Here we are 17 years after Hurricane Andrew and still working on a "fix'' for Florida's beleaguered property insurance market. How else can you explain why the biggest private insurer in the state decides to throw in the towel and Florida taxpayers gave Warren Buffett's Berkshire Hathaway $224 million last year just for the right to borrow up to $4 billion to help pay claims out of the Florida Hurricane Catastrophe Fund if necessary? We fortunately didn't need the loan after a mild season, but Berkshire still got the cash. • For newbies to the scene and old hands at racing to put up plywood as a Cat 4 gears up in the gulf, here's a state-of-the-market primer.
Florida's modern hurricane history has two watershed moments: Hurricane Andrew in 1992 exposed just how expensive a single storm can be and the 2004 season exposed that Florida is vulnerable to being beaten up by multiple major storms in a single season.
With (until recently) a growth spree throughout Florida, the state has amassed $2 trillion worth of property exposure. As of a 2006 national comparison, Floridians were paying the third-highest property insurance premiums in the country.
Where we are now
Florida's insured masses are in one of the most challenging periods on record and it has nothing to do with recovering from hurricanes.
Heading into the 2009 season, state-run Citizens Property Insurance still has about 1 million policies despite attempts to entice a growing network of Florida-based insurers to take policies out of Citizens. With the exit of State Farm's 1.2 million policies (700,000 of them covering homeowners), Citizens could continue to swell if other insurers statewide don't pick up those State Farm discards. Why worry about Citizens' exposure to risk? Because under state law, everyone who pays insurance premiums in Florida could be assessed if Citizens is swamped with claims beyond its reserves.
A global credit crunch, meanwhile, is crimping the Florida Hurricane Catastrophe Fund's ability to borrow billions of dollars. The state-run Cat Fund, which insurers pay into, is tapped to help pay claims after damages reach certain thresholds. The state was potentially on the hook for $28 billion last hurricane season, but had access to only about $13 billion to reimburse insurers. This season it faces a $17 billion shortfall.
... A Category 2 or 3 storm churns through the mouth of Tampa Bay causing $20 billion in damage… Insurers would be responsible for covering about the first $7 billion in damage combined before the Florida Hurricane Catastrophe Fund kicks in. Then the Cat Fund would pay out 90 percent of claims and insurers 10 percent up to a certain level. What that level will be is the looming uncertainty. Depending on the availability of financing in the bond markets, the Cat Fund hopes to have capacity for handling at least $10 billion to $13 billion in claims as its 90 percent share. Beyond the Cat Fund, private insurers would rely on other reinsurance coverage they have arranged.
... We have a repeat of 2004 and four decent-sized hurricanes hit the state:
For the first two storms, the same scenario is in place: insurers cover the first $7 billion in damage before the Cat Fund can be tapped. After the third storm (and any subsequent storm), insurers would only have to pay a third of that $7 billion level before the Cat Fund is activated.
... A massive Cat 5 storm hits Miami, causing upward of $50 billion in damage: Much depends on how much the Cat Fund can line up in borrowing power and how much reinsurance the cluster of private insurers in the state can line up. But at some point, likely well before a $50 billion storm, private insurers will run out of reserves, exhaust their reinsurance and fail. There will be heavy lobbying for federal intervention but Floridians could still face a hefty tab. After the hurricanes of 2004-05, three Poe Financial Group insurance companies failed in the largest insurance insolvency in state history. That debacle left Floridians who pay property, boat and auto insurance on the hook for a growing tab of assessments in the hundreds of millions of dollars.
For years, politicians have tried unsuccessfully to create a national catastrophe fund or mega-regional catastrophe fund that would spread the risk of a major hurricane, reducing costs to Floridians. On the other extreme is the notion of floating a catastrophe bond of $75 billion on the global free market in the event of "the big one.''
Neither idea has made headway, prompting much more modest "fixes.'' One likely scenario is ending Citizens Property Insurance's rate freeze. Hiking Citizens' rates would both bolster its reserves and encourage homeowners to look harder on the open market for coverage. Florida Insurance Commissioner Kevin McCarty is also lobbying the federal government to provide a $17 billion line of credit in case the Cat Fund can't borrow enough money from the private market.
Big price tags
Here are the most expensive states for homeowners insurance in 2006, by average premiums.
|5. District of Columbia||$963|
Source: National Association of Insurance commissioners