Don Brown

The Miami Herald
Letter to the Editor
J. Robert McClure, III, president and CEO, The James Madison Institute, Tallahassee
November 12, 2011

As we approach the start of the 2012 legislative session, it’s important that this headline remain top of mind for Florida’s elected leaders because of the financial impact the fund could potentially have on Floridians.

Because it cannot meet its overexposed obligations, the catastrophe fund needs to be addressed immediately. Both Citizens Property Insurance Corp., which continues to write policies with actuarially unsound rates, and private insurers are mandated to buy from a fund that admits it is unable to meet its financial obligations. This situation puts everyone including businesses, homeowners, renters, churches, charities and automobile policyholders at risk.

While news reports have suggested insurance premium rate hikes could be impossible for some to afford, the costs associated with insolvent insurers, unpaid claims and future hurricane taxes could total thousands of dollars per year per policy, for up to 30 years. It’s not enough that all South Florida residents currently subsidize Citizens policyholders living in multi-million dollar beachfront homes, but the current structure of the fund is likely to tax these same individuals on their insurance policies the next time a storm or series of storms pummels the state.

We would be wise to take the advice of Florida Hurricane Catastrophe Fund COO Jack Nicholson and scale back the size of the fund. Doing so will help Florida continue along a glide path to stability, lessen the risk and exposure associated with the state-run insurance entities, help reinvigorate the private market and, most importantly, better protect Floridians.

http://www.miamiherald.com/2011/11/12/2498165/scale-back-catastrophe-fund.html

The Tallahassee Democrat
By Steve Pociask
November 6, 2011

The debacle involving Citizens Property Insurance Corp. and the sinkhole rates that it charges consumers points out one clear thing — that Citizens is not a true insurance company.

It is a socialized mechanism that undercuts the private market and maintains artificially low rates because it has the power to tax all policyholders when it suffers losses. The losses are here. Over the past four years, sinkhole claims have exploded — especially in the Sinkhole Alley area of north Hillsborough, Pasco and Hernando counties. In 2010, Citizens, the major insurer in the area, took in about $30 million in sinkhole premiums and paid out $245 million in sinkhole losses — a clearly unsustainable situation.

When the Legislature directed Citizens to move its rates to more actuarially sound levels, Citizens’ board recommended sharp increases in sinkhole rates, as high as $4,000 to $5,000 in some areas of Sinkhole Alley. The public uproar was understandable, considering the tough economy. However, this sinkhole insurance is not for catastrophic ground collapse — that is already covered by mandatory homeowners’ insurance policies. Instead, these higher premiums are for optional sinkhole insurance that covers cracks in walls and driveways — something that every home has.

The root cause of the high price of optional insurance is that, without definitive signs of problems such as visible ground openings and structural shifts, it is hard to know if cracks were caused by sinkholes or merely normal settling, or whether damage may eventually make a house uninhabitable. This uncertainty creates an opportunity for lawyers, public adjusters and sinkhole remediation specialists to worry and entice homeowners into filing claims, pressuring insurance companies to make payments to avoid expensive litigation. This drives up the cost of insurance for everyone else.

So while the focus of attention has been mostly on the high sinkhole rates that Citizens sought to charge in the Sinkhole Alley area north of Tampa, precious little attention was paid to one of the main factors that is causing Citizens to have such huge sinkhole losses — the virtual “cottage industry” that encourages disputable claims and lawsuits and costs taxpayers tens of millions of dollars. Ironically, those lawyers, public adjusters and sinkhole remediation specialists were among those most vocal in getting residents upset about the proposed rate hikes, when in fact these special interests had a direct hand in driving the huge losses that caused the need for a rate hike in the first place.

How big is the sinkhole business? In February 2011, the Office of Insurance Regulation testified before the House Insurance & Banking Subcommittee that, between 2006 and 2009, trial attorneys and public adjusters made $21.4 million in fees in closed sinkhole cases — attorneys made $13.2 million and public adjusters made $8.2 million. In 2010, OIR reported that the average payment to an attorney in a closed sinkhole case was $32,237, and the average payment to a public adjuster was $22,384 per sinkhole case.

Additionally, little attention has been paid to the fact that members of the sinkhole cottage industry are positioning themselves as advocates for consumers in fighting sinkhole rate increases, when, in fact, they are part of what’s driving Citizens’ sinkhole losses. The former state insurance consumer advocate is now working for a law firm in the business of suing insurance companies. One group that has been rallying against sinkhole reforms, Policyholders of Florida, has its website registered by a law firm in the business of suing insurance companies.

