Damage Control Report

This summer's gang of hurricanes may not change Florida's insurance landscape as radically as Andrew did in 1992. But the storms left the insurance infrastructure wobbly, highlighting its weak points and the long-term challenges to maintaining a viable insurance market in Florida.

In the years since Andrew, the state of Florida had rigged together a hybrid insurance system using two main crutches:

- The Florida Hurricane Catastrophe Fund -- the so-called CAT fund -- offers cheap reinsurance to private insurers. The CAT fund enables the private insurers to hold down rates for the policyholders they are willing to insure.

- A state-run "insurer of last resort," formerly known as the JUA and now called Citizens Property Insurance Corp., was formed to insure property owners who can't get insurance from private companies. Citizens' rates can be high, but without the company, those property owners couldn't get affordable insurance under the present circumstances.

Citizens also is tasked with attracting private insurers back into Florida. Citizens, the thinking goes, should charge rates high enough so that private insurers feel they can undercut it and still make a profit. For several years, Citizens even paid private companies $100 to $300 per policy to take coverage off its hands.

While the effort to depopulate Citizens has been unsuccessful, Citizens and the CAT fund have succeeded at providing a measure of stability to the market. Without them, a totally private insurance market would likely mean either that hundreds of thousands of property owners would be unable to get insurance or that rates for most in coastal areas would rise even higher than what Citizens' customers pay.

The calculations built into the CAT-Citizens-private company structure focused mainly on potential losses in coastal areas and assumed that a storm, or storms, wouldn't exceed Andrew's impact. With final damage estimates from Ivan not yet in, the storms appear to have come uncomfortably close to Andrew's threshold, however.

The surprises? The number of storms -- did anyone think Florida would see three in six weeks? -- their size, and the damage they did inland. Those factors will likely force both state regulators and private insurers to re-evaluate some of the assumptions underpinning the post-Andrew system.

In the end, the legacy of the summer of 2004 may be a reminder from nature that living in Florida is neither as easy or as cheap as we might like it.

Status Report
Private Insurance Market
The state's chief financial officer, Tom Gallagher, remains optimistic that the $11 billion-plus in claims from this summer's storms won't send private insurers scurrying for the border. Gallagher says he doesn't expect any of the 168 insurers now writing policies for property and homes in Florida to leave. "I think (insurers) realize that this is a risk they write. Other than realigning their business, the majority will stay right where they are," says Gallagher. Strengths in the market? A combination of post-Andrew rate hikes, higher deductibles for consumers and better modeling that means insurance companies can better predict loss patterns -- and avoid overexposure in coastal areas.

After Charley, several large insurers said they have no plans to cut back in Florida. "We are continuously analyzing the most appropriate ways to grow our business while still managing risk," says Ryan M. Priest, an Allstate spokesman. Frances and Ivan introduced considerably more uncertainty, however.

One key factor in determining whether or how much rates may rise will be the actions of big reinsurance companies, which write their contracts with primary insurers on an annual basis. The reinsurers will meet in January to re-evaluate the prices they charge the primary insurers.

Even before Frances, says Damien Magarelli, an associate director with Standard & Poor's, the reinsurance market saw an increase in the cost of second- and third-event coverage -- reinsurance to protect primary insurers from multiple storms in a season. After Charley, Frances and Ivan, reinsurers will likely re-evaluate whether their prices reflect the potential losses. If they raise the cost of reinsurance, primary insurance companies will pass those costs on down to consumers in some form.

Status Report
Cat Fund
All primary insurers, regardless how big, buy reinsurance so that they can cover losses after an exceptionally bad storm. The Florida Hurricane Catastrophe Fund offers up to $15 billion in reinsurance (for residential policies) to private insurers and to state-run Citizens. The CAT fund charges one-third to one-fourth the cost that private companies and Citizens would pay to a private reinsurance company.

Once each insurer has absorbed a deductible (based on that company's share of total exposure), it can access CAT funds.

This year, the fund took in $611 million from insurers, says Jack Nicholson, senior officer for the CAT fund. Before this summer, Hurricane Opal and Hurricane Erin, both in 1995, were the only two storms since the CAT's founding to trigger calls on the fund. The fund paid a total of $13.1 million on those storms to 11 companies and has banked nearly all the rest of its premium money. Result: $6 billion in reserves was on hand before Charley struck.

Damages from Charley are expected to suck an estimated $1.5 billion from that reserve. Each storm event creates its own set of deductibles for private insurers, and claims arising from Frances and subsequent storms probably won't eat up the remaining CAT reserves. If they do, the fund can go to the bond market to raise up to $9 billion more -- debt that would be repaid by assessments on insurers, who would pass the increased costs to their policyholders.

In August, the Fitch rating agency upgraded the CAT fund's rating. Robin Prunty, a director in S&P's public finance department, says that while the CAT fund has never had to test its ability to go the bond market, the market has proved able to handle offerings the size the CAT fund would make.

Status Report
Citizens Property Insurance Corp.
By statute, the state's insurer of last resort can write wind-only coverage in southeast Florida only east of Interstate 95, meaning it insures some of the priciest real estate in the riskiest places in Florida.

Before the storms, Citizens had about $1.2 billion on hand, and it takes in some $40 million in premiums each month. Initial loss estimates for Citizens range around $1 billion for Charley and more than $300 million for Frances. Citizens President Bob Ricker said the insurer had "more than adequate resources to pay claims that will arise."

With the bills for Ivan still being tallied, it was possible that Citizens might have to issue bonds to pay claims coming from its high-risk policies. Citizens would then assess all insurers statewide to repay the bonds ("Shrinking Citizens," above), and insurers would pass on the costs to their policyholders.

Customer Service
Lessons Learned
Both private insurers and Citizens Property Insurance Corp. did an admirable job in serving policyholders. Citizens President Bob Ricker says Citizens was among the first insurers on the ground after Charley struck, dispatching 400 adjusters, taking 12,000 claims in the first six days after the storm and writing $2,500 checks for hotel, food and other essentials. State Farm, the leading private insurer in Florida, dispatched 1,200 people and seven mobile "catastrophe facilities" to add to its 2,900 employees in the state. "In the wake of Hurricane Andrew, we all learned some lessons," says spokesman Kip Diggs. "We are better prepared to handle a situation like we have now."

Tags: Around Florida