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Insurers at Risk

6/13/2012

Herald Tribune  

 

Gov. Rick Scott and Florida's legislative leaders have frequently sounded alarms over the potential insolvency of the state-run Citizens Property Insurance Corp.

If a catastrophic hurricane hits, they warn, Citizens' reserves will be insufficient to pay the claims and, by law, it will have to assess insurance policies statewide to make up the difference.

We hope that Scott and the Legislature are just as worried -- if not more so -- about a state agency's report that inadequately capitalized private insurers in Florida are more likely than Citizens to fail and force post-hurricane assessments.

The report, by the state's Office of the Insurance Consumer Advocate, should cause the governor and Republican lawmakers to:

1. Rethink their ideologically driven campaign to shrink Citizens -- by raising its rates and reducing its coverage -- and push consumers toward undercapitalized private insurers.

2. Demand tighter state regulation and monitoring of Florida's private insurance market.

The likely scenario

The Consumer Advocate's report, "Potential Assessments from Florida Hurricanes," issued in April, found that private insurers "are as much or more of a financial risk" as Citizens in the event of a major hurricane, the Herald-Tribune's Zac Anderson noted in an article published Sunday.

In the most likely scenario -- a storm causing $21 billion in damage -- "Citizens would not need any assessment money, while a $200 million bailout would be needed to pay the claims of private insurers that fail," Anderson reported.

Only in the Consumer Advocate's worst-case scenario -- a hurricane causing $50 billion in damage -- would Citizens pose a much greater financial risk than private companies. Citizens would need to make assessments of roughly $10.3 billion, double the estimated $5.1 billion in assessments required to cover private insurers' claims.

Damage of such magnitude would exceed that of Hurricane Andrew, the Category 5 storm that devastated parts of South Florida in 1992. It caused about $26 billion in damage, or roughly $42 billion in today's dollars.

Such a storm is expected to occur once every 100 years, the Consumer Advocate pointed out, while the likelihood of the $21 billion scenario is once every 25 years.

The reason that Citizens -- despite the criticism by Scott and others -- is better able than private insurers to handle a major hurricane is partly the luck of the weather, and partly the failure of Florida's regulatory system.

Because Florida has gone an unprecedented six years without a hurricane strike, Citizens has been able to accumulate $5.6 billion in reserves. Citizens, like some private insurers, also has purchased reinsurance from the state-run Florida Hurricane Catastrophe Fund. The Cat Fund, too, has grown stronger in the absence of storms.

In contrast, numerous small, undercapitalized insurers operating in Florida are in perilous financial condition.

The Pulitzer Prize-winning series by the Herald-Tribune's Paige St. John depicted a state insurance regulatory apparatus that not only permits private insurers to carry dangerously low reserves, but encourages them to take on more homeowners policies than they can safely cover.

Smaller reserves

In the wake of Andrew and continuing through the past decade, major insurers have either left Florida or sharply reduced their exposure in areas, like Sarasota, Manatee and Charlotte counties, that are on or near the coast.

Into the breach have stepped small, undercapitalized companies, many of which operate only in Florida. Some major insurers, such as State Farm, have even set up Florida-only subsidiaries that maintain much smaller reserves. These companies now hold almost three-quarters of the homeowners' policies in Florida.

Florida's private insurers have collected record amounts in premiums during the recent, hurricane-free years but apparently haven't used the money to build adequate reserves.

Instead, as the St. John series revealed, they've shifted profits to affiliated management companies and reinsurance providers. Having removed the gains from their books, they seek even higher rates from the state.

Unfortunately, state officials appear receptive to the idea.

Double standard

Scott and legislative leaders have consistently pushed to increase premium rates for Citizens, which, with 1.45 million policyholders, is the state's largest single insurer. They contend that the higher rates will create more competition and encourage larger insurers to return to the Florida market.

Yet, major insurers offer no assurances that they will write more policies in the state in return for higher rates.

And, while the smaller companies may charge rates that are more competitive with Citizens', neither Scott nor the Legislature has shown any indication of requiring that private insurers show they have resources sufficient to cover the policies they write.

So far, such hard-nosed demands are directed only at state-run Citizens. In light of the Insurance Consumer Advocate's report, state leaders should explain why a public insurer is held to a high standard, but private insurers get a pass.