hurricanes, droughts and flooding are growing at four times the rate of GDP growth.

Collich said it, together with Swiss Re, is creating a natural disaster refinance facility to help its catastrophe-vulnerable countries deal with natural disasters.

“This was previously totally unfunded,” he said.

The IDB plans to issue a $100 million insurance facility in the Dominican Republic to protect the country against hurricanes and earthquakes under a five year policy. [ID:nLDE71G1J7].

GLOBAL GOVERNMENTS LOOK TO PRIVATE SECTOR

Governments in both emerging markets and richer countries are looking to securitise catastrophe risks through Public Private Partnerships, which provide governments with immediate disaster relief and insurance protection against human health, crop yields, as well as rebuilding and rehabilitation costs from weather-related risks.

Australia’s government expressed the need for a national disaster fund after recent cyclones and floods in Queensland state left the country with a clean-up bill of around A$10 billion.

“Major disasters can have negative impact on the long term development agenda of the developing countries,” Olivier Mahul, co-ordinator of the disaster risk financing and insurance program at the World Bank told Reuters.

“We have seen a major increase over the last five-six years from developing countries looking for disaster risk management and risk financing,” he said.

The World Bank entered the disaster insurance arena ten years ago after launching a catastrophe reinsurance pool in Turkey.

Since then, economic development, population growth and a higher concentration of assets in exposed areas, as well as climate change, has led to an ever increasing gap between the impact of catastrophes and the financial losses covered by insurance.

Insurance schemes and reinsurance pooling facilities have been tested all over the world, which has attracted the attentions of top reinsurers such as Swiss Re and Munich Re (MUVGn.DE) and insurance leaders, like the Lloyd’s of London, says David Simmons, MD of Analytics at WRN, part of reinsurance broker Willis Re (WSH.N).

There is a growing appetite from the private sector – looking for non-correlating risk to financial markets on their existing insurance books, he says.

A successful example is the Caribbean Catastrophe Risk Insurance Facility (CCRIF) – a reinsurance pool set up by the Caribbean government and the World Bank in 2007 to cover 13 Caribbean nations against hurricanes and earthquakes.

Last year, the CCRIF paid over $25 million to Barbados, Saint Lucia, St Vincent and the Grenadines following Hurricane Tomas, while in the previous January, CCRIF paid $8 million to Haiti after the devastating earthquake triggered the country’s earthquake coverage.

“The traditional response model of aid isn’t working – disaster risk reduction models are more sustainable development models. Governments are re-analysing their positions as aid is not going as far as they need it to go,” Simmons adds.

In October 2009, the World Bank launched a $290 million catastrophe bond with Mexico’s government and Swiss Re to cover the country against hurricane and earthquake events.

Catastrophe bonds transfer the risk of natural disasters to investors, who receive a yield in return for agreeing to cover damages they consider unlikely, and lock in funds for disaster relief before storms strike.

“As a government we have a responsibility to provide better protection and financial security for the Mexican people,” said Manuel Lobato-Osorio, head of insurance and pensions at the Mexican finance ministry. “We can develop a financial instrument or risk transfer mechanism for the sake of it – but that’s not the point.”

PRIVATE SECTOR WILLING TO MEET GOVERNMENTS’ NEEDS

Support from the private sector has been improving, having previously shied away from investing in high frequency risks, which tended to generate low returns, says the World Bank.

“The private sector now see developing countries as a new business opportunity – they see the value of diversifying their portfolio and adding – say tropical cyclone risk in Asia – to its high paying risks such as Florida and California hurricane and earthquake,” says Mahul.

Cat bonds, reinsurance pools or index based insurance policies all receive credit ratings – allowing industrialised countries to pick tradable instruments with capital market benchmarking and triggers.

“It’s an easy comparison for finance ministers to make to other market based instruments such as sovereign debt,” Nikhil da Victoria Lobo, client manager, public sector at Swiss Re said.

These insurance linked products can give governments access to large amounts of cash at short notice, compared to issuing debt to fund recovering efforts, he said.

The IDB’s Dominican insurance policy will be issued by a captive insurer, which will give the IDB’s institutional platform an investment grade rating.

“We are so happy,” says Collich. “We are going through the international reinsurance market – which means we are not entering through the main gate and not by the service door.”

http://www.reuters.com/article/2011/05/06/ils-govts-idUSLDE7440UJ20110506

Sarasota Herald Tribune
by Paige St. John
May 5, 2011

TALLAHASSEE – A “diluted” property insurance bill that still opens the door for rate increases and greater industry profits with less coverage to homeowners has cleared the Legislature and now heads to a friendly reception from Gov. Rick Scott.

