Don Brown

Florida-Based Property Insurers CEO Group
Editorial
October 27, 2011

The State Board of Administration on Tuesday is expected to appoint former House Insurance Chair Don Brown of DeFuniak Springs to the Florida Hurricane Catastrophe Fund Advisory Council, representing reinsurers. Don is a lobbyist for the Association of Bermuda Insurers & Reinsurers and other reinsurance clients.

Also Tuesday, John Auer, a new Florida Insurance Council member, will become Advisory Council chair. John is President and Chief Operating Officer, American Strategic Insurance Company, St. Petersburg.

Finally on Tuesday, the Advisory Council is expected to get a new insurance agent representative, Jeffrey Evans. He succeeds Jim Henderson, of Longwood, who has served on the Advisory Council since 2001.

The SBA sits as trustees for the Cat Fund. It consists of Governor Rick Scott, Chief Financial Officer Jeff Atwater and Attorney General Pam Bondi.

Rep. Brown will assume the reinsurance Advisory Council seat held for the last 10 years by Robert L. Peduto of Kimberling City, Missouri, a reinsurance consultant who also has been chair. John Auer has been vice chair and moves in as chair upon Don Brown’s appointment to the Advisory Council. The council will elect a new vice chair early next year.

This will be the new Cat Fund Advisory Council:
John Auer, American Strategic Insurance Company, St. Petersburg, insurers, Chair;
Campbell Cawood, Key West, consumers;
Judith Curry, Georgia Institute of Technology, Atlanta, meteorologist;
Jeffrey Evans, agents;
William Huffcut, Tallahassee, consumers
Vacant, engineer
David Walker, Clearwater, consumers;
Floyd Yager, Allstate Insurance Company, Northbrook, IL, actuary.

Here is information from Don Brown’s biography submitted to the Financial Services Commission:
Don Brown has served on the Walton County Board of County Commissioners, President of the Walton County Chamber of Commerce and Chairman of the Walton County Airport Authority. He has also served as Republican State Committeeman, Chairman of the Walton County Republican Executive Committee and as a State Representative in the Florida House of Representatives. Don has been an Independent insurance agent for over 35 years and together with his wife they currently own an insurance agency in DeFuniak Springs, FL.

While in the Legislature Don Brown was best known for his work on insurance issues. In the back-to-back years of 2002 and 2003 he was recognized by both the Florida Association of Insurance Agents and the Florida Association of Insurance and Financial Advisors for his significant contribution to insurance reform. Most notably, in 2007 Don was one of only two legislators to vote “No” on HB1A which significantly expand the role of government into private homeowners insurance markets. Since 2007, many of his objections to HB1A have proven to be correct.

By Donald D. Brown
October 25, 2011

When it comes to the concept of risk sharing, or what is sometimes also called spreading the risk, a word of caution is in order. Most people believe that insurance is based upon the principal of spreading risk. “Spreading” the risk is only half the principal. For insurance to work properly “risk must be spread among risks with similar risk characteristics.”

The financial goal of any insurance program should be to operate on an actuarially sound basis; that is, total premiums collected should more than offset total indemnities paid out. Spread of risk cannot compensate for under pricing of risk.

To illustrate: if you had four individuals wanting to purchase $100,000 of life insurance and one was 20 years old, one was 40 years old, one 60 years old and one 80. Should they all pay the same premium for the same coverage? Of course they should not. They each represent very different risks. The random risk that one of the four will die in the next five years (for instance) is very different. A slightly different principal would apply if I told you that the 20 year old and the 60 year old were smokers and the 40 year old was a skydiver. Now an element of human behavior must be taken into consideration.

A single price in the face of various risk attributes will cause adverse selection. As soon as one competitor begins to lower price for the best risks and/or not accept the poorer risks, any company that does not follow suit or take defensive action will find themselves adversely selected against with risks that have higher loss costs that their premium can cover.

Another way of illustrating the need to price different (non-homogeneous) risks differently is to consider the story of the origin of insurance.

