Don Brown

The Miami Herald
By Gary Fineout
September 21, 2011

Florida’s hurricane fund chief is warning that the state-created fund used to help insurers pay off claims after a big storm is in danger.

The state has relied on a hurricane fund ever since Hurricane Andrew devastated South Florida nearly 20 years ago. Insurers get help to pay homeowners if a hurricane – or a series of hurricanes – results in widespread damages.

But Jack Nicholson, the chief operating officer of the fund, told state legislators on Wednesday that the fund is on “shaky ground.” He said ongoing turmoil in the world financial markets is raising questions about whether the fund could borrow enough money to help insurers after a hurricane.

This year the fund is providing $18.5 billion worth of coverage, and while it has more than $7 billion worth of cash on hand, it would still need to borrow another $11 billion.

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

Nicholson used the warnings as part of a pitch to state lawmakers to scale back the size of the Florida Hurricane Catastrophe 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 Floria are paying off charges due primarily to Hurricane Wilma.

Nicholson, however, said he’s less worried about future hikes in the “hurricane tax” because right now he’s not sure he can even borrow enough money. He said the turbulence in the financial markets this summer has created “tremendous uncertainty.”

The Republican-led Legislature – including then House Speaker Marco Rubio – agreed with Gov. Charlie Crist to greatly expand the size of the fund back in 2007 as part of an effort to lower insurance rates. Two years later legislators started whittling the fund back down but Nicholson says more needs to be done.

“The Cat Fund needs to be right-sized,” Nicholson said. “It’s too much when you are expecting to depend on 10 billion or greater of debt.”

State Sen. Alan Hays, R-Umatilla, said he considered it “fraud” to force insurers to buy coverage from the fund if there is no guarantee the fund can pay for storm damages.

“We’re taking a tremendous gamble which I find unacceptable,” Hays said.

But any move by state lawmakers to change the hurricane fund could run into opposition from coastal lawmakers concerned about raising insurance rates during bad economic times.

“We need to go very slowly,” said State Sen. Mike Fasano, R-New Port Richey. “I have great concerns of the ramifications of what this will do to every property insurance policy holder in the state. We’re not just talking about homeowners. We’re talking about mobile home owners, condo owners and small business owners.”

The governor, however, agrees with Nicholson. He said he would prefer insurers to rely on other sources of help instead of utilizing the state-created hurricane fund.

“I like free markets, I believe free markets work,” Scott said. “I believe free markets are efficient so I would like to downsize the Cat Fund responsibly.”

http://www.miamiherald.com/2011/09/21/v-print/2417786/fla-hurricane-fund-chief-warns.html

Florida-Based Property Insurers CEO Group
Editorial
September 21, 2011

Florida Hurricane Catastrophe Fund Chief Operating Officer Jack Nicholson told the next Senate president and other Senate leaders Wednesday the Cat Fund is “dangerously over-exposed” and was asked to submit “a business plan” to make it financially sound.

Nicholson’s concerns were acknowledged by Sen. Don Gaetz, R-Destin, designated earlier this week to succeed Senate President Mike Haridopolis after the 2012 session, and Senate Banking & Insurance Committee Chairman Garrett Richter, R-Naples. Both asked Nicholson to submit a Cat Fund “right-sizing” proposal to the Banking & Insurance Committee staff.

Nicholson is expected to submit the proposal he has discussed before the Florida Insurance Council and other groups this summer. Provisions include reducing the mandatory program from $17 billion to $12 billion over the next three years; and increasing the participating insurer co-pay by reducing the maximum available coverage percentage from the current 90 percent to 75 percent over a three-year period.

Nicholson told the Senate Banking & Insurance Committee he is concerned that the Cat Fund could not sell the more than $11 billion in bonds it would need to fully fund selected coverage for the 2012 hurricane season because of the country’s economic crisis. “We are dangerously over-exposed, given the reality of the current marketplace,” he said.

The emergency assessments “are not the biggest problem,” Nicholson said. “The biggest problem is having the obligation and not being able to issue the debt and not being able to pay the companies.”