Supporters contend that the final moderated bill approved Thursday evening, while no longer containing steep increases for customers of the state-run carrier and still requiring insurers to offer sinkhole coverage for sale, is a step toward a more stable property insurance market. Opponents countered that consumers will bear the burden.

“The bottom line is, rates are gonna rise,” warned Sen. Mike Fasano, a conservative New Port Richey Republican who turned out to be the industry’s chief opponent this year.

Fasano went down fighting a House-written provision that allows nearly automatic 15 percent boosts on top of other rate increases approved by regulators.

His effort to block those increases failed 18-20. Among those voting against Fasano was Sen. J.D. Alexander, the Senate budget chairman from Lake Wales who was out of the chamber at the time. Senate President Mike Haridopolos refused to take up Fasano’s objections that someone else had punched the button for an absent senator — a violation of Senate rules — declaring that Fasano would have lost anyway.

A video taken during the voting appears to show Sen. Ellyn Bodganoff, R-Fort Lauderdale, reaching over and punching the vote for Alexander.

Nevertheless, the final bill, a melding of several controversial measures, is a far step from what insurance lobbyists themselves wrote at the beginning of the session.

“I think it was overload,” said Don Brown, a former Panhandle lawmaker who now lobbies for insurance carriers and is a policy expert for a conservative think tank. Disappointed that lawmakers did not pursue rate deregulation, Brown chastised them earlier in the week for failing to stick to free market principles.

Though the industry’s ambitious agenda fell short — leaving their lobbyists uncharacteristically glum even after passage — Florida’s struggling property insurers do walk away with a victory that has eluded them for years, undoing a 2005 law change that required companies to pay claims in full and up front.

The bill now headed to Scott for likely approval into law allows insurers to pay only the depreciated value of a property at first, withholding the full amount until repairs are made.

The holdback applies only to structural property. Homeowners will still be able to buy policies — at added cost — that require carriers to pay in full for personal belongings insured by the policy.

Insurers also win the ability to raise rates up to 15 percent higher than what regulators ordinarily approve, to cover the costs and added profit demanded for providing hurricane coverage. “There is no automatic rate increase,” said bill sponsor Sen. Garrett Richter, R-Naples, who declared that the increases are not automatic, but rather “expedited.”

It will result in stronger insurers, ultimately worth the added cost to consumers. “The most expensive policy is a company that can’t pay the claim when the claim is filed,” Richter said.

Property insurers also can pull sinkhole coverage off the table, requiring homeowners who need the protection to buy it back as an ala carte “extra.” Carriers also staved off consumer-oriented measures, including state audits of the side ventures some insurance companies use to hide profits while seeking rate increases.

Richter characterized the final bill as “diluted,” reflecting a compromise between lawmakers in both the House and Senate.

Other bills already headed to the governor kill a state grading system intended to allow consumers to compare insurers, and a public database showing where and how bad the state’s sinkhole problem actually is.

Several insurers had pressed for an end of the mandate to provide sinkhole coverage. Carriers would still be required to offer sinkhole coverage for the house alone, but they can drop protection in the main policy and require homeowners to buy a second policy adding it back.

Sen. Alan Hays, R-Umatilla, sought to require Citizens Property Insurance to raise rates as high as 25 percent a year, to make it less competitive to private insurers.

A current requirement to raise rates, capped at 10 percent, remains in effect but there would now be no limit on how high and how fast the state-run carrier can raise its rates for sinkhole coverage.

Heading into what could be Florida’s first actual brush with hurricanes since 2005, the time limit for hurricane victims to file insurance claims shrinks to five years; for those with sinkhole damage, it falls to two years.

The bill limits what insurers, including state-run Citizens Property Insurance, will pay for sinkhole damage, to just the house and not attached structures, pool decks or sidewalks.

It requires that Citizens policyholders first be assessed the maximum tax to pay hurricane claims, before the state then attempts to collect from other home, auto and commercial policyholders in the state.

It keeps the 100-day cancellation notice requirement on property insurers, but allows state regulators to trigger 45-day cancellations if they believe a property insurer is in danger of financial collapse.

New carriers would be required to put up $15 million in capital, but existing insurers in Florida would be given until 2021 to raise that much money.