There is a significant case before the Florida Supreme Court deciding the question of whether Citizens can be sued for bad faith — in other words, for failing to act in good faith in settling claims with its policyholders. Trial attorneys oppose this, since they want the state insurer to be a bottomless pit — with Citizens pushing its losses to other homeowners and auto insurance policyholders in the form of assessments on their insurance policies.

If the recent sinkhole rate filing debacle is any guidance, Citizens is not a true insurance company.

The bottom line is that the current system puts consumers in the worst of situations — it encourages a parasitic cottage industry to seek questionable and sometimes fraudulent claims, which depletes Citizens’ financial reserves. Because Citizens is not a true insurance company, its losses are pushed to taxpayers in the form of higher assessments. In the end, consumers and taxpayers pay more, and the cottage industry financially benefits by posing as a consumer advocate.

ABOUT THE AUTHOR: Steve Pociask is the president of the American Consumer Institute, a nonprofit education and research institute. Contact him at steve@theamericanconsumer.org

http://www.tallahassee.com/article/20111106/OPINION05/111060311/Steve-Pociask-Consumers-taxpayers-lose-Citizens-sinkhole-debacle

SunSentinel.com
By Julie Patel
November 3, 2011

Florida TaxWatch released a report on Wednesday on the need to reduce the size and risk of the Florida Hurricane Catastrophe Fund, which sells cheaper backup insurance to insurers so they can pass the savings to consumers.

The problem is, all property and automobile insurance policyholders pay fees to offset the fund’s deficits after major hurricanes: Floridians are still paying 1.3 percent of their premiums for deficits from the 2005 hurricane season. What’s more, it’s unclear if the fund would be able to raise the full $17 billion in coverage it offers to help pay claims if a major hurricane strikes. There would likely be $3.2 billion shortfall, according to TaxWatch.

But the problem with shrinking the fund is that it would lead to rate hikes for consumers.

The report quantifies the impact of various proposals to reduce the fund’s risk. It would cost the average policyholder:

$19.25 more a year, or $95 million for all policyholders, if what amounts to the industry’s deductible was increased from $7 billion to $8 billion;

$92 more a year, or $453 million for all policyholders, if the coverage amount offered was decreased from $17 billion to $12 billion;

$115 more a year, or $566 million for all policyholders if the coverage offered was reduced slightly, by $3 billion, and the minimum co-pay for insurers was increased from 10 percent to 25 percent; and

$173 more a year, or $850 million for all policyholders, under a scenario where all three proposals are implemented, the coverage drops $5 billion and the deductible and co-pay increases.

TaxWatch acknowledges there are pros and cons to any funding system. If the cat fund shrinks, policyholders pay more upfront in premiums and insurers use the money to buy reinsurance, or backup coverage, from private insurers.

If the cat fund stays as is, policyholders could have to pay fees to offset deficits after a major hurricane but they can use the extra money they’d have now to spend money and stimulate Florida’s economy.

The TaxWatch report said there are several disadvantages. Consumers’ policies can be canceled if they can’t pay fees charged after a major hurricane bankrupts the fund and policyholders who may not benefit from the catastrophe fund would still be subject to paying fees to support it. For instance, some policyholders may move into the state years after a hurricane but they’d still have to pay fees to support claims from the hurricane. Charities and businesses don’t benefit from the potential savings offered by the cat fund because the fund doesn’t cover commercial claims, yet they are still subject to the fees.

Several groups – Associated Industries of Florida, the Florida Wildlife Federation and the James Madison Institute – on Wednesday voiced their support for the TaxWatch report and for proposals to shrink the cat fund and state-backed Citizens Property Insurance.

“Despite the fact we’ve been hurricane-free for years, hurricane taxes of the past continue to haunt us,” said Manley Fuller, president of the Wildlife Federation. “We urge the Florida Legislature to enact reform that will end the practice of allowing Citizens and the Cat Fund to subsidize reckless coastal development.”

Proposals to shrink state insurance programs are backed by many in the insurance industry. Policyholders of Florida, a group formed by Tampa Attorney Sean Shaw, released a video Thursday urging lawmakers to give both insurers and consumers a voice in policy-making during the legislative session that starts in January.

http://weblogs.sun-sentinel.com/business/realestate/housekeys/blog/2011/11/what_proposals_to_reduce_the_s_1.html

News Channel 5 wptv.com
By Whitney Ray
November 3, 2011

TALLAHASEE, Fla. – If a major hurricane hit a large Florida city, all homeowners could be asked to fork over more than a thousand dollars to help pay for losses.

