Don Brown

SunSentinel.com
by Don Brown
August 29, 2011

While we’ve dodged a bullet with Hurricane Irene, today Florida is in a precarious position. Despite the fact the state’s largest insurer is financially unsound, most believe we will be able to repair the damage from the next storm and rebuild our communities as we’ve done before. Unfortunately, that is not the case, and instead what Floridians will be forced to deal with is a financial burden beyond imagination.

Estimates suggest Citizens Property Insurance Corp. will have a $5.7 billion surplus by the end of 2011, with the potential to recover $6.591 billion in Florida Hurricane Catastrophe Fund reimbursements and $0.575 billion in private reinsurance to pay storm claims. However, with a total exposure of about $465 billion and the 100-year probable maximum loss estimated at $22 billion, all Floridians will be required to repay the loans for the amounts needed in excess of what Citizens has available. This debt will be paid for through hurricane taxes tacked on to the insurance policies of working families, business owners, charities and renters.

For those fortunate enough to own multimillion-dollar beachfront property as a first home or vacation home, it’s unreasonable they receive subsidized insurance via Citizens at the expense of hardworking Floridians.

As lawmakers work to put our state on a path to financial stability, we need those individuals who choose to live on Florida’s coast to take responsibility for their actions. Reforming the state-run entities and encouraging the return of the private market will help alleviate the financial pressures Citizens policyholders are being faced with today and the potential financial calamity the entire state will face in the wake of the next major storm.

Don Brown is senior fellow with The Heartland Institute, a former member of the Florida Legislature and chairman of the House Insurance Committee.

http://www.sun-sentinel.com/news/opinion/fl-property-insurance-forum-20110829,0,7109130.story

SunSentinel.com
by Julie Patel
August 29, 2011

HomeWise Insurance in Tampa, which merged with First Home Insurance in Maitland in June, lost its financial health rating last week.

Demotech, the only rating agency that rated the company, dropped the rating Thursday. Most homeowners are required by their lenders to have property insurance from a rated company. That means if they don’t find a new insurer fast, some lenders could “force-place” coverage, or secure insurance from a rated company for the homeowners, which typically costs them a lot more.

Rules vary from lender to lender, but most banks will give customers time to find a new insurer, said Anthony DiMarco, an executive vice president for the Florida Bankers Association. “With a bank, they would get some time to find something. It isn’t going to be the next week,” DiMarco said.

HomeWise has more than 76,000 policies in the state, including about 28,000 in Broward, Palm Beach and Miami-Dade counties.

Demotech President Joseph Petrelli said some parts of HomeWise’s financial results “are stable” but it didn’t meet the financial benchmarks that it set for itself as of the end of June.

“Even though their most recent financial statement looks good, they no longer meet each and every of our numerous requirements necessary to earn” a rating of “A” or better, Petrelli wrote in an email.

http://weblogs.sun-sentinel.com/business/realestate/housekeys/blog/2011/08/homewise_insurance_loses_ratin.html

Fort Myers New Press
August 28, 2011

When the Atlantic Coast and Northeast are cleaned up and insurance claims settled from Hurricane Irene, Florida homeowners could see a bump in insurance rates.

That increase won’t be extraordinary, such as what came after hurricanes struck in the last decade.

Don Brown of DeFuniak Springs, a former state legislator who was chairman of the House Insurance Committee and is a noted national insurance expert, said since Irene missed Florida and aimed its fury to the north, any impact on higher rates would be because of reinsurance.

“You might see some upward pressure on reinsurance,” Brown said. “It’s unlikely there would be any immediate impact. It would down the road.”

Reinsurance is insurance that is purchased by one insurance company from another for risk management, transferring risk from the insurer to the reinsurer.

“When compared to the tsunami in Japan and the earthquakes in New Zealand … there is a global system system of catastrophic losses that reinsurers have to cover … the direct impact of the hurricane would be very minimal,” he said.

Brittany Perez, a spokeswoman for the Florida Office of Insurance Regulations, agreed.

“I would hesitate to say it would have any effect,” she said from Tallahassee on Friday, referring to the damage Irene is causing north of Florida.