The bill includes a special provision written to help out a single potential insurer — allowing home and auto policies sold as a package to be canceled together, for any reason, with 90 days notice. Senators had objected that it was unwise to write a new law on behalf of a single, unnamed company.

Sen. Mike Bennett, R-Bradenton, was among the 19 senators who voted against Fasano’s amendment seeking to remove the expedited 15 percent rate hikes. Sen. Nancy Detert, R-Venice, supported Fasano’s amendment.

http://www.heraldtribune.com/article/20110505/ARTICLE/110509701/-1/sports?Title=-Diluted-insurance-bill-will-allow-rate-increases

The Miami Herald
by Janet Zink
May 4, 2011

With proposals to increase rates for Citizens Property Insurance Corp., by up to 25 percent dead in the legislature this year, Barney Bishop, president and CEO of Associated Industries of Florida on Wednesday called on the governor, House Speaker Dean Cannon and Senate President Mike Haridopolos to replace the state-run program’s board. Bishop and others at a news conference said the current board has acted irresponsibly, by failing to raise rates annually by the full 10 percent allowed under state law. Citizens officials have warned its premiums aren’t high enough to cover potential losses if a massive storm or series of storms hits the states. If that happens, non-Citizens policy holders will have to pay the tab.

“Citizens Insurance company is in danger because it can’t pay its debt, it can’t pay the bills that will come in when a hurricane hits this state,” Bishop said. “They won’t charge rates that are actuarially sound. this must stop. if it does not then we face the potential bankruptcy of the state of Florida.”

Rep. Bryan Nelson, R-Apopka, chairman of the House Banking and Insurance subcommittee, urged lawmakers to pass a bill that, among other things, will help Citizens and other insurers address a growing number of expensive sinkhole claims. The House is scheduled to vote today on the bill, but it’s vastly difference from the Senate proposal, putting its fate in question.

“Hopefully the Senate will consider the House bill,” Bishop said.

Former state Rep. Don Brown, now a senior fellow at the Heartland Institute, said he’s deeply disappointed that the legislature failed to adequately address Citzens this session.

“It’s a grave disappointment to me, and I’m sure it’s a grave disappointment to the governor,” he said.

Gov. Rick Scott has said repeatedly that “fixing” Citizens is one of his top priorities. But as it looks now, there’s no “fix” coming this session.

http://miamiherald.typepad.com/nakedpolitics/2011/05/insurance-reform-advocates-call-for-replacement-of-citizens-board.html

Sunshine State News
by Gary Rohrer
May 4, 2011

With three days left in the legislative session, those pushing for reforms to Florida’s insurance market, especially to state-run Citizens Property Insurance, are bemoaning the lack of bold legislative reforms that made it through the lawmaking process this year.

The House is poised to take up an insurance bill Wednesday that eliminates the requirement for private property insurers to offer sinkhole coverage. The bill already passed the Senate, and insurance reform advocates say it will help put the market back on a sound footing, but falls short of the transformative change to Citizens they seek.

Insurance companies and low-tax advocates have warned for years that allowing rates to rise for private companies while holding Citizens’ rates arbitrarily low, merely funneled customers into Citizens and encouraged private companies to leave. The effect of that policy means taxpayers would be on the hook in the event of a catastrophic hurricane, since Citizens’ rates are not actuarially based, and the state-run company and the catastrophe fund would not be able to cover the losses.

“That is simply a formula for the growth of Citizens,” said Don Brown, senior fellow at the Heartland Institute and former chairman of the state House Insurance Committee.

At the start of the legislative session, insurers had high hopes for reform, with a pro-business GOP sweep in the 2010 election putting a veto-proof Republican majority in both chambers of the Legislature and a bottom line-minded executive in Gov. Rick Scott. But bills that would have allowed Citizens to raise rates on their 1.3 million policyholders at a more rapid rate and end policies for property valued over $1 million did not make it through the committee process, as legislators shied away from increasing insurance rates on homeowners.

“The one thing that everybody understands intuitively is that Citizens doesn’t have enough money to pay its claims and the cat fund can’t even cover its first storm and it’s legally required to cover two. That is going to be an unmitigated disaster when we get hit,” said Barney Bishop, president and CEO of Associated Industries of Florida.

http://www.sunshinestatenews.com/blog/insurance-reform-advocates-see-missed-opportunity-sessions-end

Last week I submitted this Letter to the Editor to the St. Petersburg Times in response to their editorial titled, “Don’t let insurers walk away from sinkholes,” on April 29, 2011. To date, it has not been published, so here it is in it’s entirety. Thank you for your continued interest and following of this high-profile issue affecting our state.