Chinese and Babylonian traders practiced the first methods of transferring or distributing risk. Chinese merchants traveling treacherous river rapids would redistribute their wares across many vessels to limit the loss due to any single vessel’s capsizing. If a merchant received a loan to fund his shipment, he would pay the lender an additional sum in exchange for the lender’s guarantee to cancel the loan should the shipment be stolen. Now consider this: if the merchant was selecting the fleet of ship upon which his wares would be transported, would he want the most seaworthy vessels with the most experienced sailors or would he be more inclined to accept the most tattered vessels with the town drunk as the captain?

So, as you can see, spreading the risk is only half the story (particularly as it relates to price). If price is constant among a pool of non-homogeneous risks then some individuals in that pool will be subsidizing the 1) “random” risk characteristics, and the 2) human behavioral characteristics of others.

When this happens, whether by accident or intention, even when the differences are subtle, individuals begin to behave in ways that they might not otherwise consider in their own self-interest.

In conclusion, please forgive me but I always get a little nervous when I hear people talk about “spreading risk” because the “risk” they may want to spread to me may just be very different than mine.

About the Author: Don Brown is an insurance agent in DeFuniak Springs, FL, a Senior Fellow at The Heartland Institute, former member of the Florida House of Representative and Chairman of the House Insurance Committee.

By Donald D. Brown
October 25, 2011

It is a little recognized fact that in Western Cultures we tend to focus on symptoms rather than the root cause(s) of our problems.

This tendency to focus on symptoms rather than the cause can also be seen in many other aspects of western culture, not the least of which is “Public Policy” – which brings me to what I want to cover in this article. When it comes to the Florida property insurance market, Florida’s leaders have, with the very best of intentions, crafted a solution (HB1A – 2007) to the wrong problem (high homeowners premiums).

So, if high homeowners premium are not the problem then what is the problem?

The problem is 1) the severity of hurricanes, not the price of insurance and 2) stubborn human behavior. (More recently sinkhole claims could be added to the list of Florida’s problems).

We all pay more than we’d like to protect our homes against hurricanes. But the price of our insurance is just the symptom of a much larger problem—Florida’s enormous vulnerability to hurricanes. Until we are able to reduce the cost of hurricanes, we’re just spinning our wheels.

Every “solution” that tries to treat the hurricane problem as an insurance problem is doomed to failure.

High insurance rates are the symptom. The severity of hurricanes coupled with our stubborn behavior of building in places where the severity is greatest, and expecting to shift all or part of the bill to someone else – that’s the problem.

Whether we exhibit good behavior or bad as long as we do nothing to reduce the high cost of hurricanes, we’re on the hook, whether we pay before the storm (insurance premiums) or after the storm (taxes and “assessments”).

Hurricanes

Solutions to complex problems are made far more difficult when the problem is not properly defined. In our case scientific developments have made it far easier for us to predict hurricanes but we are yet powerless to alter their direction or intensity.

Given how destructive hurricanes can be to both human lives and property, the demand for faster and more precise warnings is ever increasing; to provide these, we need more accurate forecast guidance with longer lead times. Over the past few decades, we’ve made significant progress in short-range predictions of tropical cyclones. This is most notable in track forecasts: today’s average 72-hour forecast position is as accurate as a 36-hour track forecast was 15 years ago. However, there’s little improvement in our ability to predict hurricane intensity in terms of maximum surface wind speed during the same period, and our skill at predicting tropical cyclone formation or rapid intensity changes is quite limited.

With more than 50 percent of the U.S. population living within 50 miles of the coast,¹ and with 180 million people visiting the coast annually, the risk to our Nation’s coastal areas continues to grow. As the U.S. coastline continues to develop, more people will be at risk and impacts are likely to increase. In addition, annual U.S. hurricane losses average about $10 billion and a recent historical analysis of hurricane damages from 1900 to 2005 suggests a doubling of economic losses from land falling hurricanes every ten years.² The need for substantial improvements, above and beyond current research efforts, in hurricane track and intensity forecast capabilities has never been greater.³

The bottom line is that science has not developed to the point that we can do much to change the direction or intensity of hurricanes.