That’s because state-backed Citizens Property Insurance isn’t collecting enough money from premiums to pay claims in that scenario. Governor Rick Scott is giving the Citizens board a month to come up with a plan to lower the state’s risk.

“How many people do you think in Florida are sitting on $1,200 dollars, just waiting for a hurricane, to be able to give Citizens Insurance the money so they can pay people to fix their houses. I don’t think many,” said Scott.

Citizens already has the authority to raise rates 10 percent a year, but efforts are being pursued in the legislature to increase premiums faster to force people away from the state-backed insurer.

http://www.wptv.com/dpp/news/state/citizens-property-insurance-remains-shaky

SunSentinel.com
By Julie Patel
November 2, 2011

Legislation to allow less-regulated insurers to take over state-backed Citizens Property Insurance’s policies cleared a first hurdle Wednesday.

The House insurance committee approved the bill, HB 245, by a 13 to 1 vote. The legislation intends to reduce the size and risk of Citizens, the state’s largest insurer with nearly 1.5 million policies. Nearly all Floridians are subject to paying fees to offset potential Citizens’ deficits after a major hurricane.

Surplus lines insurers and their customers are exempt from fees other policyholders pay to support the Florida Insurance Guaranty Association and they may be cheaper because they aren’t subject to Florida rate regulations.

But there are risks: If a major storm hits, their policyholders can’t tap FIGA, a fund that helps pay claims when insurers fold. Regulators can’t intervene if a surplus lines insurer refuses to pay homeowner claims or drastically raises rates.

The bill requires the insurer to tell prospective policyholders that FIGA wouldn’t cover claims but Rep. Richard Steinberg, D-Miami Beach, asked about other disclosures: “Does the person have to be that told that the rates are going to be unregulated?”

Rep. Jim Boyd, R-Bradenton, who sponsored the bill, said the insurer must tell consumers if there are major differences in coverage but it doesn’t have to say anything about rates being unregulated. Boyd agreed to work with Steinberg to add the requirement.

Boyd said the bill only allows insurers that have strong financial ratings and at least $50 million in claims-paying reserves to participate, so they’re unlikely to fold. Consumers who don’t want to leave Citizens wouldn’t have to, he added. That means surplus lines companies would have to charge a reasonable price if they want a Citizens policyholder to switch.

http://weblogs.sun-sentinel.com/business/realestate/housekeys/blog/2011/11/bill_allowing_less_regulated_i.html

The Miami Herald
By Brent Kallestad
November 1, 2011

TALLAHASSEE, Fla. — Gov. Rick Scott wants the state-backed Citizens Property Insurance Corp. to recommend ways to shore up the troubled insurer.

Scott, who would prefer the insurer be sold to a private company, wants answers from the Citizens’ board by a Cabinet meeting Dec. 6.

“I expect them to come back with ideas of things they can do without the Legislature, things that we have to go to the Legislature with,” Scott said Tuesday. “We shouldn’t be sitting here just hoping every hurricane season that we’re not going to have a hurricane. Someday we’re going to have a hurricane.”

No hurricane has hit the state since Wilma in October 2005.

Despite going six years without a storm, property insurance rates have continued to soar in Florida and Citizens, designed as the insurer of last resort, has grown dramatically and is the state’s largest property insurer with nearly 1.5 million customers. A one-in-100-year storm or series of destructive hurricanes could leave the company insolvent and put Florida taxpayers on the hook for making up the difference.

Scott said he didn’t think most of the state’s insured are aware that they’d be assessed on their personal property and vehicle policies in the event Citizens couldn’t pay off.

“I don’t think that they have any idea that they are taking that risk of having an assessment,” Scott said. “All consumers should know that.”

The governor grilled Citizens’ President Scott Wallace about details of the company’s business plan and was clearly chagrined at what he learned.

“You would never organize your personal life like this,” Scott said. “We’ve got to fix this.”

The Citizens’ Board of Directors next meets Nov. 16 in Orlando.

“Outside of the Legislature there (are) things that Citizens can be doing on its own and I expect the board to come back and do those things,” Scott said.

Legislators in 2007 tried to protect the so-called insurer of last resort in Florida by clamping down on higher premiums, but that decision didn’t work. They passed another property insurance measure earlier this year designed to give insurers some slack. And the issue never goes away.