Your editorial regarding the major property insurance bill that passed overwhelmingly in the Florida Senate this week was correct in declaring, “the status quo in sinkhole coverage is unsustainable.” Yet you failed to say what the bill actually requires in terms of sinkhole coverage, and you mischaracterized the legislation as “anti-consumer,” when in fact it does several things to help consumers.

How can your editorial writers on one hand acknowledge there is a problem with the explosion of sinkhole claims being filed in Florida, yet on the other hand call sinkholes “the new excuse” that insurers are using “to seek big breaks” from the Legislature? Between 2006 and 2009, sinkhole claims skyrocketed 375 percent in Hernando County, 187 percent in Pasco County and 384 percent in Hillsborough County, absent any significant geological changes. Do you think that claims surge has anything to do with the cottage industry of public insurance adjusters, trial lawyers and “remediation specialists” who are advertising on the major roadways in Tampa Bay and are reaping tens of millions of dollars annually from claims filed over what are most often minor settling cracks in homes, driveways and pool decks?

In reality, Senate Bill 408 continues to require homeowners’ insurers to offer coverage for catastrophic ground coverage collapse – in other words, a real sinkhole that causes structural damage to a home. The bill says insurers “may” offer more comprehensive sinkhole coverage beyond that. Many insurance industry experts believe that private insurers will step forward and offer that optional sinkhole coverage – if they are allowed by state regulators to price it appropriately.

It’s worth noting that a Senate staff report on sinkholes surveyed insurers about their sinkhole claims and found that many homeowners who received claims payments did not use the money to fix their homes. One insurer reviewed 55 closed claims and found that in instances where the homeowner was represented by a public insurance adjuster or attorney, 79 percent of the homes were not repaired – in most instances, the homeowner used the claims proceeds to pay off their mortgage. Another insurer found that out of 53 sinkhole claims it paid out, only five homeowners used claims payouts to complete repairs to their properties. If these homeowners were truly concerned about a sinkhole under their home, wouldn’t they use the money to fix it rather than to pay off a loan, buy a new car, or invest in a new bass boat?

When homeowners file sinkhole claims and then use claims payments they receive for something else, it hurts their property values and their neighbors’, erodes local property tax revenues, and increases the costs of property insurance for everyone else. How is a bill “anti-consumer” when it address those very real problems?

Your editorial also mischaracterizes as “mischief” a provision in the bill that would allow insurers to make claims payments to homeowners and contractors as repairs are made to a home and belongings are replaced, rather than to pay the full replacement cost up front. This provision is designed to discourage fraud and questionable claims and to encourage that homeowners actually make repairs and replace property when there is a partial loss to a home – which is exactly what the purpose of insurance indemnification is. Insurance was never intended to be used as a cash windfall.

Under this provision, no homeowner will have to pay out of pocket or max out his or her credit cards for repairs to begin, as critics have contended. That is a complete fabrication. In fact, paying the homeowner actual cash value up front is more than sufficient to fully cover the deposit required by licensed contractors. As repairs are made, the insurer then pays the full replacement cost.

As an insurance agent and a former chairman of the Florida House Insurance Committee, I know that eliminating unnecessary cost drivers in our state’s property insurance market is good for consumers and good public policy. Senate Bill 408 is good for homeowners who pay premiums and good for taxpayers. It deserves the strong support of homeowners.

Herald-Tribune
by Sen. J. D. Alexander
May 2, 2011

An April 14 Herald-Tribune article by Paige St. John suggested that state legislators are exaggerating the financial risk posed by Citizens Property Insurance Corp. and that Citizens is “the strongest and most profitable” insurer in our state.

These assertions and editorialized statements could have been overlooked or ignored if they did not present a false and misleading picture for Herald-Tribune readers and all of Citizens’ customers.

As Senate budget chair for the third year now, I am very familiar with the financial outlook of our state, as well as state programs that are fiscally sound or on the verge of complete financial failure.

Citizens is an example of a state program that is only one storm away from disaster.

The very real possibility that Citizens could face billions of dollars in losses and does not have the money to pay for its claims, in my opinion, is the greatest financial threat facing our state’s economy and already overburdened taxpayers.

Government-run Citizens derives what St. John calls its “financial strength” through its unique ability to tax every Floridian who has a home, auto, boat or business policy if a hurricane hits and Citizens runs out of money to pay claims. Simply put, Citizens will tax Floridians if and when it runs out of money.