Before the House Banking & Insurance Subcommittee Tuesday, Nicholson expressed similar concerns. His presentation came at the end of the meeting and there was no time for responses from committee members. Wednesday, there was extensive discussion about Cat Fund financial instability following a monster hurricane and formal interest in pursuing the matter expressed by the two key Senate leaders.

The Cat Fund should be restructured so it no longer depends on $10 billion in debt; $5 billion to $7 billion in debt is more realistic, Nicholson said. He described the difference between $10 billion in debt and $5 billion as “like night and day.”

The Cat Fund has issued $18.55 billion in coverage for the 2012 hurricane season. It is backed by $7.25 billion in cash, the most in its history and more than the $6.2 billion entering the 2004 hurricane season, Nicholson reported. If required to pay $18.55 billion, it would have to sell $11.3 billion in debt.

In May, the Cat Fund Advisory Council adopted a $12 billion bonding estimate, which covers the $11.3 billion bonding requirement, but with little cushion. And this estimate was based on two reports from underwriters – one estimating $3 to $3 billion in bonding capacity and the other $24 billion.

“A lot of things have changed since May,” Nicholson said, He mentioned, among other developments, the down-grading of the country’s credit rating and the worsening economic crisis worldwide. The Advisory Council reassesses the bonding and claims-paying estimates in mid-October. Nicholson said he has not idea what it will do.

“I’m extremely disturbed that our Cat Fund is dangerously over-exposed,” said Sen. Alan Hays, R-Umatilla. “Companies are going to be stiffed…if we can’t raise that $12 billion.” Hays expressed concern about Citizens Property Insurance C orporation being able to pay all of its claims, with its huge reliance on the Cat Fund and suppressed rates.

“What do you think we should do and what do you think we can do?” Senate President-Designate Gaetz asked Nicholson.

Richter instructed Nicholson to get with committee staff to develop “a business plan for right-sizing the Cat Fund; among other reasons, so he can sleep at night, the chairman added.

Here are the major provisions of the Nicholson plan to restructure the Cat Fund:

Reducing the limits of the FHCF mandatory coverage layer from the current $17 billion over a three-year period. For the 2013 contract year, the limit is reduced to $15.5 billion; for the 2014 contract year, the limit is reduced to 14 billion; and for the 2015 and subsequent contract years, the limit is reduced to $12 billion (with provision for increased limits after the FHCF can fully fund its single-season capacity and its second-season capacity).

Increasing the participating insurer copay by reducing the maximum available coverage percentage from the current 90 percent over a three-year period. For the 2013 contract year, the maximum available percentage is 85 percent; for the 2014 contract year, the maximum available percentage is 80 percent; and for the 2015 and subsequent contract years, maximum available percentage is 75 percent. The current, lower coverage options (45 and 75 percent) will also remain available.

Increasing aggregate insurer retention to $8 billion for the 2013-2014 contract year, and retaining current provisions that automatically adjust retention each year based on FHCF exposure growth.

Increasing the cash build-up factor. Under current law, the cash build-up factor, which is added to the actuarially-determined premiums, is scheduled to increase by 5 percentage points a year until it reaches 25 percent for the 2013 contract year. The draft continues this annual 5 percentage point growth until the 2018 contract year, when the factor will reach 50 percent.

Reducing the maximum emergency assessment for a single year’s losses to 5% (instead of 6%) and for all losses from all years to 8% (instead of 10%), beginning in 2015.

Terminating the TICL layer after the 2012 contract year. Current law provides for elimination of TICL after the 2013 contract year.

The Tampa Tribune
By Louis J. Carron
September 19, 2011

As an insurance professional I feel as though every consumer who has a property insured in Florida should be properly educated as to exactly what defines a sinkhole and what is covered or not covered by a sinkhole coverage endorsement.

Insurance companies are required by law to provide coverage for “Catastrophic Ground Cover Collapse” and include this in the base policy.

Florida law affirms that catastrophic ground cover collapse does not occur until all of the following four conditions are met:

* There is an abrupt collapse of the ground cover.

* There is a depression in the ground cover clearly visible to the naked eye.

* There is structural damage to the building, including the foundation.

* The structure is condemned and ordered to be vacant by the local government agency responsible for issuing condemnation orders.

