This year the Legislature is considering proposals that, if passed, would give massive subsidies to the private reinsurance industry, paid for by significantly higher rates for policy holders.
These unregulated, largely offshore reinsurers operate with no rate controls or consumer oversight. In stable markets, reinsurance is insurance for insurance companies, policies bought in relatively small amounts to protect carriers from the remote chance of a very large disaster.
The departure from Florida of national brand carriers like State Farm has led to an unstable market. Since 2005, over 2.5 million policies have been cancelled, resulting not only in the growth of Citizens Property Insurance Company but also of private insurance companies.
These Florida carriers now serve over half the homeowner’s insurance market and they are the only remaining private market carriers writing new business. Regulators and rating agencies require companies to annually demonstrate strict financial claims paying ability designed to ensure that they can pay claims from catastrophic storms.
In order to meet these financial requirements, they must purchase reinsurance every year. This additional annual expense for reinsurance is the biggest cause for the explosion in the cost of homeowner’s insurance.
The two sources for this reinsurance are private reinsurance companies and the Florida Hurricane Catastrophic Fund (Cat Fund), a state agency. Private reinsurance is extremely expensive, taking as much as half or more of every premium dollar collected from policyholders.
If there is no major storm, reinsurers pocket the premium. On average, reinsurers charge five times more than the actuarial risk of loss, meaning that 80 percent of the premium charged is pure profit.
The very same national brand carriers that have fled Florida own some of them. State Farm, which has shed hundreds of thousands of Florida policies and continues to write lucrative auto coverage in Florida, is the largest shareholder in Da Vinci Reinsurance, a company specializing in selling reinsurance to start-up Florida-based carriers.
By contrast, reinsurance coverage from the Cat Fund costs much less, as little as 10 percent of the cost of private reinsurance. Also, unlike private reinsurance, unused premiums paid to the Cat Fund are available to pay claims in future seasons.
The reinsurance lobby understandably hates the existence of the Florida Cat Fund. Every dollar of reinsurance purchased from the Cat Fund costs private reinsurers nearly $1 billion in lost profits per year. In an effort to regain lost profits, the reinsurance lobby insists the Cat Fund won’t be able to raise enough bonding money to pay its bills, which they say would result in mass failures of insurance carriers, followed by general disaster and mayhem.
Bonding estimates prepared by market experts show that the Cat Fund has nearly $4.5 billion in excess bonding capacity over two years. But, according to state loss models, a 1:100 year storm (1 percent probability each year) would result in a less than 2 percent Cat Fund assessment on policyholders, about $60 per year for the average household.
A proposal recently debated in the Senate would have raised rates an estimated 5 to 10 percent by reducing the capacity of the Cat Fund by as much as $5 billion per year, coverage that would then have to be purchased from the private reinsurers.
In other words they want policy holders to accept a 100 percent chance of paying on average $150 to $300 per year to avoid a 1 percent chance of paying $60.
This nonsensical approach has already dug a deep hole. Florida carriers have paid $26 billion for private reinsurance over the last seven storm-free years, premiums that could have strengthened cash reserves in the Cat Fund, paid for a repeat of the 2004-2005 storms, and lowered rates by 20 percent, but instead left Florida forever as unregulated payments line the pockets of private reinsurers.
It’s time to stop digging. The consumer group, FAIR (Florida Association for Insurance Reform) has offered a modest alternative, which would expand the Cat Fund by $2 billion. This alone would reduce private carrier property insurance rates by at least 7 percent, making them more competitive with Citizens and giving a boost to Florida’s economy.
State Rep. Frank Artiles, R-Miami, has a Master of Law in Real Property Development from the University of Miami Law School and is a general contractor and public adjuster & appraiser.