Don Brown

Property Casualty 360
by Gary Fineout
August 2011

Citizens Property Insurance Corp., the state’s largest property insurance carrier, keeps growing and growing. Despite being set up initially as a so-called “insurer of last resort,” Citizens is adding an average of 4,200 policies a week. It now has nearly 1.4 million policyholders, and there is no sign that the number will be going down.

The growth is being blamed on a variety of reasons, many of them tied to the fragile nature of Florida’s property insurance market and rising insurance rates charged by private companies. And that has people like Jim Malone plenty worried.

Malone, the chairman of the board of governors that oversees Citizens, is so frustrated that state lawmakers have been unwilling to make major changes to the state-created company that he wants legislators to consider privatizing part of the company.

His rationale is simple: Citizens is too large and has too much exposure if the state is suddenly hit by a major hurricane. A private company—with the ability to more easily raise rates—could bolster its finances faster than Citizens currently can.

Malone warned that there is a “train wreck” that could hit Citizens—and ultimately the state—if something is not done soon. Currently, Citizens can place an assessment on nearly every insurance premium, including auto insurance, if it does not have enough money to cover losses from a major hurricane.

“It’s not a question of whether we are going to have a hurricane … it’s a question of when, where, and how bad,” said the Naples businessman.

An Idea Born of Frustration
Malone threw out the idea of privatizing Citizens during a July meeting of the Citizens’ board when he sharply criticized legislators for failing to pass a bill this year that would have allowed Citizens to raise its rates as high as 25 percent. That same legislation also would have made it more difficult for Floridians to obtain coverage through Citizens.

Citizens’ rates are capped and cannot be raised more than 10 percent a year. These rate restrictions are in place even though Citizens insures many coastal homeowners and has a total exposure of roughly $460 billion.

The legislation to raise Citizens’ rates was sharply opposed by a coalition of both Republicans and Democrats from coastal areas. They argued that such a rate hike would hurt Florida at a time when its economy is slowly recovering from the recession.

Malone, clearly exasperated, told his fellow board members that if legislators couldn’t pass a Citizens’ bill this year he thinks it would be even harder for a similar bill to pass next year when all 160 legislators will be up for re-election because of redistricting.

He said he did not understand why legislators were willing to make it easier for private companies to raise rates by passing SB 408, but did not do the same for Citizens.

“Why in the world should it be complicated for the Legislature to let us charge what is necessary to be financially responsible,’’ Malone asked. That’s when he suggested that his only remaining idea was to ask legislators to spin off up to 800,000 policies into a new private company.

Scott Likes the Idea
While Malone’s suggestion may have been a bit off-the-cuff, his idea quickly gained support from Gov. Rick Scott and Sen. Garrett Richter, R-Naples, the chairman of the Senate panel that oversees insurance.

Richter, who shares Malone’s frustrations that a Citizens’ bill went nowhere this past year, said he wants to have a “bona fide discussion” about the privatization concept. He called Citizens’ current premiums “artificial” and not “actuarially sound.”

“I would absolutely approach that discussion with an open mind,’’ Richter said.

Scott, who has said he would like to eventually eliminate the ability of Citizens to charge assessments, said he would be willing to look at a privatization proposal if it would ultimately help reduce the cost of insurance in the state.

“The cost of property insurance is a significant problem for our families in the state right now,” Scott said. “So if looking at things like privatizing Citizens is something that would help drive down the cost of insurance in our state, I’d want to look at it very closely.”

Some lawmakers do not share that enthusiasm, however.

Sen. Mike Fasano, R-New Port Richey, said the reason so many people have enrolled with Citizens is because they cannot obtain coverage elsewhere. He pointed out that there is already a program in place that allows insurers to take out policies from Citizens, but right now there are not any carriers doing so.

He voiced concern that privatizing a chunk of Citizens would just harm consumers. “It would only be worse if Citizens would be turned into a private entity,’’ Fasano said.

He also pushed back at Malone’s suggestion that lawmakers lacked the political will to deal with Citizens. “The political will that is needed in Tallahassee is to say no to the private insurance companies,” said Fasano, who opposed SB 408.

Citizens’ Finances Improve
It is not that Citizens lacks a large amount of resources to use if a storm hits the Sunshine State. Because Florida has had five hurricane-free years, the company has built up a decent-sized amount of surplus. The new numbers show that Citizens expects to have a total surplus of more than $5.7 billion by the end of 2011.