The official definition of sinkhole, sinkhole loss and the damage covered is determined by statute, and very complex.

The type of damage a sinkhole does to a home is the same as the type of damage caused by lack of maintenance, settlement and improper building construction — such as exterior cracks, interior doors that do not close or torn pool screens. Most often the cause of this damage is determined not to be caused by a sinkhole.

The cost of determining the cause of the damage is on average $5,000 to $16,000 and is paid completely by the insurance company. The presence of a sinkhole does not have to be confirmed, and sinkhole claims are paid if an engineer cannot eliminate sinkhole as a cause of damage. A large part of the cost of a sinkhole claim is to pump grout into the sinkhole. The damage to the structure in most cases is cosmetic in nature, but policy limits, in most cases, are paid in full.

Due to the involvement of some public adjusters and/or attorneys, claims have been filed for sinkhole losses, and the companies have incurred large costs for investigation, running geological tests and, in some cases, court defense costs for claims that were later deemed to be non-sinkhole losses.

What each resident of Florida has to realize is that sinkhole coverage is now becoming an endorsement, which may or may not be offered by their carrier and thus can be and should be charged adequately for, according to the area where the property is located.

This is along the same lines as adding replacement-cost coverage, computer equipment, a lower deductible, jewelry or any other special enhancement that may be available for your policy. If you desire the broader coverage, there is an increased cost associated with the extra risk and exposure taken on by the carrier, and the consumers must make the decision to decide whether they can afford this extra cost or not.

Floridians faced the same issue after Hurricane Andrew. Carriers started offering a separate hurricane/named-storm deductible, and consumers complained that banks would not accept these deductibles, and this new deductible would cause foreclosure and financial burden for the consumer. The banking industry adapted, and the public now better understands these deductibles and what they would be responsible for in the event of such a loss, and now hopefully they better prepare for this large expense.

I am not saying that there are not legitimate sinkhole claims, and I am not saying that public adjusters and attorneys are the main problem. What I am saying is that when a leak springs in the dam, you need to plug it before it floods the town. If our state and the insurance carriers that do business here do not limit this sinkhole issue, all consumers will suffer and we could lose our “freedom of choice” to find affordable property insurance.

We, the consumers, are also on the “hook” for hundreds of millions of dollars in exposure that exists with Citizens Insurance Corp. Every Florida resident would share in the losses of Citizens if it could not pay all its obligations to its policy holders. This would be triggered by policy taxes, which we are paying now, special assessments, which are a part of every Citizens policy, and finally higher rates.

This sinkhole issue is doing just that; depleting the claims-paying ability of Citizens as well as all carriers doing business in the state.

Consumers should ask their agent to explain the coverages of their policy, and the consumers should understand what it is they would be responsible for in the event of a loss, such as their deductibles, rejection of coverage or possible assessment that may occur if their carrier would not be able to cover obligations to policyholders.

Louis J. Carron Jr. is the owner of Carron Insurance Agency in Tampa.

http://www2.tbo.com/news/opinion/2011/sep/19/meopino2-getting-to-bottom-of-sinkhole-controversy-ar-258479/

Citrus County Chronicle
By Dr. William Dixon
September 18, 2011

The concept of home insurance is not difficult. Think of it as a game of chance.

An insured homeowner places a bet each year with the insurance company (your premium payment) that his house may be damaged or destroyed. The company determines appropriate odds for the bet.

Odds are derived using statistical probabilities of fires, storms and other risks. Despite the numbers being fuzzy, different insurers will come up with odds for the bet that will be very similar. Competition among insurers forces the profit component down.

Like the “house” in a game of chance, the insurer must make a profit in the long term. In the short term he could get crushed by unusually frequent storms or other hazards. To cover his bet, he buys expensive backup insurance from a reinsurance company with very deep pockets.

In a free competitive market, the cost of insuring one’s home is a fair reflection of the risks. Not so, once government gets involved. Florida is a prime example.

In the years prior to 1990, property insurers in Florida offered premiums that reflected favorable loss experience. From 1950 through 1990, only six storms made landfall in Florida. In 1992, Category 5 hurricane Andrew devastated South Florida, bankrupting some insurance companies and forcing the strong companies to transfer surpluses earned elsewhere to cover losses in Florida. After Andrew, the cost to insure a home increased substantially as insurers recalculated the odds on their bets.