Today, state government is Florida’s largest homeowners’ insurer, with 1.3 million policies, representing 18 percent of the market and growing. Citizens’ executives freely admit the state insurer’s rates are too low – in some parts of the state, by nearly 200 percent.

While it is true that Citizens is the only property insurance available in some high-risk coastal areas, its taxpayer-subsidized undercutting has driven out the private market and left all taxpayers vulnerable to massive tax increases or budget cuts.

If we think the budget cuts and decisions being made in Tallahassee are bad now, filling in the budget holes after Citizens goes bankrupt would be the equivalent of filling in a sinkhole with a teaspoon.

Citizens’ own executives testified earlier this year that the state insurer had $11.3 billion in cash and other assets to pay claims this coming hurricane season, but losses from a very large hurricane could easily run more than $22 billion, with Florida taxpayers having to make up the $11 billion shortfall.

St. John may be able to dismiss the odds of another major hurricane, or even a series of such hurricanes hitting Florida, but even she cannot editorialize or turn an $11 billion tax increase into sunshine.

When the next major hurricane strikes, Citizens’ policyholders will see their premiums increased by 45 percent overnight and every Florida family will be on the hook for $14,000 per household in tax increases. I would not characterize that as financial strength and neither should St. John.

State Sen. J.D. Alexander, R-Lake Wales, is chairman of the Senate Budget Committee.

http://www.heraldtribune.com/article/20110502/COLUMNIST/110429349/-1/news300?p=1&tc=pg

Gulf Coast Business Review
by Matt Walsh
April 30, 2011

When Florida Gov. Rick Scott delivered his first State of the State address in March to the full Legislature, he urged lawmakers: “Don’t blink.”

“I did not fight to become the 45th governor of the greatest state in the nation to settle for a status quo that does not promote the enormous potential of our people,” Scott said. “I am completely committed to this mission. It is achievable.

“A vast majority of legislators were elected, as I was, on our promise of smaller government, lower taxes, less regulation, support for job creation, individual opportunity, individual accountability and more freedom.

“Don’t blink. Don’t let special interests persuade you to turn your back on the people who elected you …”

They blinked.

And they missed a big opportunity to make a big impact on the forward momentum of Florida’s economy.

The Legislature has about a week before finishing its regular 2011 session. And in that time, it doesn’t look as though lawmakers are likely to embrace the most significant pieces of Scott’s agenda — eliminating the corporate income tax and cutting property taxes to reduce taxes by $2 billion.

Had they done this, imagine the national media attention it would have garnered, and imagine the message it would have sent nationwide: that our “jobs” governor and the Republican-dominated Legislature were and are indeed determined to resurrect Florida’s economy, and that Florida is open to business.

Instead, what are we getting? What message is Florida’s Legislature sending to Floridians and the nation?

How about this: Ho hum. Or better yet, to paraphrase that famous 1980 Boston Globe headline: “More mush from the wimps.”

Name one thing the Legislature has done so far that will shake the economic landscape. The answer is: Blank.

Lawmakers likely believe they delivered a major accomplishment by trimming about $4 billion in spending — the expected gap between next year’s state spending and revenues. While that is indeed significant and delivers to an extent on the promises by the governor, House speaker and Senate president to shrink state government, many Florida taxpayers will look at the new budget and say, “Big whoop. That’s your job.”

In the end, the balanced budget will mean lawmakers shrank the budget a piddling 3%.

They deserve a little due. State employees will be required to contribute to their own pension plans. But even this change was not as dramatic as it should have been and not exactly a show of high-risk political courage.

And they adopted some Medicaid reform. But like the pension issue, this wasn’t one that would resonate with the average Floridian as a step toward boosting Florida employment and attracting businesses.

As of this writing, meaningful measures that would move Florida toward a friendlier economic climate and a more limited government sat stalled. To wit:

• The phasing out of the corporate income tax;

• Cutting or eliminating the locally required state school property tax;

• A taxpayer bill of rights limiting the annual growth of government to the combined rates of population and inflation growth;

• Tort reform.

These measures would have rocked the state’s foundation for the better. But instead of joining with Scott to move Florida ahead, Speaker Dean Cannon and Senate President Mike Haridopolos maintained the status quo. That is, they were not going to let a rookie governor push them around. They have their power to protect.

Scott won’t give up. But now he has a good measure of the opposition — the wimps who show little courage of conviction and are happy to operate in the margins.

http://www.review.net/opinion/detail/more-mush-from-the-wimps-they-blinked/