Scott said he believes the Legislature would be willing to will work on the issue again in the 2012 session, even in an election year.

“They know we can’t keep on doing what we’re doing on Citizens Insurance,” he said. “We’re very vulnerable as a state with Citizens.”

Citizens’ was created by the Florida Legislature in 2002 by the merger of two existing state-backed insurance pools.

It is now Florida’s largest insurer of homes, condos and businesses with a book of business. The nonprofit company has more than 900 employees at offices in Jacksonville, Tallahassee and Tampa is run by an eight-person board of governors appointed by the governor.

http://www.miamiherald.com/2011/11/01/2482374/scott-wants-answers-from-citizens.html

By James C. Massie
October 31, 2011

The United States is the world’s largest insurance market and the largest consumer of property/casualty reinsurance in the world. Florida is the peak zone for insurance and reinsurance catastrophe protection. Global reinsurance companies play a critical role in maintaining the financial health of the Florida insurance marketplace.

Reinsurance

In its simplest terms, reinsurance is insurance for insurance companies. Reinsurance is a transaction in which one insurance company (the reinsurer) indemnifies, for a premium, another insurance company (the ceding insurer) against all or part of the loss that the insurance company may sustain under its insurance policies. In other words, the insurance company transfers some of its risk to one or more reinsurance companies.

The fundamental objective of insurance – to spread the risk so that no single entity is saddled with a financial burden beyond its ability to pay – is enhanced by reinsurance, which enables risks to be spread throughout the world.

Reinsurance is a global business. In 2009, 57.8% of the reinsurance premiums on U.S. business was written directly by non-US reinsurers, and 42.2% was assumed by U. S. professional reinsurers. In 2009, reinsurance was ceded to or recoverable from over 5,300 reinsurers in over 100 jurisdictions outside the United States.

The Role of Reinsurance

Reinsurance benefits insurance companies and the public at large in three ways:

1. Reinsurance enables an insurance company to offer more coverage than it could otherwise by limiting an insurer’s loss exposure to levels commensurate with its net assets.

2. Reinsurance stabilizes an insurance company’s operating results by reducing significant fluctuations in loss experience.

3. Reinsurance enables companies to spread catastrophic losses around the world.

Encouraging the participation of reinsurers worldwide is essential to providing much needed capacity in the U.S. for both property and casualty risks. By way of example, reinsurers paid $57.9 billion, or 45% of the 2005 hurricane losses and they paid over $34 billion or 60% of the September 11 terrorist attack losses.

While reinsurance contract language can be tailored to meet the needs of the ceding insurer, in the context of catastrophe reinsurance, contract language generally defines “occurrence” much more broadly than just the specific criteria for hurricane triggers found in derivative contracts. Reinsurance treaties typically cover other events that can cause major damage such as tropical storms, tornadoes, and wildfire conflagrations. A derivative trade only pays for the specific type of risk named in the trade, and then only if the conditions of the derivative are met (typically either an industry loss or a parametric wind speed trigger).

Reinsurance is a competitive business, which has experienced relatively weak returns over the long term

• The U.S. reinsurance industry has a lower return on equity than the U.S. property and casualty insurance industry, the U.S. commercial bank industry, the U.S. diversified financial services industry, and the average of all U.S. industries (data excludes mortgage and financial guaranty in 2008 and 2009.) The U.S. reinsurance industry is also subject to more dramatic negative spikes than other financial services industries. Even when considering 2006, the U.S. reinsurance industry has experienced a cumulative net underwriting loss for over 20 years (for every dollar in reinsurance premiums, reinsurers pay out more than a dollar in losses and underwriting expenses). Investment returns for U.S. reinsurers have averaged less than 6% due in large part to conservative investments required by U.S. state law and regulations.

• In Florida, private reinsurance rates have decreased on average three out of the past four years. In 2007 reinsurance rates decreased 10% – 15%. In 2008 reinsurance rates decreased an additional 10% – 15%. In 2009 reinsurance rates increased 10% -15% primarily due to the fact that insurance demand increased at a time that reinsurance supply was constrained due to the turmoil in the capital markets. In addition, worldwide 2008 was the third worst catastrophic insured loss year in history (although Florida did not suffer any catastrophes that year) including Hurricanes Gustav and Ike. The June 1, 2010 report from the brokers indicated that Florida reinsurance renewal rates generally decreased 10% – 15% for the current hurricane season and that reinsurance capacity was near record levels.