The company also has $2.9 billion worth of bond proceeds it can tap into, as well as $575 million worth of private reinsurance coverage and another $6.59 billion worth of reinsurance coverage from the state-created Florida Hurricane Catastrophe Fund.

In July, Citizens borrowed an additional $900 million where for the first time the carrier pushed out the maturity of the bonds as far as nine years to take advantage of low interest rates. The bond issue included $750 million of fixed-rate tax-exempt bonds and $150 million of floating-rate tax-exempt bonds. Interest rates ranged from 0.65 percent for the one-year maturity to 4.75 percent on the nine-year maturity.

“This financing demonstrates Citizens’ continuing commitment to our policyholders, but it does not represent a financial burden on other citizens of the state,’’ Malone said. “The issuance of these bonds does not require an assessment of any type, since all debt service will be paid from internal resources of the company.”

Even with all of its resources, Citizens would find itself in a precarious position if a large enough storm hit the state. An analysis conducted by Citizens shows that the carrier could easily withstand a 1-in-5 year storm similar to Hurricane Frances in 2004 or even a storm of a 1-in-25 year magnitude. That cushion, however, would be lost with a major storm.

A 1-in-50 year storm similar to 1992’s Hurricane Andrew would occasion the need for nearly $3 billion worth of surcharges and assessments on insurance bills in Florida. A 1-in-100 year storm would trigger nearly $12 billion worth of additional charges.

http://www.propertycasualty360.com/2011/07/27/breaking-up-is-hard-to-do

The Miami Herald
by John W. Rollins
August 1, 2011

The recent rate increases proposed by Citizens Property Insurance Corporation 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 observed the explosion of billboards and TV ads encouraging new claims.

Legislation enacted this spring (Senate Bill 408) did not generate these claims, nor the need for the rate hike — it simply authorized Citizens to address a problem that drains hundreds of millions of dollars annually from the coffers of the insurance safety net relied upon by millions of Floridians. By filing actuarially sound rates for this coverage, Citizens quantified the subsidy going to the abusive claimants pursuing large payouts for often minimal damage, often at the urging of public adjusters and plaintiffs’ attorneys.

If the proposed Citizens sinkhole rate increase is not approved then nearly all policyholders in Florida will face sharply higher assessments when Citizens runs deficits.

Regulators demanded detailed claims totals from all Florida insurers while studying this problem in late 2010. Citizens’ response shows it incurred over 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 separately charging for sinkhole activity coverage in 2007, and recently reported it incurred $245 million in sinkhole losses against just $32 million in sinkhole premiums in 2010.

Claim filings are nearly doubling annually, so trends indicate it can expect to incur thousands more claims in the coming year. Do the math and you will see the need for a substantial sinkhole rate increase that is not the result of controversial modeling, as with wind rates.

Some of the same legislators who vilify private insurers as unreliable and tout Citizens as the “people’s insurance company” are now actively working to ensure it is starved of the premiums needed to support its promises to its policyholders. This is puzzling. A better use of that energy would be to attack the factors driving spiraling costs, such as claims settlement laws.

Testimony highlighted abusive claimants who pocketed six-figure settlements with dubious evidence of loss and no responsibility to repair damage. But when Senate Bill 408 addressed the cost drivers behind the rate hikes, these legislators fought to kill rather than pass the reforms.

Critics say that private insurers may also ask for higher sinkhole activity rates mirroring Citizens request. With the hard data coming to light, is it any wonder private insurers are wary of writing policies with sinkhole activity coverage at almost any price — no matter what else might be attractive about the risk? It’s easy to forget, but prior to the sinkhole claims explosion, insurers competed aggressively for Tampa Bay area business. Regulatory data shows Citizens market share has rocketed in the region only in the past few years. And remember, all policies must cover ground cover collapse — there is no danger of being uninsured for a true sinkhole loss.

It’s reasonable to ask whether the recent claims law reforms may stabilize or even reduce actuarially projected claims costs, and to consider some restraint in applying the full effect of rate increases immediately. But rates send a signal to consumers about the risk. A move to simply suppress yet another facet of Citizens rates while enabling the “sinkhole lottery” to continue is bad for all Floridians, whether Citizens policyholders or those who are simply liable for Citizens taxes when it cannot meet its obligations.