Companies, at that point, made a decision that some homes were just uninsurable because Florida limited what they could charge. Many quit writing policies on high-risk homes. Some pulled out of the property insurance market in Florida.

Rather than permit insurance companies to charge rates consistent with risk, many Florida politicians demonized them as price-gougers. Lacking wisdom and common sense, the same politicians established state-owned Citizens Property Insurance as the insurer of “last resort” for homeowners who could not find insurance or found the rates unaffordable. In another stroke of economic genius, the politicians set premium rates below the private market and below rates needed to offset Citizens’ assumed risks.

Citizens has never had adequate cash reserves to cover major storm damage. Its reinsurance for excess losses comes from the Florida Hurricane Catastrophe Fund, an entity that is financially unable to back it up. Were a major storm to hit, Citizens and the Cat fund would have to sell bonds and place surcharges on every insurance policy, auto, home, whatever, held by Floridians to raise cash. The cost of insuring selected homeowners would be transferred to all Floridians.

No hurricane has touched Florida in the past six years. But a storm of a different sort — sinkhole fraud — threatens to bankrupt Citizens and smaller private companies unless rates are raised to cover the sinkhole risks. Senate Bill 408 helps combat new cases of sinkhole fraud, but does nothing for those already in the pipeline.

Affected homeowners (and the editorial board of this newspaper) are denouncing rate increases. Local politicians, concerned more about re-election, are ginning up anger against the proposed rates for sinkhole coverage. Would they prefer the costs for sinkhole coverage (and wind damage) be transferred onto the backs of Floridians who don’t live in sinkhole regions or along the coast? Do they really believe private insurance companies will write policies that will cause them to lose money?

The cost to insure against sinkholes will decrease once pending claims are settled. Not so the costs of wind damage. The only fair solution is for homeowners to pay premiums based on actual risks. Subsidizing select homeowners is but another form of wealth redistribution. In the long run, that always fails.

William Dixon is a graduate of Columbia University, New York Medical College and the USF College of Business Administration. He served in the Army as a surgeon and as a Special Forces Officer, achieving the rank of Lieutenant Colonel. He was an assistant professor of surgery at the University of Georgia before entering private practice. Dr. Dixon can be reached at Wdixon16@yahoo.com.

http://www.chronicleonline.com/content/capping-insurance-premiums-invites-disaster

Orlando Sentinel
By Mike Thomas
September 14, 2011

Tell those danged politicians to take their hands off our gubberment property insurance!

That’s the hue and cry coming from Sinkhole Alley, where homeowners are getting a firsthand taste of Florida’s free-market insurance reforms.

They stormed a Tallahassee meeting this week protesting thousandfold increases in their sinkhole insurance from state-owned Citizens Property Insurance.

Sinkhole Alley is in west Central Florida. Pasco and Hernando counties sit in the heart of it and face the biggest increases. They are Republican strongholds that voted heavily for Rick Scott. He is the guy behind the reforms.

As they say, elections have consequences.

This is not to say I disapprove. Citizens Property was losing so much on sinkhole claims that it was headed for yet another taxpayer bailout.

But I am amused by voters and politicians who rant against government entitlement programs until it’s their own ox that gets gored.

And make no mistake. Citizens Property Insurance is a state-owned government entitlement program.

It sells most of the sinkhole insurance in Sinkhole Alley because private insurers can’t charge enough to cover their losses.

Losses aren’t a problem for Citizens because it is backed by taxpayers. And so it has been charging a fraction of the market value for sinkhole coverage.

The result is predictable. Without any changes it was on track to lose $559 million next year. Sinkhole claims doubled in the past year alone as homeowners and public adjusters rushed to cash in on wall cracks.

So Scott and state lawmakers told Citizens to begin charging full freight for the policies.

They stood united: Free market good! Gubberment insurance bad!

I stood with them.

Then Citizens came out with its new rates. And Pasco and Hernando homeowners were looking at premiums between $4,000 and $6,000.

Sinkhole Alley is now Heart Attack Alley.