Reinsurance Regulation

• Like insurance, reinsurance is regulated by the states. In Florida, reinsurance is regulated primarily by Section 624.610, Florida Statutes plus applicable regulations.

• Insurance regulation is focused on protecting consumers and usually involves significant oversight of rates, policy forms and market conduct of insurers. The focus of reinsurance regulation is different. Because reinsurance contracts are between two sophisticated parties – the insurer and reinsurer – reinsurance regulation focuses on the financial solvency of the reinsurer. Because the reinsurer’s solvency is regulated rather than the terms of the reinsurance contract, each ceding insurer can negotiate reinsurance that satisfies their specific business needs. Ceding insurers generally utilize reinsurance brokers in helping them negotiate reinsurance terms and price with reinsurers. Reinsurance brokers represent and have a fiduciary duty to the ceding insurers, not the reinsurers.

• The U.S. regulatory system enables ceding insurers to purchase reinsurance from both companies that are licensed in the United States and those that are not.
• There are two methods of reinsurance regulation: direct and indirect.

o Direct regulation applies to those reinsurers that opt to be licensed in at least one state in the United States. U.S. licensed reinsurers are subject to the same entity regulation as U.S. primary insurers, including:

• risk-based capital requirements
• holding company laws
• state licensing laws
• annual statement requirements
• triennial examinations
• investment laws

o Indirect regulation is utilized to regulate the reinsurance transaction. Reinsurers that do not opt to obtain a license in the United States are regulated for solvency by their home country regulator. U.S. regulation of such reinsurers is primarily through the credit for reinsurance mechanism.

• Credit for reinsurance laws allows these unlicensed companies to assume risk directly from U.S. ceding insurers without restriction so long as they provide acceptable security for insurers to receive financial statement credit for that reinsurance.

• Credit for reinsurance laws enable a U.S. ceding insurer to treat amounts due from reinsurers as assets or reductions from its liabilities if certain defined criteria are met. As a general matter, credit is allowed if the reinsurer is licensed or accredited in the same state where the ceding insurer does business or if the reinsurer is domiciled in a state that employs substantially similar credit for reinsurance laws to those imposed by the ceding insurer’s state of domicile. If the reinsurer does not meet any of these criteria, it must either establish an acceptable U.S. trust fund (like Lloyds has done) or establish appropriate security in the United States, such as a letter of credit for the ceding insurer to be able to take credit for the reinsurance.

• The Florida legislature amended its credit for reinsurance laws in January 2007 to allow credit for reinsurance that would otherwise not meet the specified requirements of its credit for reinsurance law so long as the assuming insurer holds surplus in excess of $100 million and has a secure financial strength rating from at least two nationally recognized statistical rating organizations deemed acceptable to the Insurance Commissioner. In determining whether credit should be allowed, the Commissioner shall also consider the quality of the assuming insurer’s regulatory jurisdiction.

• Reinsurers are also subject to U.S. federal and state antitrust laws. While the McCarran-Ferguson Act provides a partial exemption from federal antitrust laws for the “business of insurance”, the exemption only applies to the extent that such business is regulated by the state and does not involve a boycott, coercion or intimidation.

Insurer Options with Regard to Reinsurance

• Reinsurance is essentially a substitute for the amount of risk insurers would have retained themselves if they had not transferred that risk to the reinsurer. Thus, the cost of reinsurance is essentially a surrogate for the amount insurer “net” rates would have to increase if they retained the risk.

• In addition, the total cost of reinsurance has two components. The price/rate per unit of risk and the amount of reinsurance purchased. Even when reinsurance prices/rates are declining, as they were in 2010, if an insurer buys more reinsurance, its total reinsurance cost may increase.

• Insurers do not necessarily have to purchase reinsurance. A homeowners’ insurance company may choose from a number of options instead of purchasing reinsurance. The insurer may:

o Write less catastrophe exposed business and/or write more non-catastrophe exposed business to balance its book of business;

o Keep the risk itself;

o Raise capital by selling stock or attracting new investors;

o Obtain loans;

o Access the capital markets to purchase capital market products in lieu of traditional reinsurance. Some capital market products include catastrophe bonds, ILWs (industry loss warranty products), and sidecars.

o Pursue some other method of financing.

• The fact that an insurer elects to purchase private reinsurance – knowing in advance the price of that reinsurance – means that the insurer had the opportunity to evaluate all of its other options and made a business decision that reinsurance is its best option for its particular circumstances. Thus, it is difficult to understand why the cost and purchase of reinsurance is sometimes criticized by the regulator when all of the other options apparently are worse.