John W. Rollins is an independent consulting actuary focusing on Florida property insurance and based in the Gainesville area. He has served as senior actuary at both Citizens and the Florida Farm Bureau.

http://www.miamiherald.com/2011/08/01/2340797/sinkhole-insurance-abuse-hurts.html

TCPalm
by Richard Geisinger Jr.
July 30, 2011

Six years ago, your taxpayers association took the unusual position of commenting on a state economic issue for the first time. In 2005, a 6.8 percent assessment was being tacked onto all Florida homeowners’ insurance premiums by the state treasurer and insurance commissioner to support the newly formed Citizens Property Insurance Corp. At the time, Citizens was dealing with a $500 million loss covering damage to otherwise uninsurable homes and businesses caused by the 2004 hurricanes.

These assessments were passed along to all insured Florida property owners and amounted to about $60 per year for the average Florida homeowner — almost double that for Martin County. Our objection was with ” establishing the precedent of a bureaucratic state agency being able to impose a sizable ‘tax’ with little justification, discussion or accountability.” Our concern was well-founded. Citizens’ losses for 2005 ballooned to $2.5 billion. Since Citizens has the power under the statutes to make up losses by assessing all homeowners through its commercial insurance companies, it did so.

In 2006, the 2005 assessment was retained and supplemented by a further “one-time assessment” of 11 percent. In 2007, the legal justification was strengthened and made a permanent feature in private insurance policies that can be “adjusted” at the discretion of the commission. Since then, the number of Citizens’ subscribers has multiplied dramatically, covered risks expanded and the “taxes” needed to support Florida government’s involvement are included in the premiums of all private carriers. Look for them. They are listed as “FHCF Recoupment” (Florida Hurricane Catastrophe Fund), “FHP Recoupment” (Florida Hurricane Premium), Citizens Emergency Assessment or Florida Insurance Guaranty Association. Recoupment, depending on your insurance company.

Basically, Citizens is a tax-exempt, taxpayer-supported corporation that has far exceeded its original mission. Further, the risk it assumes is now underwritten by every Floridian having a home or auto insurance policy with a private carrier and, ultimately, by every state taxpayer. Since its inception, Citizens has grown more than 10 percent a year, with 1.38 million policies in effect today. The natural propensity is for a bureaucracy to grow, and Citizens’ low-cost, government-backed insurance rates expanded coverage to all that could justify a need, using very loosely written regulations. This growth was greatly enhanced as for-profit companies raised rates, added the aforementioned assessments and reduced exposure following heavy insurance losses between 2004 and 2008.

The problem is not enough dollars are being collected in Citizens premiums to cover the increased risk. We have not had a major hurricane in an area with large Citizens’ coverage since 2005. In that year, with far fewer policies in force, Citizens suffered a loss of more than $2.5 billion. If a major hurricane occurred today, the uncovered loss insured by Florida taxpayers could be as much as $20 billion. A loss of this magnitude in the current economic environment could throw Florida’s government into bankruptcy and devastate any chance of an economic recovery for the foreseeable future.

A number of recent articles and editorials have lamented newly approved increases in homeowner premiums, reductions in coverage options and efforts to restrict the number of Citizens’ policyholders. We take the opposite view and again highlight the threat Citizens poses to Florida property owners and taxpayers. This corporation should return to what was intended — to be the insurer of last resort for Floridians unable to obtain insurance from private sources. Citizens’ rates should rise to cover actual risk. And more private carriers should be encouraged to compete without undue state intervention.

http://www.tcpalm.com/news/2011/jul/30/martin-county-taxpayers-association-citizens-to/

Orlando Sentinel
by Mike Thomas
July 30, 2011

My property insurance once cost as much as the cable bill, then the YMCA membership, then the electric bill — and now it’s approaching the property-tax bill.

Insuring a house in Florida soon could cost almost as much as the house itself.

None of this bodes well for the value of your home or the future of the state’s real-estate market.

It may be time to resurrect a Marco Rubio idea from 2007: lower the cost of homeownership by eliminating property taxes.

But more on that later.

The newest insurance blow comes from sinkholes, or at least sinkhole-insurance scams.