That leaves us with the problem of “human behavior.”

Stubborn Human Behavior

What I am speaking about in this context is the stubborn human behavior of building in very dangerous places while expecting that someone else will pay the bill.

The truth is that Florida is America’s #1 catastrophe problem. If a hurricane is to hit the eastern coast of the U.S., there is a 41% chance it will hit Florida. The exposure is huge and can only grow in the future despite the real estate collapse. According to AIR Worldwide the total value of insured coastal exposure in Florida in 2007 was $2,458,600,000,000. That’s nearly $2.5 trillion and represents a $522B increase since 2004, up 27%. When compared to our gulf coast neighbors Florida’s coastal exposure is nearly twice as large as Texas ($895.1B), Louisiana ($224.4B), Mississippi ($51.1B) and Alabama ($92.5B) combined!

Even more disturbing is the fact that in 2007 Florida’s insured coastal exposure as a percentage of statewide-insured exposure was 79%, more than any other state. A closer look reveals that in 2007, residential structures accounted for $1.24 trillion or slightly more than half (50.4%) of all coastal exposure in Florida, far more than any other state. Interestingly New York is at $660.4B, Texas at $388.3B, Massachusetts at $373.3B and our gulf coast neighbor of Louisiana at only $96.9B.

Despite the recent crash in the real estate markets and higher unemployment, according to the University of Florida, Bureau of Economic and Business Research, Florida will add millions of new residents in the years ahead, putting more strain on the state’s fragile property insurance market.

In 2010 Florida’s population was estimated to be 18.773 million and is projected to grow to as much as 23.821 million by 2035. Florida’s demographics and land use policies make it nearly certain that catastrophe losses in the state will rise in the future.

In addition to Florida’s status as one of the most catastrophically exposed places in the world, Florida is also America’s most dysfunctional, but not necessarily most uninsurable, property insurance market. Rate suppression and, arguably, the most burdensome regulation in the nation, not hurricanes, are the principal source of the dysfunction. The hostile regulatory environment is ultimately anti-consumer. In reality, rate suppression leads to reduced consumer choice, less competition and a weakening among some insurers.

[Price does far more than compensate a seller for his goods or services. More importantly, it communicates the appropriateness of certain human behavior. When government conspires to deprive insurance consumers of the proper pricing signals it not only distorts the market, it actually increases the danger that consumers will engage in behavior that, if properly informed, they would never consider. An argument could be made that depriving consumers of the proper pricing signals creates “life safety” issues (building in very dangerous places).]

Since its creation in 2002, total exposure to loss in Florida’s Citizens Property Insurance Corporation has increased by 163%, from $154.6B to $406B in 2009. Continued growth since 2009 makes the problem even worse. Recently it has been reported by Citizens staff that Citizens’ policy count is growing by 5000 to 7000 policies a week.

There is one final aspect to human behavior that I would suggest plays an important role in the problems Florida faces. It is based on the recognition of a fundamental truth about human nature and is best described in a quote by Frederic Bastiat:

“Self-Preservation and self development are common aspirations among all people. But there is also another tendency that is common among people. When they can, they wish to live and prosper at the expense of others.”

“This fatal desire has its origin in the very nature of man – in the primitive, universal, and insuppressible instinct that impels him to satisfy his desires with the least possible pain.”

The state is one storm away from a major economic and financial crisis. When this happens, there is the expectation that the federal government will come to the rescue. Even if the federal government steps in to pay claims (which is by no means a certainty), it is doubtful that there will be a viable market the day after. Emergency assessments used to fund future capacity may not be viable if Florida citizens balk at increasing their exposure to additional losses (increasing assessments to fund future capacity).

Also, there is no guarantee that the level of bonding needed to fund future losses will be available when needed. Subsequent season capacity may not be available and certainly not enough will be available to avoid major problems.