All those stoutly anti-government politicians that backed the reforms have been backstroking faster than Michael Phelps.

Said Gov. Scott: “We have to have a financially sound insurance program, we want insurance companies coming to our state, but we’ve got to be fair to our citizens also.”

I think Scott is getting nervous about a Democratic rebirth of Charlie Crist, the Insurance Slayer, in 2014.

Citizens agreed to scale back the increase by half this year, and phase in the remainder. This means Citizens will only lose $219 million on sinkholes next year.

Yet the politicians who voted for the reforms still are pointing the finger at Citizens officials, outraged that they dared to do what they told them to do.

“As soon as you got your numbers, there ought to have been a light bulb moment,” Rep. Jimmie Smith, R-Spring Hill, said at the public hearing in Tallahassee.

Where was Smith’s light bulb when he voted on the bill? Last year Citizens took in $32 million in sinkhole premiums and paid out $245 million in claims. What did he think was going to happen to rates?

This is nothing new. In 2006, legislators required Citizens Property Insurance to charge the full price to cover hurricane losses on the coast.

Back then I wrote, “We will see tremendous political pressure to throw out [the law]. People will be squealing up and down the Atlantic and Gulf beaches. There will be a move to, once again, discount premiums and have taxpayers subsidize the coastal-insurance market.”

Charlie Crist and Marco Rubio did just that in 2007.

Look for a repeat performance from Republicans next year.

mthomas@tribune.com or 407-420-5525

http://articles.orlandosentinel.com/2011-09-14/news/os-mike-thomas-sinkholes-091511-20110914_1_sinkhole-insurance-sinkhole-alley-citizens-property-insurance

Best’s News Service
By Diana Rosenberg
September 6, 2011

HomeWise Preferred Insurance Co., a Tampa, Fla.-based property/casualty insurer, has been placed into receivership, insolvent because of sinkhole-related claims.

HomeWise Preferred, which primarily wrote homeowners insurance coverage, stopped writing new and renewal policies a year ago. The last policy expired in June, and there are no known policies-in-force and no employees, according to a spokeswoman for the company and the Florida Department of Financial Services website.

The insurer has some 500 claims remaining ? most of those sinkhole related, spokeswoman Rachel Gustafson said.

The company was a “casualty” of sinkhole claims, Gustafson said, adding that a law enacted earlier this year to address noncatastrophe cost drivers, including such losses for Florida’s property/casualty insurers, “came too late.”

The law, signed by Gov. Rick Scott in May, includes provisions that give insurers several means of limiting their payments in sinkhole claims. Among those are a two-year statute of limitations on claims and new definition of what a sinkhole is (Best’s News Service, May 4, 2011).

Sinkhole claims more than tripled in Florida between 2006 and 2009, according to a study last year by the Florida Office of Insurance Regulation. The OIR reported that 66% of claims are concentrated in three counties ? Hernando, Pasco and Hillsborough. However, there is an increase in reported sinkholes in parts of south Florida, including Miami-Dade and Broward counties, where sinkholes historically haven’t been an issue.

More than 200 insurance companies, including HomeWise Preferred, responded to the OIR’s data call. HomeWise told regulators it conducted an examination of 110 sinkhole claims, 55 with policyholders having representation, and another 55 nonrepresented policyholders.

“Reported data involving HomeWise Preferred indicates that policyholders tend to not effectuate repairs, with the percentage opting not to make repairs being higher for claims with representation,” the OIR report said. Of those having representation, 79% of claimants did not make repairs, and 58% paid down their mortgages or transferred the property. Of those nonrepresented claimants, 56% didn’t make repairs, and 40% paid down their mortgages or transferred the property, the OIR report said.

The Florida Department of Financial Services has taken over operations of HomeWise Preferred, which consented to the receivership, according to the order issued by the Second Judicial Circuit Court for Leon County.

Under the order, the department takes possession of all property and assets, including securities and certificates of deposit, of the insurer; authorizes payment of expenses, collects debts and commences legal proceedings, if necessary.