Last week folks in counties to the west of us got hit with jaw-dropping, thousandfold increases in the cost of sinkhole coverage. This comes on top of continuing increases for hurricane insurance and general all-hazard insurance.

It is not the handiwork of the big, evil insurance companies. There is no profiteering going on.

The rates are coming from Citizens Property Insurance, which is owned by the state.

And they are fully justified. Citizens simply calculated how much it was taking in with sinkhole premiums versus how much it was paying out in sinkhole claims.

The outflow was more than four times greater than the inflow.

So it adjusted its rates to put the two figures in balance. Legislators are screaming, but how do you argue against that logic and methodology?

It costs what it costs.

If we are going to allow public adjusters and homeowners to file thousands of claims attributing cracks to sinkholes, we are going to have to pay for it.

The areas getting clobbered the most are the areas with the most claims, those in the so-called “sinkhole alley.”

So an average sinkhole policy in Hernando will cost about $6,000. In Pasco it will cost about $4,000.

Policies in Tampa will go from an average of $156 to $3,651.

A lot of people simply won’t be able to afford this and will have to drop sinkhole coverage. And that’s going to be a problem because a growing number of lenders require the coverage, including Freddie Mac.

How will mortgage companies that require this coverage handle existing homeowners who no longer can afford it?

And what will this do to sales when a buyer is looking at insurance payments that come close to the mortgage payment? This could either shut down the market in high-risk counties or force drastic price reductions.

We are far from safe in Central Florida, given that sinkholes are not a rarity here. Private insurers have been increasing their rates to cover the claims. For you State Farm customers, sinkholes were behind your recent increase. Other insurers are following suit. This move by Citizens will spur them on.

If the state is allowed to recoup its losses from sinkholes, then how can state regulators deny private insurers the same right?

The days of Charlie Crist are over. The state can’t magically suppress the true cost of insurance by waving a regulatory wand. The market correction is coming in painful, lump-sum payments.

We are in the cross hairs. An important new analysis of hurricane risk says Orlando is much more prone to storm damage than previously thought because hurricanes maintain much of their strength when traversing our thin, flat state.

Insurance companies will have to respond.

All this means we will face continual increases as Florida transitions from a state-subsidized market to a free market.

This will kick a housing market already down for the count. It will kick homeowners already down for the count.

There is only one way to reduce the strain. In 2007, Rubio proposed eliminating taxes on homestead property and replacing them with a 2.5-cent increase in the sales tax.

Back then, the idea was to rein in spending of local governments. It also would have done away with all the wild disparities in property taxes caused by Save Our Homes. Rubio was blocked by Gov. Charlie Crist. One criticism is the now-amusing notion that property taxes are stable.

The idea still holds promise. I’d prefer a plan to expand the homestead exemption to something like $200,000 and close loopholes in the existing sales tax, including some services, to make it less regressive. That gives you the added benefit of creating a tax that more closely mirrors economic activity. People can control consumption; they can’t control their insurance company or property appraiser.

There are a number of variations to play with here. However you calculate it, the concept needs to be revisited.

mthomas@tribune.com or 407-420-5525
http://www.orlandosentinel.com/news/opinion/views/os-mike-thomas-sinkhole-insurance-07320110728,0,6723632.column?page=1

Letter to the Editor – SPT
July 26, 2011
By: Donlad D. Brown

(The July 19, 2011 St. Petersburg Times editorial “Taking Citizens private is no answer” to which this LTE is a response can be found at: http://www.tampabay.com/opinion/editorials/article1181156.ece)

This editorial rejecting the idea of privatizing parts of Citizens Property Insurance Corp. failed to address the flawed state policies that helped create the property insurance mess we’re in today.

Remember that in 2007, then-Gov. Charlie Crist and his supporters in the Legislature — including state Sen. Mike Fasano, R-New Port Richey, a constant critic of private insurers — passed a bill that froze insurance rates and put state-run Citizens in direct competition with the private property insurance market. Citizens unfairly retained such competitive advantages as the ability to assess almost all other types of insurance policies (including auto policies) to make up for the cheaper rates it charges its customers on the front end.

The harmful results are still being felt. Today, Citizens is the largest insurer in the state with 1.4 million policies and is growing by 5,000 to 7,000 new policies a week, the private market continues to shrink, and all Floridians face massive state assessments on their insurance policies if a hurricane hits and Citizens runs out of money to pay its claims.