A New Approach is Needed

A new approach to solving the problems in Florida’s property insurance market is needed. The gimmicks and schemes passed in the special session of January 2007 have failed. Today we are not only vulnerable to hurricanes; we are also vulnerable to an economic catastrophe that is “man-made”. The willingness of our government to pander to the fatal desire of some to “…live and prosper at the expense of others” must be checked.

Tough problems require strong leaders. We need leaders that are willing to tell us the truth, not just what we want to hear. For once we need to “count the cost” before we continue to build in very dangerous places.

¹ http://www.ofcm.noaa.gov/p36-isrtc/fcm-p36.htm
Tropical Cyclone Research: “Interagency Strategic Research Plan for Tropical Cyclones” (February 2007)

² Pielke, R. A., Jr., J. Gratz, C. W. Landsea, D. Collins, M. Saunders, and R. Musulin, 2007: Normalized Hurricane Damages in the United States: 1900-2005. Accepted for publications in the Bull. Amer. Met. Soc.

³ http://www.nrc.noaa.gov/plans_docs/HFIP_Plan_073108.pdf
“Proposed Framework for Addressing the National Hurricane Research and Forecast Improvement Initiatives” (July 18, 2008)

About the Author: Don Brown is an insurance agent in DeFuniak Springs, FL, a Senior Fellow at The Heartland Institute, former member of the Florida House of Representative and Chairman of the House Insurance Committee.

By Donald D. Brown
October 25, 2011

Gambling and insurance are two different things. Honestly.

I often hear people joke about how insurance is really nothing more than gambling, i.e., betting that something may or may not happen to their home. Beyond the science of actuaries, there is a distinct difference. It really all comes down to risk.

Gambling introduces risk where none exists. Gambling is the wagering of money or something of material value (referred to as “the stakes”) on an event with an uncertain outcome with the primary intent of winning additional money and/or material goods. Typically, the outcome of the wager is evident within a short period. Put another way, gambling is “speculative risk” where there is a chance of loss or gain.

Insurance mitigates risk where risk exists. Because contracts of insurance have many features in common with wagers, insurance contracts are often distinguished under law as agreements in which either party has an interest in the “bet-upon” outcome beyond the specific financial terms. E.g.: a “bet” with an insurer on whether one’s house will burn down is not gambling, but rather insurance — as the homeowner has an obvious interest in the continued existence of his/her home independent of the purely financial aspects of the “bet” (i.e., the insurance policy). Nonetheless, both insurance and gambling contracts are typically considered aleatory contracts under most legal systems, though they are subject to different types of regulation. Insurance for the consumer handles “pure risk” where there are two outcomes, loss or no loss vs. loss or gain.

Said another way, insurance and gambling are two institutionalized approaches to risk-taking:

– Gamblers pay to take unnecessary risks
– Buyers of insurance pay to avoid the consequences of necessary risks

Think about it. What is the chance you are going to roll a seven at the craps table? You are at no risk of rolling a seven.

What is the chance you or I will die tomorrow? I guarantee that both you and I will die at some point – hopefully not tomorrow – but it will happen. Guaranteed. There is a certain and unavoidable risk that we will die.

There are four ways to handle risk.

1) Retain the risk.
2) Avoid the risk.
3) Transfer the risk. Transferring the risk is insurance.
4) Mitigate the risk.

Retaining the risk – without transferring it – is self-insurance. You will bear the cost of the loss in entirety.
Avoiding the risk – walking to the store instead of taking the car will keep you from being a driver in a car accident.

Transferring the risk – purchasing an insurance policy makes a third party – the insurance company – liable for payments due to someone that you injure or are indebted due to your actions. If you hit a pedestrian with your car, your insurance company is contractually obligated to defend you in court and to pay any damages to the injured party to the extent of the policy you have with the insurance company.

The fact that risk is not tangible creates a certain comfort level within even the most reasonable people. It will always happen to the next guy. Risk is real. It continually surrounds us. It can be tragic not to believe in its existence.