HomeWise began operations in 2006, at a time when other carriers stopped writing policies in Florida following eight hurricanes over the previous two years. In its early years, its client base largely consisted of policies taken over from Citizens Property Insurance Corp., the state’s largest property insurer and last resort insurer (Best’s News Service, March 12, 2007).

The company posted a loss of $15.4 million last year, according to BestLink, which provides online access to A.M. Best’s database of insurance information.

Citizens Property Insurance Corp., which has paid out $1 billion in sinkhole claims over the past nine years, is pursuing a premium increase for sinkhole coverage that, if approved by regulators, will result in some policyholders paying thousands of dollars more each year for such coverage.

Residents in coastal areas of Pasco County, who currently pay an average of $1,270, would see premiums rise to $3,598, while other county residents who currently pay an average $1,475 would pay $4,440. Residents in coastal areas of Hernando County, who currently pay an average $1,356, would pay $5,734, and other county residents, who currently pay an average $1,084, would pay $6,192 (Best’s News Service, July 27, 2011).

Under the new law, rates for sinkhole coverage are not subject to the state-mandated 10% rate cap imposed on Citizens.

HomeWise’s takeover by the state marks the second time in a month a judge has ordered a Florida insurer into receivership. Last month, the Second Judicial Circuit Court ordered National Group Insurance Co., a Coral Cables-based commercial multiperil and automobile liability writer, into receivership for purposes of rehabilitation (Best’s News Service, Aug. 2, 2011).

The top five writers in the Florida homeowners’ multiperil market in 2010 were Citizens Property Insurance Corp., with a 16.06% market share; State Farm Group, with 13.61%; Universal Insurance Holdings Group, with 8.38%; USAA Group, with 4.87%; and St. Johns Insurance Co. Inc., with 3.44%, according to BestLink.

https://research.zecco.com/research/quotes/stock-news/story.asp?key=100-249u2121-1

The News Herald
Editorial
September 4, 2011

Hurricane Irene didn’t just cause flooding, death and destruction on the East Coast. It also dredged up calls to create a national or regional catastrophe fund to spread the financial risk.

However, that would be following a natural disaster with a fiscal one.

The concept is similar to what Florida did when it created Citizens Property Insurance, a state-owned “insurer of last resort” that has become the state’s largest insurer, and the Florida Hurricane Catastrophe Fund, which requires insurers to purchase reinsurance. The idea is that applying that principle on a national scale would spread the costs of rebuilding areas hit hard by hurricanes, tornadoes or blizzards and thus stabilize the insurance markets.

It sounds deceptively appealing on a communal level. But it ignores the financial problems already experienced by such programs and the costly incentives they provide.

In Florida, political pressure to keep property insurance affordable for consumers forced rates to be set artificially low, so that they don’t reflect the true amount of risk. That meant that Citizens and the Cat Fund were unable to raise sufficient revenues to cover real losses.

According to recent estimates, Citizens will have a $5.7 billion surplus by the end of this year, with the ability to recover $6.591 billion in Cat Fund reimbursements and $575 million in private reinsurance to pay claims after a storm. However, if a 100-year storm — another Hurricane Andrew — hits, it would have a maximum loss estimated at $22 billion.

Florida has been fortunate not to have suffered a hurricane since 2005 (knock on wood — there are still three months left in the 2011 season). That has allowed it to build up reserves that can withstand a “normal” storm strike. The longer its luck holds out, the better that situation gets. Basing fiscal policy on the whims of weather, though, is about as smart as using that money to play the slots in Vegas.

If the state gets walloped by multiple storms in one year or a big Category 5 hurricane, Citizens and the Cat Fund could be overwhelmed — which means Florida would have to rely on bonds or tax increases to pay insurance claims.

It’s not difficult to imagine Congress applying the same kind of pressure on a national catastrophe fund to keep insurance rates affordable. It would be comparable to the role Fannie Mae and Freddie Mac played in the housing market meltdown, where politicians encouraged the quasi-governmental agencies to underwrite more and more risky mortgages to help inflate the housing bubble.

Washington already operates a cash-strapped national catastrophe fund — the federal flood insurance program, created in 1968 and administered through the Federal Emergency Management Agency. It charges rates that substantially underprice the risks it insures; like Citizens, it is not actuarially sound.

It is also some $18 million under water.