State lawmakers have had four legislative sessions to reverse this ill-conceived socialization of Florida’s property insurance market and to help restore the private market. But they have only taken baby steps to do so, meanwhile squandering a period of relatively calm weather.

No one wants to pay higher property insurance rates. But homeowners should pay their fair share based on the true risk of their homes. One group of Floridians should not have to subsidize homeowners’ rates for another, and the state should foster true competition among private insurers that leads to market-based rates.

Donald D. Brown, senior fellow, Heartland Institute, DeFuniak Springs
http://www.tampabay.com/opinion/letters/article1182370.ece

Northwest Florida Daily News
Editorial
July 22, 2011

Naples entrepreneur Jim Malone, board chairman of Citizens Property Insurance, is floating a suggestion to privatize Florida’s state-backed “insurer of last resort” by selling all or part of it to commercial interests — “the private world,” as he put it. But he knows it won’t be easy.

“There will be a hundred reasons people will come up with not to do it, I’m sure,” he said the other day.

A hundred? Try 1.4 million. According to The Associated Press, that’s how many policies Citizens Property has in force. And it’s probably how many policies will suddenly become more expensive if private firms take them over.

Citizens Property’s policies are widely considered to be underpriced. (That may help explain why it’s adding about 5,000 new policies every week.) What’s more, if a major hurricane were to empty the company’s coffers, Florida taxpayers would be forced to bail it out.

Private companies don’t work that way.

Neither, in our view, should the government.

Privatizing Florida’s biggest insurer of homes and businesses would be painful for some policyholders — about 1.4 million, we’d guess — but it would get state government out of the insurance business, relieve the state of a huge potential liability, take taxpayers off the hook and maybe, just maybe, increase competition among private-sector insurers and eventually bring down insurance costs for everyone.

It’s an idea worth considering, and Gov. Rick Scott is reported to be doing just that. “I want to look at it very closely,” he said.

Floridians who pay for property insurance ought to look at these events closely, too.

http://www.nwfdailynews.com/articles/entrepreneur-42062-resort-malone.html

by Don Brown
July 19, 2011

As Floridians, it could be said that, in many ways, we have a shared destiny. Certainly that is true in some measure, particularly as it relates to our extraordinary exposure to tropical storms and hurricanes. As humans, when we feel vulnerable our instincts may bring us to very different courses of action. Some will analyze the situation, develop a strategy to reduce or mitigate their vulnerability and by doing so significantly reduce the likelihood of injury.

On the other hand, some will ignore the risk or simply hope it never touches them. Another strategy we often fall back on is based on a little recognized fact that in western culture we tend to focus on symptoms rather than the root causes of our problem. In some high profile cases, such as Band-Aids and Tylenol, this tendency has made some folks a lot of money. Focusing 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” and public discourse.

Finally, there are those who cope with uncertainty by pointing the finger of blame at others, claiming “it’s their fault we are in this mess.”

Since, as Floridians, we are all in this “hurricane boat” together it is very tempting to embrace such fault finding. After all, if we can blame our misfortune on someone else then we somehow “feel better”. In fact, in some cases a lot of money can be made by pandering to this aspect of human nature.

In my opinion, no better example of this “fault finding” tendency can be found than much of what has been published recently about Florida’s exposure to hurricanes. Some have gotten so caught up in this strategy that “truth” and “the facts” have fallen victim. The pursuit of a “booger man” (so to speak) has replaced calm and logical analysis.

Speaking of calm and logical analysis; the purpose of this email is to recommend an article I found recently in “The Bottom Line” published by Crown Communications. The link to that article is: http://bit.ly/rg31xq.

I highly recommend you follow the link and read this article.

On many occasions I have been criticized for suggesting that: “Florida does not have an insurance crisis. Rather, ours is a hurricane crisis and a human behavior crisis, i.e., our desire to live in very beautiful, but dangerous places while expecting someone else to pay for our risk taking.” Notwithstanding the criticism I continue to believe this to be true.

Again, please follow the hyperlink shown above. I believe you will enjoy hearing a little different prospective.