Insurance experts say there is a mistaken impression property insurers in Florida can arbitrarily raise their rates based on hurricane damage somewhere else.

“First,” Brown said, “it’s not legal. You have to justify for losses in Florida. Companies can’t use losses in other states to raise their rates here.”

Perez said before an insurance company can increase premiums it must go before state officials to justify the need.

Brown said that’s how a company might seek a boost because its reinsurance costs could go up if there was catastrophic damage in the Northeast.

The largest property insurer in Florida is Citizens Property Insurance Corp. Known as “insurer of last resort,” it is a nonprofit created in 2002 by the Legislature to provide insurance for homeowners who could not get coverage elsewhere. As of July 31, more than 1.4 million residences and businesses were insured by Citizens.

The reason homeowners are so conscious about rate increases – sometimes huge – dates to 1992 when Hurricane Andrew destroyed Homestead. That began a decade of steep policy increases, insurance company bankruptcies, birth of the company that eventually became Citizens and an exodus of companies writing insurance in Florida.

In 2002 the Legislature merged two firms and created Citizens. Then came Charley and the busy hurricane seasons of 2004 and 2005.

Ed Ludden, a longtime insurance agent in Fort Myers, remembers the aftermath and then the rate sticker shock.

“They were going up 40 to 90 percent in a two-year period,” Ludden said, referring to the rate increases from all companies that were writing property insurance in Florida at the time. “Actually, rates prior to that were pretty low. I moved here from Illinois. My insurance was about double there compared to what I paid at that time in Florida.”

In 2006 the Legislature appropriated $715 million to reduce the Citizens deficit that had been run up after Charley and Wilma and several other hurricanes.

Florida and Louisiana, following Katrina, were among the first states to establish “insurers of last resort.” Now, almost a dozen states have set them up to protect homeowners abandoned by private insurers. They are certain to be tested. Those in the path of Irene have an exposure of $196 billion, according to The Wall Street Journal.

Brown is often called on to review the insurance situation such as the one Irene is posing. Since leaving the Legislature, he has been a senior fellow with the Heartland Institute, a nonprofit research and education think tank where he specializes in insurance policy.

“When compared to all other states, New York is second only to Florida surrounded by water,” Brown said. “Connecticut is second only to Florida with a concentration of coastal population … 79.3 percent of our exposure is coastal counties. In Connecticut it’s 65 percent.

“There’s a lot of exposure in New Jersey as well,” Brown said. “The larger the loss, the more likely an increase.”

http://www.wtsp.com/rss/article/207878/19/Hurricane-Irenes-effect-on-Florida-insurance-rates-thought-minimal

The SunCoast News
Editorial
August 27, 2011

When Charlie Crist was governor, we wondered whether his political luck would hold and he would get out of town before a major hurricane hit the state.

This would have been bad for Crist because he supported the Legislature’s efforts to destroy Florida’s private property insurance market, which left many homeowners with no alternative but the state-backed Citizens Property Insurance.

Citizens probably won’t be able to pay the billions in damage claims without dunning the state’s taxpayers when a big storm hits.

It may not have been luck. According to the Associated Press, since his days in the governor’s mansion, Crist has been writing an anti-hurricane prayer on a piece of paper and either placing the paper in the Western Wall in Old Jerusalem, one of the most sacred sites in Judaism, or having a friend to do it.

This year, Crist, who was elected governor as a Republican but then wandered into the political wilderness, had Patrick Murphy, a South Florida Democrat seeking a U.S. House seat, do the honors.

Cynics might say atmospheric conditions have kept hurricanes away from Florida since 2005, but who’s to say Crist’s prayers aren’t the real reason.

http://suncoastpasco.tbo.com/content/2011/aug/27/PGOPINO1-answered-prayers/news-opinion/

The Wall Street Journal
Editorial
August 26, 2011

Florida’s state-run insurers can’t cover their liabilities, and all Americans may end up paying as a result.

Hurricane Irene is sparing Florida as it heads up the U.S. East Coast this weekend, but that doesn’t mean the danger is over for the Sunshine State or taxpayers across the country. Florida still faces a fiscal hurricane that is going to hit the state’s catastrophic insurance funds when the next big wind blows, and all Americans may end up paying.