• Because reinsurance requires capital, insurers have a vested interest in only buying as much reinsurance as they need and no more. If an insurer is purchasing sufficient reinsurance to protect itself from a one in two hundred fifty year event (rather than the one in seventy year event Florida’s regulator is now apparently requiring), that insurer has made a prudent business decision that its purchase of reinsurance is necessary for its particular circumstances.

Accounting Treatment for Reinsurance

• Because risk is transferred from the insurer to the reinsurer and the reinsurer agrees to indemnify the ceding insurer for covered losses, insurers account for reinsurance as either a reduction of liabilities or as an asset in their underwriting results.

• Reinsurance accounting treatment is only appropriate if it is subject to the same standards as reinsurance: risk transfer and an indemnity based payment based on the insurance company’s actual incurred losses, with no opportunity to record a gain on the transaction.

• Many capital market products such as catastrophe bonds, ILWs and sidecars have been structured to qualify for reinsurance accounting treatment by transferring risk and basing payment (indemnification) on the insurance company’s actual losses, with no opportunity to record a gain on the transaction.

Proper Accounting Treatment is Important

• Accounting rules establish the guidelines by which insurers and other companies prepare their financial statements, which are in essence a “snap shot” of a company’s financial health.

• To properly protect consumers and evaluate the solvency of an insurer, regulators, rating agencies and others that rely upon financial statements use an agreed upon set of rules for accounting.

• Financial statements are only reliable because all appropriate parties know the applicable rules and standards for their preparation and audit. This enables all parties to use a consistent system to compare the financial strength and results of insurers. Florida should not create its own accounting rules, particularly when such rules can mask an insurer’s true financial circumstances.

Regulators are very comfortable with the regulation of credit risk for reinsurance recoverables. This is because a reinsurer must be licensed, authorized (meaning subject to US state regulation including in all the states the reinsurer is licensed), post collateral, or be approved by the regulator to post reduced collateral because they are highly rated and are financially sound.

About the Author: James C. Massie, Attorney at Law, Tallahassee, FL was admitted to the Florida Bar in 1974 and has served as General Council of The Florida Ports Conference; Florida Seaport Transportation and Economic Development Council; and Florida Ports Financing Commission. Mr. Massie also represents the Reinsurance Association of America.

Business Insurance
By Sonja Ryst
October 30, 2011

TALLAHASSEE, Fla.—A senior official at Florida’s catastrophe fund is urging lawmakers to reduce the fund’s role as a reinsurer in the state after a report estimated that the fund could face a $3.2 billion shortfall if a major storm were to hit.

While the report emphasized that it used conservative guidelines to estimate the Florida Hurricane Catastrophe Fund’s ability to raise funds to pay claims after a major hurricane, the fund’s capacity should still be reduced by about $5 billion, according to the official.

Insurance industry observers echoed concerns of some state lawmakers that the FHCF may be exposed beyond its ability to raise money to pay claims.

The FHCF was established in 1993 to provide reinsurance capacity for Florida insurers after losses from Hurricane Andrew led to a sharp reduction in capacity in the state. The FHCF is funded through premiums from Florida insurers. Participation in the fund is mandatory for nearly all property insurers writing residential business Florida.

Based on its current exposures, the fund could face claims of $18.39 billion if a major hurricane were to hit this year, according to the Oct. 18 report prepared by St. Petersburg, Fla.-based Raymond James & Associates Inc.

The fund is projected to have a year-end balance of $7.17 billion. However, the basis for calculating the FHCF’s ability to meet its obligations also factors in the state’s ability to raise money through municipal bonds after a catastrophe.

According to the report, taking an average estimate from a panel of leading international investment banks, the fund would be able to raise $8 billion through bond issues in the 12 months after the event, leaving a potential shortfall of about $3.2 billion. The report noted that the banks estimate that the FHCF could raise another $6 billion over a 24-month period, but “based on a desire for conservatism and guidance from FHCF staff about potential payout timing, “ the 12-month time frame was used to estimate the fund’s financial resources.

“We have a situation where if we had an event, we might not have enough money to pay for all the coverage purchased from the fund,” said FHCF Chief Operating Officer Jack Nicholson. He said depending on the size of the event, some insurers might not be able to wait two years to receive reinsurance claims payments.

Mr. Nicholson has proposed that Florida lawmakers limit the FHCF’s capacity to $12 billion by 2016, down from the current $17 billion. Some insurers also buy additional optional coverage from the FHCF, though that option is being phased out.