Quote:

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 that primitive, universal, and insuppressible instinct that impels him to satisfy his desires with the least possible pain.
— Frederic Bastiat

Don Brown is a Senior Fellow with The Heartland Institute and a former member of the Florida Legislature where is served as Chairman of the House Insurance Committee

Florida Underwriter
by Gary Fineout
July 2011

Florida’s fragile insurance market in many ways is deeply impacted by what happens twice a year inside a glass office building sheltered on a side road in northeast Tallahassee, far away from both the capitol and the state’s financial sectors.

Inside a gray-carpeted conference room in this building an obscure panel signs off on an important number: Just how much money could the state-created reinsurance fund known as the Florida Hurricane Catastrophe Fund (Cat Fund) borrow if the state got hit by a big hurricane, or just as bad, a series of smaller storms?

The sophisticated guesswork that goes into this is more than some academic exercise. This number is a reflection of the stability of the Cat Fund, itself an important backstop for insurers that operate in the state, including Citizens Property Insurance Corp.

And this year the answer is somewhat troubling.

Hurt by the ongoing volatility in the municipal bond market, the latest round of estimates adopted in late May by the fund’s advisory council conclude that the Cat Fund could borrow $12 billion to help cover its obligations for the 2011 season.

However, that borrowing power is a significant drop—roughly $4 billion less—than what the fund’s financial advisors previously concluded in October.

“Our cushion has eroded,’’ said Jack Nicholson, chief operating officer for the Cat Fund.

Good News About Reserves
These new estimates confirm that the Cat Fund remains largely dependent on swings in the global financial markets, and it continues to raise questions about the framework now in place to help bolster the state’s entire property insurance market.

The Cat Fund was created in the wake of 1992’s Hurricane Andrew to help stabilize the Florida property insurance market by offering low-cost reinsurance coverage to insurers who do business in the state. Every carrier that sells policies in the state is required to purchase a mandatory level of coverage.

The fund has certain advantages, including that it is a tax-exempt organization with low-administrative costs. Also, in the event of large losses, it has the power to levy assessments on nearly every insurance policy in the state to recoup the expenses.

But in the last decade—as Florida has been battered by a series of hurricanes and some insurers have fled the state—state policymakers have come to increasingly rely on the Cat Fund as a lever on insurance rate hikes. Four years ago, they created an optional layer of reinsurance that added billions in potential exposure.

The good news right now is that the Cat Fund has a large amount of money at its disposal. After 5 years without storms, the reinsurance fund has built up its resources and has access to more than $7 billion.

Still, that means the Cat Fund would have to rely on borrowing to cover the rest of its obligations, now estimated for this hurricane season at more than $18.5 billion.

Fortunately, the math has worked out, at least for now.

Numbers Continue to Move
New estimates drawn up by consulting with Wall Street firms conclude that the fund could now borrow about $12 billion. That is slightly higher than the $11.3 billion the fund would need.

Yet, these estimates continue to fluctuate greatly. This is the third major change in the last 3 years.

During the height of the 2008 financial meltdown, the Cat Fund was confronted with the sobering estimate that it could borrow only $3 billion. That gradually changed over the last 2 years as credit loosened up.

Last year financial advisors concluded the fund could borrow as much as $16 billion if the state was struck with devastating storms and needed to pay off reinsurance claims.

The fund’s financial advisors, however, acknowledge that this year’s estimate is one built on assumptions and that “significant uncertainty still exists.”

The fund’s financial advisor, John Forney of Raymond James & Associates, made a presentation to the advisory council in which he noted there has been a significant drop in the amount of municipal bonds issued this year. There has been a bit of volatility in municipal bond markets as some investors earlier this year fled the markets amid fears of financial instability.

“The ability of the Cat Fund to handle it from a theoretical standpoint is there,” Forney said. “It’s a question of what the market will bear.”

Another item that could hurt Cat Fund resources is the fact that it will lose access to $3.5 billion in bond proceeds next year as those bonds mature.

Despite the new estimates, there are some positive trends.

Insurers continue to pare back the amount of optional reinsurance they are purchasing from the Cat Fund, which in turn lowers its obligations. The latest figures for this storm season show that private carriers were expected to purchase only $1.14 billion worth of optional coverage despite $6 billion being offered. Part of the drop is because of the increasing cost of the optional coverage.

Additionally, Citizens made the decision to purchase private reinsurance and borrow money this year instead of purchasing additional coverage from the Cat Fund.

Nicholson also took comfort in the amount of cash that the Cat Fund is expected to have by the end of the 2011 hurricane season.

