April 24, 2024

Insurance in Florida

Tipping points for hurricane coverage in Florida

Insurance companies ability to pay depends on how high the damage estimates are.

Mike Vogel | 6/25/2012

Reading down, follow the path of what happens with Citizens Insurance and private insurance in Florida at different levels of storm destruction. Also see when and why the CAT reinsurance fund kicks in.

MANAGEABLE: Up to $7.4 billion
total claims to both Citizens and private insurers

No Problem
With $6 billion in reserves, Citizens could pay claims from a relatively small, once-in-a-decade storm in stride.
No Problem
Private insurers would be able to handle a once-in-a-decade storm without turning to the CAT fund.

TROUBLE: $7.4 billion-$16.5 billion
total claims to both Citizens and private insurers

At $12.9 billion in losses, Citizens will have exhausted its reserves and CAT fund reinsurance.
Help Wanted
Although they don’t have the concentration of homes in high-risk areas as Citizens does, many private insurers will turn to their CAT fund reinsurance if a storm produces damages in this range.
CAT Fund

Assessments = Tax
If Citizens and private insurers need more than the $8.6 billion the CAT fund has in reserves, the fund will have to borrow money in the bond market to pay the rest of the claims up to its $17-billion limit.

To pay off the bonds, the CAT fund will levy an assessment — a tax — on all Florida residents’ insurance policies, including home, car and condo. The only policies exempt are med mal, workers’ comp, accident and health insurance and federal flood insurance.

A key question is how much the CAT fund will be able to raise in the bond market if it needs money. The CAT fund in May estimated that because of bond market intricacies, it would come up $1.4 billion short if it had to sell bonds to cover all its $17-billion exposure.

DISASTER: $16.5 billion and up
total claims to both Citizens and private insurers

Double Whammy
Once Citizens burns through its reserves and CAT fund reinsurance, its customers begin facing taxes:
> A possible assessment from the CAT fund to pay for CAT fund bonds
> A surcharge of up to 45% from Citizens
Coming Up Short
If the CAT fund can’t meet its obligations, insurance companies won’t be able to pay claims. If the CAT fund comes up 25% short of its goal, for example, 24 of Florida’s 50 top insurers — representing 2.2 million policies and 35% of the market — would become insolvent. If a large number of insurers becomes insolvent, Florida enters uncharted territory. Will the nation’s taxpayers bail us out? Will companies with out-of-state parents get bailed out by them?
Taxing Everybody
If the 45% surcharge on Citizens policyholders isn’t enough to pay off claims from the coastal account, Citizens can charge non-Citizens policyholders a one-time 2% tax on their home insurance premiums.
With many companies insolvent, customers won’t be able to pay for repairs to their homes. Meanwhile, policyholders will face:

  • Assessments to pay for CAT fund bonds
  • A one-time 2% tax on their property insurance premium from Citizens
  • An ongoing tax — the maximum 10% is unlikely — on home, auto, condo and business policies to cover Citizens’ shortfalls
Wait. There’s More
If Citizens needs even more money to pay claims, it can hit all policyholders in Florida, Citizens and non-Citizens customers alike, with another tax on their home, auto and other insurance policies. That emergency assessment can run annually for up to 30 years. The 10% maximum tax is unlikely; a 1.77% assessment would raise $7.4 billion — enough to cover a 1-in-100-year storm.
Backup Taxes
If insurance companies fail, they’re taken over by the Florida Insurance Guaranty Association.
In general, it caps what it will pay at $500,000 on a residence. If FIGA runs out of money, it also sells bonds and imposes a tax to pay them. FIGA can tax Citizens policyholders but can’t take over Citizens.

Final Reckoning

  • Current premium: $2,500
  • One-time tax: $1,125
  • Annual tax: $161
  • New annual bill:
    $3,786, falling to $2,661
    in subsequent years

(Assuming a Citizens surcharge, an emergency assessment from Citizens and assessments from both the CAT fund and FIGA)

Final Reckoning

  • Current premium: $2,500
  • One-time tax: $50
  • Annual tax: $161
  • New annual bill:
    $2,711, falling to $2,661
    in subsequent years

(Assuming assessment from Citizens, the CAT fund and FIGA)

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