About the Author: Don Brown is an insurance agent in DeFuniak Springs, FL, a Senior Fellow at The Heartland Institute, former member of the Florida House of Representative and Chairman of the House Insurance Committee.

By Donald D. Brown
October 25, 2011

Florida’s property insurance market can be thought of as a “three legged stool”:

1) The Private Market,
2) Citizens Property Insurance Corporation (Citizens) and
3) The Florida Hurricane Catastrophe Fund (FHCP).

Unfortunately, all three legs of Florida’s property insurance market stool need repair.

This is due, in large measure, to a fundamental shift in public policy implemented in 2007, which purposely embraced unfunded debt as a means to finance risk. Prior to 2007 Florida relied more on private capital to finance risk. To quote Dr. Jack Nicholson from the FHCF: “It is always better to finance risk with capital than to finance risk with debt.” So, we took a wrong turn. We now have an opportunity to correct our course.

What the Florida property insurance market needs more than anything else is: CAPITAL!

What are the impediments to Capital formation in Florida? To answer that question it might be helpful to reference Frank H. Knight’s landmark book: Risk, Uncertainty, and Profit (1921). In his book Dr. Knight defined the difference between Risk and Uncertainty like this:

1. Risk is present when future events occur with measurable probability
2. Uncertainty is present when the likelihood of future events is indefinite or incalculable

When the probability of risk can be quantified there is a clear path forward. When uncertainty prevails and future events are indefinite or incalculable then the path forward is clouded and forward progress slows or, in extreme cases, stops altogether.

The following, now famous quote, expresses a concern over the unknown in a different way: “…there are known knowns; there are things we know we know. We also know there are known unknowns; that is to say we know there are some things we do not know. But there are also unknown unknowns—the ones we don’t know we don’t know.”—Donald Rumsfeld

How do people weigh risk versus uncertainty? Consider a famous experiment that illustrates what is known as the Ellsberg Paradox. There are two urns. The first urn, you are told, contains 50 red balls and 50 black balls. The second one also contains 100 red and black balls, but the number of each color is unknown. If your task is to pick a red ball out of either urn, which urn do you choose? Most people pick the first urn, which suggests that they prefer a measurable risk to an immeasurable uncertainty. This condition is known to economists as ambiguity aversion, a kind of fear or paralysis in the face of the unknown or it could also be called “the inherent fear of the unknown.”

Today the greatest impediment to capital formation in Florida is political, legislative and regulatory uncertainty.

Private capital markets (insurers and reinsurers) observe in utter disbelief as Florida policy vacillates from one extreme to another.

Finally, to illustrate the effects of Florida’s political and regulatory uncertainty I refer you to an article that recently appeared on insurancenewsnet.com. The title to the article is “Farmers COO: Company’s Eastward Push Won’t Include Florida”. Farmers Insurance Group is one of the largest personal lines insurers in the nation.

The article says, in part:

“As Farmers moves ahead with an East Coast expansion, Florida’s mainstream property market won’t be a factor in that overall equation.

Farmers President and Chief Operating Officer Jeff Dailey said the company believes it just wouldn’t be a wise use of capital. He pointed out other insurers have had trouble maintaining surplus even without hurricanes affecting Florida’s marketplace.

It’s just not an environment that we would want to expose our capital to, Dailey said. It’s really from a property perspective. We’re not looking to expand our exposure there.”

The full text of the article can be found at:
http://bit.ly/ojmlxW

As can be seen from the article referenced above the attitude of some capital investors is not favorably inclined toward Florida. Contrary to what some will tell you, I do not believe their attitude is shaped so much by the extraordinary wind exposure Florida represents. Rather, it is the political and regulatory uncertainty to which they refer when they say: “It’s just not an environment that we would want to expose our capital to…” We desperately need to change that environment.

Before we can expect significant improvement in Florida’s property insurance market we must regain the confidence of capital investors. To do that our political and regulatory behavior must change. To follow will be a series of brief articles that suggest how some semblance of certainty can be restored to Florida’s troubled property insurance market. Stay tuned.