That’s the alarm raised last week from none other than Jack Nicholson, chief operating officer of Florida’s state-run reinsurer, in an interview with Best’s Insurance News. “We would like to be able to say to the legislature that we can pay 100% of our losses, regardless of what happens. Right now, we can’t honestly say that we can,” he said.

Mr. Nicholson manages the Florida Hurricane Catastrophe Fund, a tax-exempt trust created in 1993 to provide extra reinsurance to private insurers in the hurricane-prone state. The “Cat Fund,” as it’s known, is funded by premiums charged to insurance companies, by investment earnings, and by the ability to issue bonds after a storm and to tax insurers to pay for them. The fund was supposed to be a safety net, not a reinsurer of first resort.

It became the latter in 2007, when then-Governor Charlie Crist raised the reinsurer’s coverage caps. The Cat Fund grew quickly thanks to its pricing advantage and a mandate that all property and casualty companies in Florida—including state-backed Citizens Property Insurance Corp.—purchase reinsurance from it. Citizens is an especially large client because its rates are also set by law below those of private competitors.

Oh, oh. What this means is that this hurricane season the Cat Fund estimates it has $18.6 billion in liabilities but only $7.3 billion in liquid assets, leaving an $11.3 billion financing gap. The Cat Fund forecasts a 5.4% chance a hurricane could cause more than $15 billion in claims. If you think a 5% chance is negligible, remember Category 5 Katrina in 2005, or Andrew in 1992.

A big storm, or a series of small ones, would wipe out the Cat Fund’s cash and force it to issue bonds to cover the shortfall. The fund would then tax casualty and property insurers to pay the interest and principal on the bonds, and those companies would pass on the costs to Florida taxpayers through higher rates. That’s assuming the fund can raise billions of dollars in today’s volatile bond markets.

Or the fund could simply refuse to pay its claims. The Sarasota Herald-Tribune recently analyzed nine insurance companies that cover two million Floridians and found that only one company could withstand a once-in-20-year storm if the Cat Fund only covers 90% of its claims, potentially leaving some 1.8 million without coverage.

Which means that Florida’s pols are really betting the state would get a federal bailout. This is no mere conjecture. Mr. Crist lobbied Congress to pass such a federal disaster fund when he was Governor.

Mr. Nicholson has drafted a bill that would go a long way to avoiding this disaster. He’d reduce the size of the fund, increase what insurers have to pay for coverage, require insurers to pay more before Cat Fund reinsurance kicks in, terminate optional Cat Fund reinsurance coverage that few companies use, and mandate that the fund hold more cash, among other things. These reforms would shrink the Cat Fund and open up Florida’s reinsurance market to competition.

Citizens has to be reformed too, as CFO Sharon Binnun acknowledges. She points to a bill introduced by Senator D. Alan Hays this year that would raise Citizens’s rates and reinvigorate private competition. That bill died after opposition from Republican Mike Fasano and a populist scare campaign. If Citizens doesn’t get paid by the Cat Fund, it would “assess” insurers—code for tax—to “fill that gap,” Ms. Binnun notes. So in the event of a big storm, taxpayers could take a double hit—first to shore up the Cat Fund, and then to shore up Citizens.

Governor Rick Scott has so far tinkered around the edges of insurance reform, and it’s no fun telling Floridians that more private insurers and higher rates are needed to make the insurance market work. Then again, waiting for a big storm and dealing with a fiscal hurricane won’t be popular either.

http://online.wsj.com/article/SB10001424053111903596904576516291342561886.html?mod=WSJ_topics_obama

The Wall Street Journal
by Erik Holm and Leslie Scism
August 25, 2011

Hurricane Irene could be a major test of “insurers of last resort” created by U.S. states to protect homeowners marooned by private insurers.

Of the 14 U.S. states in Irene’s projected path as of late Wednesday, at least 10 of them run insurance pools for homes in vulnerable areas. Those insurers, which have ballooned in size in recent years, now have about 677,000 policyholders and overall exposure of $196.2 billion, according to the states.