At a Sept. 21 Florida Senate Banking and Insurance Committee meeting, state Sen. Mike Fasano, R-New Port Richey, asked Mr. Nicholson if reducing the fund’s capacity ultimately would result in higher rates for consumers who buy insurance in Florida.

Mr. Nicholson said yes, “absolutely.”

“Your conclusion was that we need to right-size the cat fund,” said Sen. Don Gaetz, R-Niceville. “By my reckoning as an amateur that means either reducing risk…or we have to increase the cash reserves on hand.”

The fund is in better financial shape now than three years ago. The projected fund balance was only $2.80 billion in October 2008, after the financial crisis sparked worries about the FHCF’s ability to raise additional money in the debt markets, according to an FHCF annual report.

“It’s gotten better over the years,” said Richard Attanasio, vp of property/casualty ratings at the Oldwick, N.J.-based rating agency A.M. Best Co. Inc. “They’ve been able to build up cash because there haven’t been significant events” in Florida. He added that Best has “some skepticism” about the fund’s ability to meet claims in the event of a major catastrophe.

Using its most recent model released in July, EQECAT Inc. estimated a 5% chance that a loss of at least $17 billion might occur in Florida in any given year. The last storm that produced losses of that magnitude was Hurricane Andrew 19 years ago. According to the Insurance Information Institute’s most recent estimate, in 2010 dollars, Hurricane Andrew resulted in $22.4 billion in insured losses.

Some insurance industry organizations voiced concerns over the FHCF’s funding.

“The Florida Insurance Council’s position is that the fund should be structured so it can every year deliver the reinsurance that it sells,” said Sam Miller, the Tallahassee trade group’s executive vp.

“There are insurers that are concerned that the FHCF is promising more than it can deliver,” said Bryon Ehrhart, chief strategy officer and chairman of the analytics and investment banking group for Aon Benfield Inc. in Chicago.

It’s remains unclear, though, whether reforms will be passed.

“The political environment in the past has been to ignore the problem,” said R.J. Lehmann, deputy director of the center on finance and real estate in Washington at The Heartland Institute. “But insurance in Florida is always among the top issues and we’re hopeful that something can move forward.”

http://www.businessinsurance.com/article/20111030/NEWS04/310309987?tags=%7C306%7C64%7C81

The Bond Buyer
By Shelly Sigo
October 27, 2011

BRADENTON, Fla.— The Florida Hurricane Catastrophe Fund is “dangerously overexposed” and should be downsized because unpredictable market conditions could prevent it from selling enough bonds to pay claims, according to the agency’s executive director, Jack Nicholson.

The nonprofit state-run FHCF could be $3.2 billion short of what is needed to pay claims over the next year, a new report says.

The shortage is based on estimates from the reinsurer’s four senior underwriters in a biennial report on potential bonding capacity released last week.

It’s not the first time underwriters have predicted there may not be enough capacity in the bond market to cover claims.

Nicholson told a state Senate Banking Committee last month that the so-called Cat Fund is “dangerously overexposed.”

“There is volatility in the market and tremendous uncertainty,” he told legislators. “I don’t know what the markets are going to be tomorrow.”

Nicholson is proposing legislation to decrease the fund’s reliance on tax-exempt bonding and increase its cash position so it is less susceptible to insolvency, he said in an interview last week. Most of the Cat Fund’s cash comes from insurance premiums.

It is expected to have $7.17 billion in cash at year end.

Sponsors are being sought for a draft bill that Nicholson has prepared.

Some lawmakers on the Banking Committee agreed that it may be time to revamp the reinsurer.

Florida law allows the Cat Fund to provide up to $17 billion of coverage to the property insurance market plus some optional coverage that could boost the amount to $18.38 billion.

That coverage is provided through a combination of cash and tax-exempt bonding, though the fund can only pay claims up to the amount it can raise in the capital markets.

Nicholson wants to trim back the $17 billion obligation over several years to $12 billion, and make the fund’s obligations “more guaranteed than speculative,” he said.

In addition to reducing the total obligation of the fund and building cash resources more quickly, Nicholson’s proposal calls for increasing the amount insurers must pay out in claims before Cat Fund coverage kicks in, and reducing the amount of optional coverage insurers can select.

These steps are aimed at decreasing the agency’s exposure.

With uncertainty over the U.S. budget, foreign debt and predictions of municipal debt problems, Nicholson said now is the time to address changes.

