By: Zac Anderson
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.
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.
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.