But in many states, such pools rely on homeowners far from the coast to pay for any funding shortfalls if a mega-storm drains the pool’s capital. In Florida, for example, people insuring their cars, boats and small businesses can also get hit with surcharges to help pay for the state pool’s hurricane claims.

Many private-sector carriers began shrinking their exposure to coastal areas in the 1990s, often after complaining that regulators and lawmakers wouldn’t let them charge rates that reflect the risks of doing business in areas where hurricanes hit. As a result, total exposure of state-created pools in the U.S. is up 81% to $757.9 billion of property from 2005, the last time a major hurricane hit the East Coast.

If Irene stays on course, it could reach Category 4 strength by Thursday, with winds of at least 131 miles an hour, and hit North Carolina’s Outer Banks on Saturday, the National Hurricane Center said. Authorities began evacuating parts of the barrier islands Wednesday.

More than half of the total property-insurance exposure along the North Carolina coast belongs to the state’s last-resort insurer, the Beach Plan, which was created in 1969 to cover barrier islands near the Atlantic Ocean. Lawmakers expanded its territory in 2003 to all 18 coastal counties.

North Carolina officials say the insurer would lean on its current surplus of about $775 million to pay claims if Irene strikes. If the surplus is drained, as much as $2.25 billion in losses would be covered by reinsurance and the Beach Plan also has the power to assess private-sector insurers. Beyond that, the Beach Plan would resort to emergency municipal-bond sales and surcharges on North Carolina homeowners with private-sector insurance. A Beach Plan representative declined to comment Wednesday.

Homeowners insured through companies other than the Beach Plan would have to bail out the Beach Plan only if a “one-in-134-year” storm hits, officials estimate.

Still, critics say the worst-case scenarios underscore deeper problems with insurers of last resort. Many of the pools are in the same uncomfortable spot as North Carolina, with capital cushions that could be wiped out by one mega-storm, or several midsize ones.

In addition, by trying to keep rates affordable for homeowners, the last-resort insurers help fuel coastal development that puts homeowners across the state at financial risk, some critics say.

“The people who live at the beach get to enjoy the benefits, but they don’t bear all the risks, and those of us who don’t live on the beach don’t get the daily benefits but do bear some of the risks,” says Thomas Birkland, a professor of public policy at North Carolina State University in Raleigh.

In recent years, homeowners in Louisiana and Florida have paid emergency assessments. The state of Texas has assessed private insurance companies to help cover shortfalls.

Overall, North Carolina’s Beach Plan has $69.3 billion in exposure out of the $132.8 billion total along the state’s coast, according to disaster-modeling firm AIR Worldwide. The number of policies issued by the pool is up 82% since 2005. Such jumps are “staggering,” says Robert Hartwig, president of the Insurance Information Institute.

Lawmakers and regulators in North Carolina have reinforced the Beach Plan’s financial foundation by increasing rates and deductibles, slicing coverage limits and making other changes.

The last major hurricane to hit North Carolina was Floyd in 1999. Hurricane Hazel, a Category 4 storm in 1954, would result in $1.34 billion in damage insured by the Beach Plan if it hit in the same location now, according to disaster models cited by state officials. The largest private-sector insurer in the state, State Farm Mutual Automobile Insurance Co., has about 20% of the market, according to SNL Financial. Much of State Farm’s business is from insuring less-risky homes inland.

Regulators don’t allow private-sector insurers to raise money after a disaster in order to pay claims. Instead, those insurers must hold sufficient capital to meet potential obligations. State Farm has $61.2 billion in surplus backing policies across the U.S.

In Florida, state-run Citizens Property Insurance Corp. has been the largest home insurer since 2006 and is one of the nation’s 10 largest insurers in premium volume. Citizens has potential exposure of $406 billion and $13 billion available to pay claims before it would have to levy assessments.

U.S. property and casualty insurers began the current hurricane season with one of their plumpest capital cushions ever, a surplus of $565 billion. The pile is enormous despite tens of billions in reinsurance claims from earthquakes in Japan and New Zealand and flooding in Australia.

Reinsurers provide backup coverage to insurers, taking responsibility for some of their claims. Many reinsurers are based outside the U.S. and their capital is also considered ample by ratings firms.