About the Author: Don Brown is an insurance agent in DeFuniak Springs, FL, a Senior Fellow at The Heartland Institute, former member of the Florida House of Representative and Chairman of the House Insurance Committee.

The Wall Street Journal
Editorial
October 25, 2011

The Atlantic hurricane season is winding down without a disaster for Florida, but evidence continues to build that the state’s taxpayers will get walloped sooner or later. The state’s own hurricane reinsurer now admits its 12-month funding shortfall for claims is $3.2 billion.

That estimate is based on the taxpayer-backed Florida Hurricane Catastrophic Fund’s cash on hand, its investment income and the amount banks estimate the fund could raise in municipal bond markets, if needed. Uh-oh.

The Cat Fund was supposed to be a reinsurer of last resort but was expanded far beyond a prudent size in 2007, thanks to former Governor Charlie Crist. If a big storm hits the hurricane-prone state, insurers with Cat Fund coverage have to absorb $7 billion in losses first. If the losses are larger, the Cat Fund starts paying claims with cash on hand, which currently totals $7.2 billion. If the damage exceeds that $14.2 billion, then the Cat Fund must turn to the capital markets.

In headier financial times, the Cat Fund estimated it could raise as much as $27.8 billion. Those days are over. The Cat Fund estimated in May it could raise $12 billion and now it is $8 billion. In any event, Florida consumers will ultimately pay the bill. If the Cat Fund must issue bonds, it levies “assessments”—a code name for a tax—on the state’s property and casualty insurance holders to pay interest and repay principal. Only workers’ compensation and medical malpractice insurance holders are exempt—Mr. Crist’s nod to the tort bar.

Lest you think $14 billion is enough, consider that Category 5 Hurricane Andrew caused $26.5 billion in damage in 1992, according to the National Hurricane Center. Wilma, which hit in 2005 as a Category 3, cost $21 billion.

If the fund couldn’t pay its claims, some of the state’s insurers would likely go bust. The Cat Fund’s chief operating officer, Jack Nicholson, characterizes that problem as potentially “significant.” He is promoting legislation to reduce the fund’s size and shore up its finances. The time to do that is before the next big one hits, but Florida’s ruling Republicans continue to behave as if this is someone else’s problem.

http://online.wsj.com/article/SB10001424052970204485304576641103021823180.html

PropertyCausalty360.com
By Chad Hemenway
October 25, 2011

Companion bills introduced in the Florida House and Senate would allow surplus-lines insurers to participate in a program to depopulate the state’s supposed insurer of last resort.

The bills, sponsored by Rep. Jim Boyd, R-Bradenton, and Sen. Garrett Richter, R-Naples, are once again rippling the waters of the yearly debate about Florida’s Citizens Property Insurance Corp., which long ago eclipsed its intended purpose of being the last-resort insurer in the Sunshine State due to several factors in the Florida property-insurance market.

Legislation several years ago established a depopulation, or “take-out,” program and numerous domestic insurers sprung up, establishing their books based on policies taken from Citizens.

However, the take-outs have slowed and Citizens is growing again at an alarming rate—about 1,000 policies per day, the industry says.

Samuel Miller, executive vice president of the Florida Insurance Council, says the FIC has yet to develop a formal position on the legislation but “something has to be done” to stop Citizens’ growth.

“There has been very little take-out activity,” Miller says. “The depopulation of Citizens needs to be rejuvenated. Most primary insurers are not interested in taking out right now.”

There are a number of factors that are to blame, Miller says. Four years ago Florida lawmakers tried freezing Citizens rates after an outcry for property insurance affordability. The move had consequences—mainly the ballooning of Citizens because, under Florida law, more residents qualified to enter the state-run insurer.

Laws have been passed to allow Citizens to again increase rates—albeit gradually—but it’s a losing game of catch-up, the industry says. Primary insurers still consider Citizens a competitor.

Additionally, approved take-out companies must maintain the Citizens’ rate on a policy for three years after removing it—rate that have been proven to be far below actuarial soundness.