“The projected cash balance of $7.245 billion is a big plus,” Nicholson said, adding that it would “buy us some time” if a major storm hits.

Time to “Right Size’’ Cat Fund?
However, the ongoing volatility associated with the bond market is one of the reasons that Nicholson says the time has come to rethink just how much exposure the Cat Fund has right now.

“What really causes concern is the level of our capacity and how we plan financially to address that,” he said.

Nicholson pointed out that state leaders have increased the capacity of the Cat Fund twice in the last decade. Back in 2004, state lawmakers increased the size of the mandatory layer from $11 billion to $15 billion.

They followed that up 3 years later in a special session when they created the second layer of coverage known as the Temporary Increase in Coverage Limit (TICL). Legislators signed off on this second layer in the wake of voter anger at insurance rate hikes following the storm seasons of 2004 and 2005.

The initial amount of TICL was $12 billion, which greatly expanded the total potential exposure of the fund. However, this led to criticism that the Cat Fund was overexposed and that the state of Florida itself would be held financially responsible if the reinsurance fund was unable to pay off its obligations.

Lawmakers have since taken some steps to whittle down TICL and agreed to phase it out completely over the next several years.

Nicholson, however, said the “major over-expansion” of the Cat Fund’s exposure does not serve to stabilize the state’s economy. He said the time has come to consider forcing insurers—and ultimately consumers—to have “more skin in the game” by reducing the capacity and size of the Cat Fund over the next few years.

Nicholson has suggested lowering the current mandatory layer of coverage from $17 billion to $12 billion while increasing the amount of co-pay insurers must pay to access the coverage.

“It is hard to say what the ‘right size’ is for the fund, but I’ve defined it in terms of how comfortable and certain we can be issuing a level of debt,’’ Nicholson said. “Like I have said, $5 to $7 billion is doable and reasonable, but over $10 billion gets risky. Theoretically, the ‘right size’ for the fund is big enough to accomplish its mission (stabilize the insurance market as well as stabilize and help avoid disruptions to Florida’s economy), but not so large that the issuance of debt is questionable and highly volatile over time.

“The fund needs to be more of a ‘guarantee’ of coverage, not speculation,” Nicholson continued. “The idea of right sizing is more of an art than an exact science, but it has a lot to do with common sense and judgment.”

The trade off would be that the threat of assessments would be reduced because a smaller Cat Fund could more easily manage its obligations without having to borrow massive amounts of money.

A Reality Check on Rates, Expansion
However, it is likely that insurers will be forced to raise rates if they have to purchase private reinsurance instead of relying on the Cat Fund. State lawmakers remain skittish about allowing anything that could sharply increase insurance rates.

Don Brown, a former state lawmaker who was one of the few to vote against the expansion of the Cat Fund back in 2007, is already taking up Nicholson’s cause. He wrote an op-ed for newspapers where he said the time for Nicholson’s reforms has come.

“A reduction in the mandatory layer—which would more accurately reflect our ability to borrow—would have some upward pressure on rates but that, my friend, is the hard reality and at the very heart of our problem,’’ Brown wrote.

He cited the “dynamic changes in the financial markets” as a key reason for the change but also pointed out that there are fears that huge losses during one hurricane season would render the Cat Fund unable to provide significant coverage the following year.

“Any expectation of coverage for second season events, and maybe subsequent events in the season, is ‘pie in the sky,’” Brown wrote. “…For too long we have been fooling ourselves and Florida homeowners into thinking that if we ignore this problem it will go away. In the meantime, consumers, deprived of the correct pricing signals, continue to build beyond their means and, in some cases, in very dangerous places.”

Brown also said, “It’s not just folks who build on the beach…It’s also folks who live in Orlando who divvy up their monthly mortgage and insurance budgets based on real mortgage costs but imaginary insurance cost. We don’t do anyone a service when we mislead them.”

http://www.propertycasualty360.com/2011/06/28/floridas-cat-fund-healthy-enough-for-another-year?page=3

Keysnews.com
by Don Brown
July 14, 2011

Recently, the Sarasota Herald-Tribune’s Paige St. John spoke at a local event hosted by the Key West Chamber of Commerce. While I was not present at this event, I read with great interest the article “Insurers’ statistics dismay audience” (June 16).