A Category 5 storm, with winds of at least 156 mph, could result in about $100 billion in insured damage if the hurricane made a direct hit on a major East Coast city, disaster modelers say. That would seriously weaken the U.S. property-and-casualty industry, analysts say.

Even if Irene loses its punch or veers away from the East Coast, researchers are predicting an unusually active storm season through the end of November. According to Colorado State University scientists, there are likely to be five major hurricanes, up from the historic average of 2.3.

Write to Erik Holm at erik.holm@dowjones.com and Leslie Scism at leslie.scism@wsj.com

http://online.wsj.com/article/SB10001424053111904009304576528802428593100.html

The Tallahassee Democrat
by Don Brown
August 24, 2011

It looks as if Florida is once again the luckiest state, with Hurricane Irene just skirting the coast. But while September is considered the most active time of year with regard to hurricane season, it was the month of August that produced two of the most devastating storms our state has ever experienced — hurricanes Andrew and Charley.

It’s been 19 years since Andrew made landfall in South Florida and seven since Charley pummeled the west coast, but again this year we can only wait and see if the next named storm will be another one for the history books.

Regardless of how we recovered from the storms of the past, today Florida is in a rather precarious position. Despite the fact the largest insurer in the state, Citizens Property Insurance Corp., is financially unsound, most Floridians believe we will be able to repair the damage from the next storm and rebuild our communities the same way we have done in the past.

Unfortunately, that is not the case.

Instead, what Floridians will be forced to deal with following another Andrew or Charley is a financial burden beyond imagination.

According to estimates, Citizens will have a $5.7 billion surplus by the end of 2011, with the potential to recover $6.591 billion in Florida Hurricane Catastrophe Fund reimbursements and $575 million in private reinsurance to pay claims after a storm.

However, with a total exposure of about $465 billion and the 100-year probable maximum loss estimated at $22 billion, it will be all Floridians — whether they are Citizens policyholders or not — who will repay the loans for the amounts needed in excess of what Citizens has available to pay consumer claims.

The cost of this debt will be paid for in the form of hurricane taxes tacked on to all insurance policies, including those of working families, business owners, churches, charities and renters.

While no one relishes paying more for insurance, fairness requires that those who generate risk should pay their full share of it. By choosing to live in the Sunshine State, a year-round vacation spot for many with perfect temperatures and beaches for miles, we must also take responsibility for the cost of this American paradise.

For those fortunate enough to own multimillion-dollar beach front property as a first home, or even vacation home, it is unreasonable that they receive subsidized insurance via Citizens at the expense of so many hardworking Floridians who can’t afford to own property on the beach.

As we maneuver through this time when lawmakers are working to put our state on a path to financial stability, we need those fortunate individuals who made the choice to live on Florida’s coast to take responsibility for their actions.

By reforming the two state-run entities and encouraging the return of the private market, we can work to alleviate both the financial pressures Citizens policyholders are being faced with today and the potential financial calamity the entire state will face in the wake of the next major storm.

Don Brown, senior fellow with The Heartland Institute, is a former member of the Florida Legislature representing DeFuniak Springs and was chairman of the House Insurance Committee. Contact him at don@donbrownflorida.com.

http://www.tallahassee.com/article/20110825/OPINION05/108250310/Don-Brown-End-subsidized-insurance-coastal-property-owners

The Tampa Tribune
by Steve Otto
August 24, 2011

Here’s a story to read while you keep a weather eye on Hurricane Irene as it storms up the coast. If you have insurance this also is about your money.

It starts with a young woman sitting at the airport last week. She’s taking advanced placement statistics this fall at Plant High School, which right away means she’s smarter than you or I. Her assigned summer reading: “Numbers Rule Your World,” by Kaiser Fung.

No, I’m serious. That’s the guy’s name. Not only that, I’ve learned Fung is hot out there in the world of numbers. He’s sort of the Lady Gaga of statistics.

Anyhow, she’s reading the book, turns a page and the next chapter is about her grandfather, Bill Poe Sr., the former mayor of Tampa. The chapter is about the collapse of Poe’s insurance and financial empire a half-dozen years ago and how it relates to the influence of probability and statistics.