Federal flood insurance, like Citizens and similar entities, subsidizes risk, thus encouraging people to construct homes in flood- and storm-prone areas. That’s a big reason why damages from hurricanes and floods have skyrocketed in recent decades — more, and more expensive, property is being developed in vulnerable regions. The potential costs to taxpayers are staggering.

In 2010, USA Today investigated the program and concluded its financial problems “reflect a broader government reluctance to restrain benefits. FEMA leaders and some lawmakers have tried to end the premium discounts and the multiple insurance payments, ‘but there’s always been a few in Congress that have had enough political muscle to hold that back,’ ” one former FEMA assistant administrator told the newspaper.

Sound familiar?

Given the nation’s dismal financial situation — a mountain of debt coupled with rising entitlement costs in the coming years — the last thing it needs is to shoulder another costly responsibility. The cost of insurance should reflect the full risk, and not be used subsidize one class of property owners at the expense of others.

http://www.newsherald.com/articles/irene-96560-proposal-didn.html

The Palm Beach Post
by Dennis Burke
September 2, 2011

Your Sunday editorial, “Will Irene whip up support?”, deemed other states’ insurance funds to be equivalent to reinsurance and stated that offshore reinsurers are the main opponents of a federal catastrophic disaster plan. Those statements are incorrect.

While other states insure some property owners, only Florida has a government fund that insures insurance companies (reinsurance). Florida’s reinsurance fund is seriously underfunded and relies upon taxes. Your automobile, business and homeowners’ policies are assessed to pay for the fund’s 2004 and 2005 hurricanes losses. Those assessments will continue for the next several years, forcing individuals, charities, school boards and churches to subsidize home­owners on the coast, including millionaires with their second and third beach houses.

Every other state that has considered a reinsurance catastrophe fund, a prerequisite for the national plan you support, has rejected that option. Those states self-fund their risk through insurance and market-of-last-resort insurance mechanisms. Most insurers oppose a national disaster insurance program, as do the three major insurance trade associations. Taxpayers and environmentalists oppose the plan due to debt and reckless coastal development concerns, respectively.

While shifting the cost of Florida’s unique exposure to severe and frequent hurricanes to other states through a federal bailout of its one-of-a-kind reinsurance program may be attractive to some Floridians, it is understandable why people in the other 49 states don’t want to pay for Florida’s risk and its self-inflicted underfunding of the Florida Hurricane Catastrophe Fund.

http://www.palmbeachpost.com/opinion/letters/letters-post-got-it-wrong-about-reinsurance-state-1811721.html

PropertyCasualty360.com
By Joel S. Mutnick
September 1, 2011

Florida’s residential insurance law SB 408 that took effect in May should bring much needed relief to homeowners who fear their property and casualty company might fail and to auditors who must offer opinions as to whether those insurers are financially fit to stay in business.

Rules that allowed insurers to operate with the thinnest of financial cushions before toppling under the weight of oversized and unpredictable claims have changed for the better. So have the requirements for all types of claims, in particular the sinkhole claims that have done more than hurricanes to afflict property and casualty companies.

The law raises the minimum surplus requirement to $15 million from the previous $5 million for newly organized insurers. This should help eliminate many “going concerns” issues that auditors must address each year. With more money in the bank, fresh-faced Florida insurers can better weather unexpected calamities.

The extra capital should bolster the customers’ faith that their new insurer will be around next year and the year after that. Stronger balance sheets also reduce skepticism among independent accountants and possibly save insurance companies time and money in convincing insurance regulators and auditors of their solvency.

The improved cushion also helps insurance companies when purchasing reinsurance to share the risks of potential exposure to claims. Stronger financial ratios and higher credit ratings give property & casualty companies more choices and better prices when in the market for reinsurance.

The law lifts all of Florida by requiring existing insurers to boost their financial cushions over the next 10 years to the levels of new companies today. The key will be how well an insurance company with that additional surplus manages that asset to grow its book of business and how capable existing carriers will be in securing the additional capital, be it either from investment, accumulated earnings or a combination of each.