“We’re trying to look at risk management — the investor base may or may not be there. Today it’s not. Tomorrow it possibly may be,” he said.

Bond capacity estimates by the agency’s four underwriters underscore the reasons why the Cat Fund cannot rely on the bond market as it has in the past, according to Nicholson.

The underwriters — Citi, Goldman Sachs, JPMorgan and Barclays Capital — provided wide-ranging estimates of the tax-exempt bonds the Cat Fund could sell over the next year if necessary to pay reinsurance claims.

Goldman Sachs has estimated that $5 billion of bonding capacity could be available over the next year, while Citi believed $10 billion to $11 billion could be available.

Since the credit market meltdown in 2008, the reinsurer’s estimated bonding capacity has ranged from a low of $3 billion to a high of $26 billion with “significant dispersion” between individual underwriters’ estimates, according to a report by Raymond James & Associates Inc., the Hurricane Catastrophe Fund’s financial advisor.

“Weak economic conditions depressing municipal budgets, investor skittishness in the wake of widespread predictions of municipal financial distress, and general debt fatigue among both issuers and investors” are some of the reasons the bond market has become unpredictable, Raymond James said.

“A smaller market with a more limited buyer base may present challenges that did not previously exist for the FHCF in issuing bonds,” it added.

Shrinking the size of the Cat Fund and building cash resources will provide a more “consistent guarantee of our coverage,” Nicholson said.

The Cat Fund was created to stabilize hurricane-prone Florida’s property insurance market after Hurricane Andrew devastated South Florida in 1992, forcing many private insurers into insolvency and others to leave the state.

The loss of insurers made it difficult for homeowners to get property insurance, and jeopardized the ability of some people to obtain mortgages.

The Legislature created the Florida Hurricane Catastrophe Fund to provide low-cost reinsurance.

The agency bears no resemblance except in name to a company that provides catastrophe bonds.

The Cat Fund has a private-letter ruling from the Internal Revenue Service enabling it to sell tax-exempt bonds after a hurricane to pay property insurers covering residential policies.

Bonds sold are secured by premiums, assessments, or both on all property and casualty insurance lines except workers’ compensation, medical malpractice, and accident and health policies statewide, if needed.

The assessment base is valued at $33.6 billion.

According to Nicholas, the cost of Cat Fund reinsurance is about one-third of the amount similar coverage could cost in the private market

Given the FHCF’s current cash resources, it could need to bond for as much as $11.219 billion after a hurricane, according to Raymond James.

“Bonding needs of this size are extremely large by market standards,” the financial firm said in its report, noting that estimating the bonding capacity is an “inexact science.”

As of Dec. 31, the Cat Fund had 172 participating insurers and a claims exposure of $2.16 trillion.

About $2.15 billion of tax-exempt bonds are outstanding.

The reinsurer’s bonds are rated AA by Fitch Ratings, Aa3 by Moody’s Investors Service and AA-minus by Standard & Poor’s.

An additional $3.5 billion of taxable floating-rate notes were issued in 2007 to provide liquidity, or additional cash flow, to pay claims in the period immediately after a hurricane. Those notes mature on Oct. 1, 2012.

http://www.bondbuyer.com/issues/120_207/florida-catastrophe-fund-overexposed-1032500-1.html

Bradenton.com
By Jose L. Gonzalez
October 27, 2011

The article “Fla. hurricane fund has $3.2 billion shortfall” (Oct. 18) should be a wakeup call for every business owner, homeowner, renter, charity, church and automobile policyholder throughout the state.

For years we have stressed how a “hurricane tax” has the potential to financially cripple Floridians, and the announcement the Cat Fund is confronting a potential $3.2 billion shortfall demonstrates how the current system continues to leave everyone vulnerable.

Florida’s property insurance game of Russian roulette needs to be stopped. If the state cannot meet its financial obligations, then it has no business selling protection.

As the Florida Legislature continues to meet in Tallahassee and prepare for the upcoming 2012 legislative session, I hope they strongly consider the proposals set forth by Jack Nicholson, the chief operating officer of the Cat Fund.

He has warned legislators in the past that he believes the fund is “dangerously overexposed,” but now more than ever we should take his advice and scale back the size of the fund in order to put the taxpayer-backed fund on sounder financial footing.

Jose L. Gonzalez, Vice President of Governmental Affairs, Associated Industries of Florida Tallahassee

http://www.bradenton.com/2011/10/26/3600877/florida-cat-fund-should-be-put.html