“What amazes me,” said Poe Sr. from his office, “is how detailed and correct Fung is in the book. I’ve never heard of the guy and he never contacted any of us. But he is right, not only in the details, but that there was no way I could have anticipated or predicted what was going to happen.”

* * * * *

Go back to the late 1990s, when Poe was at the top of his game. The former mayor still was active in his community, a philanthropist and a good guy.

His insurance empire had soared; selling property and underwriting insurance he had become the state’s largest broker. In 2005, following an unprecedented string of devastating storms, it all collapsed.

Fung writes of that time: “… national insurance giants like State Farm and Allstate were ruminating openly about quitting Florida markets. … Having inherited hundreds of thousands of polices from failed property insurers, the state government realized it lacked sufficient capital to cover potential losses and offered to pay … companies to assume these policies. Poe was one of the early takers.”

Fung moves on to 2005. “Hurricane Wilma arrived at the tail end of two consecutive devastating seasons in which eight hurricanes battered the Florida coast. … In 24 months Poe’s customers suffered losses topping $2.8 billion.”

* * * * *

I think Fung, like me, knows that Bill Poe did nothing wrong except believe the models and projections that were the standard for the industry. He took the risks and paid a huge price, one that we need to learn from.

He goes on to describe why the numbers and models were completely wrong for hurricanes in Florida. You’ll have to read the book to figure all that out, although Fung concludes we are living on borrowed time and even the state-run Citizens, which has swallowed up many of Poe’s customers, ultimately is doomed to fail.

Because all of you contribute to Citizens, it’s an unsettling scenario and one that suggests in the end both the insurers and the policyholders in Florida are in trouble.

http://www2.tbo.com/news/opinion/2011/aug/24/menewso3-a-numbers-game-thats-sure-to-fail-ar-252530/

Out Of The Storm News
by Matthew Glans
August 12, 2011

Florida’s hurricane catastrophe fund may finally be moving in a more fiscally sound direction. In a news release released late Friday, Heartland Institute staffers praised the new proposals from Florida Hurricane Catastrophe Fund Chief Operating Officer Dr. Jack Nicholson that would put the giant taxpayer-backed reinsurer on sounder financial footing.

In these proposals, which were presented by Dr. Nicholson both in several public speeches and in a widely circulated piece of draft legislation, (a summary and full text version of the bill is available below), Dr. Nicholson includes provisions that would reduce the size of the government-run reinsurer’s “mandatory” layer, requires insurers participating in the fund to pay more, reduces special taxes the fund might impose on Floridians, and ends the fund’s never-funded TICL (temporary increase in coverage) layer.

Many of the proposals echo those made in a James Madison Institute report, written by Eli Lehrer, vice president of Washington, DC operations for Heartland, titled “Solutions to Restore Florida’s Property Insurance Marketplace to Protect Taxpayers and the Insured.” Although several Cat Fund reform proposals were floated during the previous legislative session, none received a floor vote.

Don Brown, a Heartland Institute senior fellow and former Florida legislator, says Nicholson’s proposal is necessary for Florida’s future. “For some time we have known that the Florida Hurricane Catastrophe Fund might not be able to borrow enough money to fully fund its mandatory coverage limit after a major storm. The uncertainty is now greater than ever given the status of the world financial markets.

“The proposal recently advanced to restructure the Catastrophe Fund to more accurately reflect its ability to fund post-loss obligations is not only timely but, in my opinion, not optional,” Brown continued. “We must thank Dr. Nicholson for his leadership and adopt his proposal as soon as possible.”

Heartland’s Florida director, Christian Cámara, agreed. “As currently structured, the Cat Fund poses an enormous risk to Florida taxpayers and the state’s economic future. This plan would be a major step in the right direction that would not only help insulate taxpayers from years of devastating post-hurricane taxes, but also promote the transfer of billions of dollars’ worth of hurricane risk outside our borders.

“The less hurricane risk taxpayers bear, the less likely it is that taxpayers will have to bail out the state after a storm,” Cámara said.