The financial health of property & casualty companies should improve with needed reforms in the property claims process, especially sinkhole claims. They exploded from 2,360 in 2006 to 6,694 in 2010. For those years, claims totaled approximately $1.4 billion. In response, state-backed Citizens Property Insurance Corp. announced in July plans to raise average premiums by 1,300 percent in South Florida and 2,100 percent in the Orlando area.

Claims and losses could decline with the new law. It provides a better definition of structural damage in a sinkhole claim, which should substantially reduce the potential for unwarranted claims.

Insurers also have a better handle on their exposure through two other reforms: a reduction in the time to make claims and cuts in compensation to public adjusters. The filing, or re-filing period, for hurricane or sinkhole claims shrinks from 5 years to 3 years from the date the incident was first identified. That alone should decrease losses and late payments for claims. With fewer claims “hanging out there,” management, auditors and actuaries can better determine ultimate losses, and therefore give more accurate and timely indications of which insurance carriers are troubled or potentially troubled.

The new law does not solve all the challenges of Florida’s home insurance system. That will take at least a few more legislative sessions. However, it does create a friendlier environment for insurers, which should provide for an infusion of fresh new surplus to the market. That, in turn, will reduce the strain on the insurance industry, regulators and consumers alike.

About the Author
Joel Mutnick is the director of audit at Fiske & Co. He may be reached at 954-236-8600; joel@fiskeco.com.

http://www.propertycasualty360.com/2011/09/01/floridas-sb-408-benefits-homeowners-and-carriers

NaplesNews.com
by Gerry Kramer
August 30, 2011

“Luck be a lady tonight” is a line from a great Frank Sinatra song about a gambler calling for luck as he throws the dice in a craps game. Luck is a lady when the gambler wins.

Florida’s former governor, Charlie Crist, didn’t sing the song, but his policies on hurricane insurance were tantamount to rolling the dice on the weather while humming the tune in his head. For five years luck has been a lady for Floridians. This continued last week when Hurricane Irene made a right turn, headed up the U.S. coast avoiding Florida while wreaking havoc on eight other states. Damage is estimated at $7 billion but will undoubtedly grow with more detailed assessment. With two months remaining in the hurricane season what happens if Florida’s luck runs out?

Crist’s insurance reform bill forced companies to lower rates and simultaneously expanded Florida’s role through Citizens Property Insurance Corp. (CPI) as “the insurer of last resort.” As private insurers dropped clients because capped premiums didn’t cover the risk, CPI morphed into the largest insurer of Florida homes, covering some 1.3 million residences and businesses, about 26 percent of the total. CPI has a total exposure of more than $400 billion making it one of the top 10 home insurers in the U.S.

The amount CPI has accumulated for hurricane damage claims is about $16 billion including the recent $900 million proceeds of a municipal bond offering. There’s additional money in the Florida Hurricane Catastrophe Fund, a state reinsurance entity. But its liabilities are more than double its liquid assets. According to insurance experts, a category 5 hurricane directly hitting Miami would cause damages of some $25 billion, roughly the same (adjusted for inflation) as that caused by Hurricane Andrew in 1992. In 2004 four hurricanes hit the state.

In short, a $16 billion cushion may not be nearly enough to cover liabilities. If the $16 billion runs out, CPI could impose additional assessments on its policy holders to make up the difference. Moreover, other insurance companies may also have to foot the bill because CPI has the right to hit them up simply because the companies do business in the state. Potentially every Florida resident could also have to chip in (higher taxes) to cover the losses.

This is what happens when governments get involved in the insurance business. The basic concept of insurance, premiums need to cover risk, is negated; the focus becomes cost. Insurance premiums get capped by vote seeking politicians. Insurance companies ultimately stop writing new policies and some cease to do business altogether. The risk gets aggregated into one public entity thereby increasing the risk for everyone.

Additionally, if the damage is large enough and the state exhausts all financial resources, it could call on the federal government for help. This is not conjecture. With Irene hitting multiple states, there is probably some politician in Washington thinking about a national hurricane/flood insurance option for all homeowners.

Property insurance in Florida is a ticking financial time bomb. Luck be a lady every night till hurricane season ends.

http://www.naplesnews.com/news/2011/aug/30/money-marts-luck-be-lady-florida-now/