“It’s a conundrum,” says Lisa Miller, former state deputy insurance commissioner and owner of lobbying firm Lisa Miller & Associates. “Primary insurers might look at removing policies but they can’t change the rate they need to do that. It is not good business practice.”

The bills to allow surplus-lines insurers into a Citizens depopulation plan “creates and unleveled playing field,” she adds, due to the discrepancy in regulation between primary and surplus insurers, which have more freedom of rate and form.

Nevertheless, primary insurers are “anxious to find ways to depopulate Citizens and keep it less competitive with the market,” Lisa Miller says.

The industry appears to commend lawmakers for trying, but is not sure this measure is the right fix. Its potential effectiveness is being questioned. As in, will policyholders chose (they have the choice under law to stay with Citizens) to link with a surplus-lines insurer knowing there is a possibility their rates could increase significantly?

The bills do have people talking. The Florida Property Casualty Association had a meeting scheduled to discuss the legislation, as did the board of the Florida Surplus Lines Assoc.

Under the bills, surplus-lines carriers looking to participate in the depopulation program would need to carry at least $50 million in surplus, reinsurance for a 1-in-100-year probably maximum hurricane loss, and maintain an “A-minus” rating from insurance rating agency A.M. Best Co.

Also, notice must be given to policyholders to inform them that surplus \-lines policies are not provided coverage by the Florida Guaranty Assoc. In other words, if the surplus-lines insurer folds, the policyholder will be left with unpaid claims and no recourse.

http://www.propertycasualty360.com/2011/10/25/surplus-lines-could-be-entering-florida-citizens-t

PropertyCasualty360.com
By Chad Hemenway
October 24, 2011

It came as no surprise to anyone that has followed the Florida’s reinsurance fund that it could potentially have a $3.2 billion shortfall but that doesn’t make the news any easier.

The Florida Hurricane Catastrophe Fund (FHCF) will not be able to raise enough money in the capital markets via post-event bonds to cover all of its claims-paying obligations, according to new report issued by independent-financial advisor Raymond James.

The FHCF has nearly $18.4 billion in obligations and a year-end cash balance of $7.17 billion. This means the fund needs to raise about $11.22 billion from bonding to meets its obligations after a storm.

“Bonding needs of this size are extremely large by market standards,” says Raymond James, which asked four financial-services firms to estimate the FHCF’s bonding capacity over the next 12 months.

The average of the estimates from the firms—Citi, Barclay’s, Goldman Sachs and JP Morgan—is $8 billion, leaving a $3.2 billion deficit.

Beyond the cash balance, Florida policyholders will end up shouldering the bill via assessments to pay the debt.

The Heartland Institute, a public policy think tank, says the $8 billion post-event bonding capacity estimate may be optimistic. Goldman Sachs, for instance, says the FHCF could raise just $5 billion in the capital markets.

Heartland, a promoter of free-market policies, has long opined about the harmful effects of past legislation intended to artificially keep homeowners’ rates down. R.J. Lehmann, deputy director of Heartland’s Center on Finance, Insurance, and Real Estate, says the “flaws of that strategy are becoming more and more evident by the day.”

He adds, “Florida must allow risk-based rates to prevail, both for primary insurance and reinsurance, or face the potential of claims the state simply cannot afford to pay.”

Jack Nicholson, chief operating officer of the FHCF, says a shortfall following a weather disaster in Florida could have “severe consequences” in the state’s property-insurance market. Every insurer, by law, has to purchase reinsurance coverage—typically at a lower rate than the private market—from the fund. Some do more than others.

“There’s the potential that companies will not be able to pay claims because the coverage they relied on the [catastrophe fund] for does not exist,” he says.

However, Nicholson insists the state’s “very hazardous” consistent reliance on the bond market to pay claims can be remedied.

http://www.propertycasualty360.com/2011/10/24/florida-hurricane-fund-not-prepared-to-meet-obliga?t=loss-control

SunSentinel.com
By Julie Patel
October 21, 2011

Legislators looking for ways to shrink state-backed Citizens Property Insurance introduced bills this week to allow unregulated insurers to take over the insurer’s policies.

