March 28, 2024

Insurance

A Game of Risk for Small Insurers

Small, Florida-based insurers are snagging market share -- but are they the solution to reinvigorating the state's home insurance market?

Mike Vogel | 6/1/2008

Buffett’s Backing:Warren Buffett
Famed investor Warren Buffett thinks Citizens’ Insurance securities are a good bet. In a recent Fortune magazine article, Buffett said he’d just bought one of the state insurer’s auction-rate securities that carried a 11.33% interest rate. He’s not worried about Citizens paying up:
If the company incurs losses from a storm, it will pass those losses onto Floridians in the form of higher premiums.
Instead, domestics are rated by an agency called Demotech, which gives some domestics only the third-highest rating on a scale of six. “Certainly they’re not as strong as your typical national insurance companies,” says Brian Schneider, a Fitch Ratings analyst who in a March report worried that Florida’s unstable market could collapse after a major storm. McCarty, the insurance commissioner, says the domestics exceed the requirements of Florida law.

With an A-minus rating from A.M. Best, American Strategic doesn’t present the solvency risk its brethren do. (A.M. Best rates State Farm and Allstate both as B-plus.) Because of reinsurance, less than 10% of American Strategic’s $200-million surplus is exposed to catastrophic loss — compared to up to 60% to 80% at some domestics.

Despite his own success, Auer says domestics can provide only part of a solution for Florida. His companies don’t insure mobile homes and won’t write policies that include wind coverage in the Keys and most of the windpool area (coastal Florida) outside of Pensacola, Daytona and Sarasota.

Remember also the emphasis that domestics place on spreading risk geographically. As part of a strategy to have high market share in low population areas and vice versa, American Strategic has a 28% market share in inland Lake County, but less than 1% in south Florida.

Florida-specific insurers can take only so many homes from high-risk southeast Florida and the Tampa Bay area before running out of offsetting low-risk inland homes. To offset huge markets such as southeast Florida, an insurer needs to write polices in other states, even other nations, Auer says.

diceAnd recall Auer’s reinsurance strategy. Florida domestics need to stay small to avoid the concentration of risk that makes reinsurance unaffordable. Because of the intricacies of the reinsurance market, the closer a company gets to needing $1 billion in reinsurance, the harder it is to find. Auer says that after 2005 it was difficult to locate $600 million in private reinsurance at a price American Strategic could pass on to customers in an affordable premium. To meet its current needs, it contracts with 43 reinsurers.

Reinsurance and Florida’s “very unstable situation” have prompted American Strategic to expand into Texas and other states. “Enough’s enough” in Florida, says Auer, 54. “We’re not really trying to grow in Florida anymore. You can’t solve the problem with a bunch of real small companies in my opinion. A good indicator things are better is when the big-name companies we’ve all heard of are willing to write here — and that’s going to take high rates.”

Tags: Florida Small Business, Entrepreneur

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