6/9/2012
By: Zac Anderson
Herald Tribune
Florida's weak private insurers will need a bailout
equal to or greater than Citizens Property Insurance
after most big hurricanes, according to a new report
that contradicts much of the rhetoric surrounding
property insurance reform in Florida.
State leaders are pushing to shrink state-run
Citizens, saying that the company is a grave financial
risk because it could run out of money to pay claims
from a monster storm.
But the new report and updated Citizens financial
information indicate shaky private insurers are as much
or more of a financial risk in the two hurricane
scenarios most likely to overwhelm claims-paying
capacity.
Released in April, the largely overlooked report from
the Office of the Insurance Consumer Advocate calculated
how much Floridians are likely to pay in post-hurricane
assessments — the taxes levied on insurance policies
throughout Florida to cover claims when Citizens or
private insurers run out of cash.
In the most likely scenario, Citizens would not need
any assessment money, while a $200 million bailout would
be needed to pay the claims of private insurers that
fail.
On the other hand, Citizens would trigger billons
more in assessments than private insurers in a rare
1-in-100 year storm.
Citizens has been growing reserves at a rapid clip
and can now handle all but the most catastrophic storms
without resorting to post-hurricane assessments.
By contrast, many private insurers in Florida sock
away much less in reserves and some are likely to
collapse after smaller storms, according to the consumer
advocate's report.
The data summarizing likely private company failures
is rarely published and almost never mentioned by state
leaders and insurance experts. It does not identify the
insurers most at risk.
Such data suggests that the drumbeat to shrink
Citizens ignores an important point: Moving customers
into poorly capitalized private companies may actually
increase the likelihood of post-hurricane assessments.
“If you are worried about failures you have to worry
about the private as well as the public, especially if
the private companies are more of a risk in some of
these scenarios,” said J. Robert Hunter, insurance
director for the Consumer Federation of America.
Weak insurers
Under the most likely assessment scenario analyzed by
the consumer advocate — a storm causing $21 billion in
damage — Citizens has enough reserves to pay all claims
while private company failures would generate $200
million in statewide assessments.
Under the second scenario — a $35 billion disaster,
larger than Hurricane Andrew, the 1992 storm that
leveled areas in South Florida — Citizens and the
private insurance market each would be short roughly
$1.6 billion, according to the consumer advocate's
report and updated financial information on Citizens'
reinsurance purchases.
Only in the worst-case scenario — a storm causing $50
billion in damage — is Citizens a much larger financial
risk. Adjusting for reinsurance purchased after the
consumer advocate's report was filed, Citizens'
assessments would total roughly $10.27 billion, about
twice the $5.1 billion needed to cover claims from
failed private insurers.
Part of that difference, though, isn't because of
less risk: the state fund is not obligated to pay more
than $500,000 per claim for private policies, while
Citizens' losses are not capped.
There is only a 1 percent chance of a $50 billion
storm, compared with a 4 percent chance for a $21
billion storm.
That means private insurance customers are more
likely to need some level of bailout when their company
goes bust after a major disaster.
But that is not the message coming out of
Tallahassee.
Bullseye on Citizens
Gov. Rick Scott and many lawmakers contend that
Citizens — the state's largest insurer with 1.45 million
customers — unfairly competes with the private market
with rates that are too low. They say raising Citizens'
rates would bring more competition back to Florida's
insurance market, spreading risk and ultimately
benefiting consumers.
They cite the potential for post-catastrophe
assessments in justifying measures to shrink Citizens.
Asked about the consumer advocate's report Friday,
Scott focused on Citizens, questioning whether insurance
policy holders would be able to afford the company's
assessments.
“How do we know? We haven't done surveys to know how
many people will have the money,” the governor said.
Last week 25 lawmakers signed a letter arguing that
Citizens is “not fiscally sound” and encouraging the
company's appointed board to “eliminate the threat of
tax increases” from post-hurricane assessments.
Some of those lawmakers said last week they support
shrinking Citizens and increasing rates regardless of
whether similar assessments would still be levied for
private companies.
“I would take the private company
route because at least we are still making steps towards
getting away from a government solution,” said Rep.
Scott Plakon, R-Longwood.
Rep. Jim Boyd, R-Bradenton, agreed.
“I still don't believe government ought to be the
largest insurance carrier in the state of Florida,” said
Boyd, an insurance agent who also signed the letter.
Hunter, the consumer advocate, said lawmakers are
engaging in “a very biased discussion.”
“It's basically philosophical: They don't like the
idea that the state government is competing. They don't
like the idea the state government is doing the right
thing and they use smoke and mirrors to confuse things,”
he said.
Vulnerable companies
The assessment risk from Florida's private insurance
market is partly the result of regulations that permit a
host of small, poorly capitalized companies.
Even big players such as State Farm have set up
Florida-only subsidiaries that maintain much smaller
reserves.
“The state has allowed a lot of these small,
single-state companies to come into the marketplace and
there is a particular concern with some of those
companies as to whether they would have enough capacity
to cover a major storm,” said professor Robert Klein, an
expert on catastrophe insurance at Georgia State
University.
During a meeting last week on how to shrink Citizens,
insurance agents noted that a string of failures among
the start-up companies left consumers shaken.
South Florida insurance agent Phil Lyons said
customers routinely ask of the small carriers: “Are they
going to be around after a hurricane?”
Lyons' answer: “Some of them yes, some of them no.”
“I blame the department of insurance for not properly
monitoring the well being of these carriers,” said
Lyons, president of the Independent Insurance Agents of
South Florida. “If the carriers were monitored closely
and scrutinized it wouldn't be as much of a problem."
Getting tough on the weakest private companies would
improve the credibility of Florida's insurance market,
Klein said, and could reduce the likelihood of
assessments.
But private insurers have fought efforts to give
consumers more information about companies' health. The
industry successfully lobbied lawmakers to eliminate a
grading system that would have issued a report card for
each insurer.
Private insurers in Florida also are no longer
required to carry enough reinsurance to cover all claims
from a 100-year storm.
Office of Insurance Regulation spokesman Jack
McDermott said his agency “has been vigilant in
monitoring solvency including rigorously reviewing
companies' reinsurance programs designed to help
companies pay claims after catastrophic events.”
McDermott noted that capital reserve requirements
increased in 2011 to $15 million for new private
insurers.
But consumer advocates still have doubts about the
direction Florida's property insurance market has taken
in recent years.
“There's a lot of risk in the private market in Florida,” Hunter said.