November 30 not only marked the end of another quiet hurricane season but also, remarkably, the ninth straight year Mother Nature has spared Florida, one of the most catastrophe-prone places on Earth.
On several levels, news regarding our often tumultuous property insurance market is outwardly positive: Citizens Property Insurance Corp., the state’s insurer, has shrunk to just over 930,000 policies, reducing the threat of post-hurricane taxes on Florida’s families and businesses. The state’s insurance provider for insurance companies, the Hurricane Catastrophe Fund, has built up cash and lowered its exposure, making it more likely to be able to cover losses from a mega-storm.
Gov. Rick Scott and the Florida Legislature have fostered a more-predictable legislative and regulatory environment for property insurers and policyholders, a welcome change from the spasm of law- and rule-making that typically occurs in Tallahassee after a bad storm season. Simply put, laws and rules are being given a chance to work.
But underneath the feel-good mood, there are legitimate questions being raised about Florida’s strategy for diversifying homeowners’ risk and whether that plan will fail when the inevitable occurs and Florida’s run of good luck ends.
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After Hurricane Andrew in 1992 and the multiple hurricanes of 2004-05 forced national property insurers to rethink their exposure in Florida, state policymakers encouraged a cottage industry of small, home-grown property insurers to enter the market.
Known as Florida domestic insurers, most of these companies got their start by taking blocks of policies out of Citizens — lured by cash bonuses or other incentives.
Without question, the domestic insurers as a whole have played a valuable role in reducing the size of Citizens and providing homeowners more options for obtaining homeowners’ coverage.
Several have grown large and financially strong and are true Florida entrepreneurial success stories.
But CAT Fund surplus data and an analysis of Florida’s property-insurance market by RH Analytics, a Wall Street research firm, raise troubling questions about the financial strength of the domestic companies and whether they can survive the next hurricane.
For example, CAT Fund records show that 56 domestic companies have a combined surplus of $2.6 billion — or about $47 million per insurer. By contrast, 97 property insurers doing business in Florida but headquartered in another state have a combined surplus of $161 billion — or $1.7 billion per company.
What this means is that Florida policymakers have increasingly relied on small, thinly-capitalized domestic insurers that are heavily dependent on the state CAT Fund to provide a financial backstop.
If these insurers and the CAT Fund run out of cash, nearly all Florida insurance policyholders will foot the bill through assessments issued by Citizens, the Cat Fund and the state agency that covers policyholder claims when their insurers become insolvent.
Between 2003 and 2009, 11 out of 29 companies — mostly domestics — that took policies out of Citizens became insolvent, were ordered to stop writing business or were “taken over” by other Citizens takeout companies because of financial woes, according to the RH Analytics analysis. Between 2006 and 2011 alone, six domestic companies that had removed almost 334,000 Citizens policies became insolvent, costing taxpayers $404 million, the analysis found.
By contrast, the financially stronger property insurers headquartered outside Florida do not rely heavily on the CAT Fund to cover losses and would mostly rebuild homes and their own surpluses in Florida with private capital, rather than relying on the state.
The point here is not to disparage Florida domestic insurers. But for some of these companies, the heavy dependence on state-backed coverage and the relative lack of cash to pay claims is troubling.
This isn’t just “inside baseball:” This very concern is echoed by some Citizens policyholders who, according to recent news reports, are worried about being transferred to small, untested insurers.
Meanwhile, state policymakers must stay the course on public policies that will encourage financially strong insurers with robust claims-paying capacity to continue to invest in Florida. Otherwise, the state will face the inevitable day when a hurricane hits, domestic insurers are overwhelmed with losses and fail, and Florida’s residents and businesses will be left to pay the bill.
Michael Carlson is the executive director of the Personal Insurance Federation of Florida.