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.

That’s a big concern for Sen. Mike Fasano, R-New Port Richey. “What’s it going to cost the consumer who can’t afford private insurance?” he told Kathleen Haughney, our Tallahassee reporter.

Sean Shaw, an attorney and founder of Policyholders of Florida, agreed: “Allowing companies that are not fully regulated by the state to swoop in and take Citizens policies” is unacceptable.

Rep. Jim Boyd, R-Bradenton, who is sponsoring one of the bills, said consumers who don’t want to leave Citizens wouldn’t have to and the bill only allows insurers that have strongly financial ratings and at least $50 million in claims-paying reserves to participate.

He said the unregulated insurers would have to charge a reasonable price if they want a Citizens policyholder to switch.

“Along coastal communities, a lot of commercial buildings are already insured by surplus lines carriers…It’s just another option for [consumers] to consider as they’re looking at what they’re paying and what they’re covering themselves for,” Boyd said. “Perhaps would help, Boyd said.

All property insurance policyholders pay fees to offset Citizens’ deficits from the 2005 hurricanes. Boyd said lawmakers should consider other ideas to reduce the risk the insurer poses to Floridians such as “doing away with those multi-line discounts [that motivates some to choose Citizens over private insurers] or making coverage options for Citizens not as attractive as standard lines.”

http://weblogs.sun-sentinel.com/business/realestate/housekeys/blog/2011/10/bill_would_let_unregulated_ins.html

Insurance Journal
By Gary Fineout
October 20, 2011

Florida’s hurricane fund is confronting a potential $3.2 billion shortfall, financial experts said in a new estimate of the money available to the pool intended to help insurers make disaster payments.

The fund was created after Hurricane Andrew devastated South Florida in 1992. Insurers get help to pay homeowners if a storm results in widespread damages.

But the fund doesn’t have enough cash on hand to meet all of its obligations in the event of a big storm, or just as bad, a series of hurricanes. So the fund must go out and borrow what it needs.

Financial experts for the fund, however, have drawn up new estimates that contend that turmoil in financial markets and a weak economy have made it unlikely that the fund would have enough money to help insurers after a hurricane.

This year the fund is providing $18.4 billion worth of coverage. It should have more than $7 billion of cash on hand by the end of the year, but it would still need to borrow another $11 billion if a storm were to strike.

The new estimates, which were to be presented to a state panel Tuesday, suggest the fund could borrow just $8 billion over a 12-month period.

The new figures, however, do suggest that the fund — formally known as the Florida Hurricane Catastrophe Fund — could borrow an additional $6 billion during a period one to two years following a major storm.

The news that the fund’s financial strength has eroded isn’t completely unexpected.

Last month Jack Nicholson, the chief operating officer of the fund, told state legislators that the fund is on “shaky ground.”

“I think we are dangerously overexposed considering the current reality of the marketplace,” Nicholson said at the time. “… It scares me to death where we are.”

Nicholson wants state lawmakers to scale back the size of the fund. That would likely cause insurance premiums to rise but it has the backing of many key Republicans, including Gov. Rick Scott.

Every insurer currently in Florida is required to purchase coverage from the “Cat Fund” as it also called. The fund provides a backstop to insurers at a rate that is generally cheaper than reinsurance sold by private companies. Nicholson estimated that this low-cost option probably results in insurance premiums being about 25 percent cheaper.

If a storm causes enough damages the insurer can ask for reimbursements from the fund. But if the hurricane fund runs out of cash due to a large storm, it borrows money to pay insurers.

The state pays off its debts with an assessment, or what some call a “hurricane tax,” that is placed on nearly every insurance policy in the state, including auto insurance policies. Right now, homeowners and drivers in Florida are paying off charges due primarily to Hurricane Wilma.

http://www.insurancejournal.com/news/southeast/2011/10/20/220845.htm