I’m familiar with articles by St. John, which sometimes contain misleading or incorrect information, and would even suggest that some material she has previously written should appear in the opinion section of a newspaper instead of the news pages. Floridians need to realize that the crises we are forced to deal with relate to hurricanes and human behavior — not insurance. While property insurance is an evident symptom, hurricanes in conjunction with people choosing to live in high-risk areas and asking someone else to pay for the risk are the real problems.

As mentioned in the article, St. John suggested that much of Florida’s property insurance problem can blamed on the reinsurance industry. How is it that more than two dozen, financially strong reinsurers — the same companies who paid billions of dollars to cover the losses from past Florida storms, without default or reliance on taxpayer bailout or policyholder assessments — are being blamed for our state’s hurricane problem?

Instead of continuing to boast about a Citizens Property Insurance Corp. surplus, it would be useful for taxpayers to know that, unlike the reinsurance industry, which spreads risk globally, the state-run Citizens and the other government-run insurer, the Florida Hurricane Catastrophe Fund, concentrate risk within Florida. By concentrating risk within the state, all Floridians, including myself, will be subject to pay hurricane taxes, whether we are Citizens policyholders or not. We will be paying assessments that will accumulate to thousands of dollars over the life of the bond issues. I wonder if that was mentioned to the group at the chamber event?

As our elected officials work to implement solutions to improve the current situation, I implore readers to take the time to understand the predicament our state is actually in. It’s time to point the finger at the real culprits, instead of the industry at large.

http://keysnews.com/node/33207

News-Press.com
July 14, 2011

Citizens Property Insurance Corp., Florida’s largest property insurer, is overexposed, and adding thousands of policies a week.

That needs to change before a catastrophic hurricane overwhelms its reserves and forces the Florida taxpayer to bail out the state-backed insurer.

A proposal by Citizens’ CEO Jim Malone of Naples to shed about one-third of the company’s policies and let the private industry cover them will cause rates to go up – maybe way up – for the dropped policyholders, but it is worth careful consideration.
Malone estimates that up to 900,000 of Citizens policies are probably uninsurable in the private market because they cover older homes and property close to the coast. The remaining 500,000, he thinks, could be sold to private insurers.

Citizens, created under state auspices as an insurer of last resort for property that private insurers would not cover, charges unrealistically low premiums.

The result is that Citizens has about $11 billion in cash and Florida Hurricane Catastrophe Fund resources. State experts say a 1-in-100 year storm – the storm and damage that have a 1 percent chance of happening in any year – would hit Citizens alone with $22 billion in claims. Several smaller storms could also add up to more than the company has in reserve, according to Citizens spokeswoman Christine Ashburn.

That sets the stage for a financial disaster to follow on the heels of a catastrophic hurricane, as taxpayers bail out the government-backed insurer and its policyholders endure special assessments to cover damage claims.

All Florida policyholders are still paying extra to cover Citizens’ losses from the stormy years of 2004 and 2005, says the Insurance Information Institute, an industry body. The Legislature took steps this year to allow property insurance rates to increase, hoping to reduce Citizens’ exposure. But Citizens was not allowed to shed policies. Partial privatization is a logical next step.

But getting property adequately covered at affordable prices in a high-risk state like Florida is a difficult balance to strike.
Rates need to be high enough to attract insurance capital, and generate competition from numerous companies, without being so high as to drive property owners out of the market – or back into the arms of Citizens.

We cannot expect property insurance in Florida to be cheap. That was the bogus promise of ex-Gov. Charlie Crist, who blocked efforts to raise rates, only to see insurers drop policyholders and flee the state. But if home- and business-owners find insurance too expensive or simply unavailable, and decide to take their chances without protection, that, too sets the stage for a fiscal catastrophe if a big storm causes billions in damages.

Lawmakers need to hear from us on this.

It’s a long way to the next regular session of the Legislature, with the controversial 10-year redrawing of legislative and congressional district boundaries. And, 2012 is an election year. But time has to be found to deal with an issue that can cripple Florida’s growth if property insurance rates are too high or insurance unavailable, and could cripple Florida’s recovery from a storm if there is not enough money for rebuilding.

http://www.news-press.com/article/20110715/OPINION/107150351/-1/VideoNetwork/Editorial-Insurance-needs-painful-changes?odyssey=nav%7Chead