Summary of FHCF Coverage Restructuring Draft 2012 (August 9, 2011)

Reducing the size of the mandatory coverage layer lowers 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 Increases 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 insurer retention

Increases aggregate insurer retention to $8 billion for the 2013-2014 contract year, and retains 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 emergency assessment caps

The draft reduces 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

Provides that TICL coverage (optional coverage in excess of the mandatory FHCF layer) will not be available after the 2012 contract year. Current law provides for elimination of TICL after the 2013 contract year.

Florida Hurricane Catastrophe Fund Finance Corporation Changes the name of the Florida Hurricane Catastrophe Fund Finance Corporation to the “State Board of Administration Finance Corporation.”

Full PDF Version: FHCF Coverage Restructuring Bill Draft 2012

http://outofthestormnews.com/2011/08/12/new-proposals-to-improve-florida-cat-fund-a-major-step-in-the-right-direction/

The Palm Beach Post
by John W. Rollins
August 22, 2011

The 430 percent rate increases proposed by Citizens Property Insurance Corp. for optional sinkhole activity coverage, while eye-popping in a few regions, are not surprising to actuaries. We have observed the alarming trend in claims costs since the last big round of changes to Florida property insurance law, and noticed the explosion of billboards and TV ads encouraging new claims.

Legislation enacted this spring did not generate these claims, nor the need for the rate hike. It simply authorized Citizens to spotlight the problem draining hundreds of millions of dollars annually from the insurance safety net relied upon by 1.4 million Florida policyholders. By filing actuarially sound rates for this coverage separately, Citizens for the first time quantified the subsidy going to abusive claimants pursuing large payouts for often minimal damage, sometimes with the help of public adjusters and plaintiffs’ attorneys. Nearly all Floridians pay for Citizens deficits with assessments on home, auto and business policies.

Regulators demanded detailed claims totals from all Florida insurers while studying this problem in late 2010. Citizens’ response shows that it has incurred more than 6,500 sinkhole activity claims and paid nearly $500 million in losses since 2006. Almost none of these claims were for “catastrophic ground cover collapse,” where a hole actually swallowed part of a dwelling.

Citizens began charging separately for sinkhole activity coverage in 2007, and recently reported that it incurred $245 million in losses and collected just $32 million in premium in 2010. Sinkhole claims are nearly doubling annually. Actuarially, the need for a sinkhole rate increase is a slam-dunk, not speculation based on simulation models or vague costs.

Some legislators who criticize private insurers as unreliable are now working to starve Citizens of the premiums needed to support its promises to their constituents. A better effort would be to attack the factors driving costs, such as laws that enable abusive claimants to pocket six-figure settlements with dubious evidence of loss and no responsibility to repair damage, and solicitation practices that help inject an attorney or public adjuster as a middleman into a claims procedure dictated by Florida law and insurance contracts. Instead, these legislators fought to kill reforms that addressed these cost drivers.

Critics also say that private insurers may ask for higher sinkhole activity rates mirroring Citizens. With the hard data coming to light, is it any wonder private insurance companies are wary of writing policies with sinkhole activity coverage at almost any price, even for otherwise attractive risks?

It’s easy to forget, but prior to the sinkhole claims explosion, insurance companies competed aggressively for business, except in areas along the coast. Regulatory data shows that Citizens’ market share has rocketed in Palm Beach County only in the past few years. And all policies must cover collapse as part of the base premium; there is no danger of being uninsured for a true sinkhole or getting a rate hike for just that coverage.

It’s reasonable to examine whether the recent claims law reforms may stabilize or even reduce actuarially projected claims costs, and to consider restraint in immediately applying the full effect of rate increases recommended last month. But rates send a signal to consumers about the risk. A move to suppress yet another facet of Citizens rates while enabling the “sinkhole lottery” to continue is bad for all Floridians, whether Citizens policyholders or not.

John W. Rollins is an independent consulting actuary focusing on Florida property insurance and based in the Gainesville area. He was senior actuary at Citizens Property Insurance Corp.

http://www.palmbeachpost.com/opinion/commentary/commentary-dubious-claims-force-eye-popping-citizens-rate-1774959.html?cxtype=ynews_rss