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Hurricane season: Amid threat of storms, doubt over property insurers

This high-resolution satellite image from Sept. 26, 2004, shows Category 3 Hurricane Jeanne slicing across Florida, the fourth hurricane to hit the state in a six-week span.
This high-resolution satellite image from Sept. 26, 2004, shows Category 3 Hurricane Jeanne slicing across Florida, the fourth hurricane to hit the state in a six-week span.
Published May 22, 2015

One of the very few Florida property insurers that is "A" rated by one of the state's leading private rating firms is rapidly downsizing. State-run Citizens Property Insurance is busy handing hundreds of thousands of its Florida policyholders in bulk to young, lower-rated small insurers in the state.

Many have never handled a hurricane claim.

If that scenario gives pause on the eve of Florida's 2015 hurricane season, it should.

If this season passes without a major storm making landfall here, Citizens officials will pat themselves on the back for reinjecting Florida policyholders — their former customers — back into the hands of private insurers. Reviving a competitive market for private insurance remains, after all these years, the goal in a state that suffered Hurricane Andrew in 1992. That devastation sent major insurance companies fleeing the state and, more than two decades later, saw the rise of a large crop of small private insurers in the state willing once again to test the financial odds against Mother Nature.

And should a hurricane wallop a major metro area in Florida this year? Young property insurers that loaded up quickly on Citizens castoff policyholders may find themselves overwhelmed —and Citizens reinheriting many customers it was so quick to jettison.

Welcome to the annual crapshoot that is the Sunshine State's hurricane season.

After almost a decade without a nasty punch by a hurricane, there's a natural tendency to say "So what and who cares?" when it comes to gauging the bench strength of Florida's private property insurance market.

This year, there's good and bad news.

On the bright side, the board of Citizens, still Florida's largest property insurer, recently approved spending $300 million to buy reinsurance, or backup coverage, worth $3.9 billion that officials say should help it avoid bailout fees even after a once-a-century storm.

The not-so-good news is that $300 million is now spent money that otherwise might have been put in the company's surplus to grow and pay claims in future years. Instead, Citizens is better protected against possible assessments to its customers and those of other insurers from a storm with an estimated 1 percent chance of happening this year.

Back on the bright side, Citizens has been busy "depopulating" its customer base, shrinking its number of Florida policyholders from a high of 1.5 million in 2005 to as few as 600,000 in March. Citizens was originally created as an "insurer of last resort" — a provider of property coverage to Floridians who could not find a private insurer. But Citizens got mired in politics in an era of price gouging by private insurers. The result: Citizens' rates became cheaper than private alternatives and the "last resort" insurer became a "first choice" for many. Now Citizens, down 60 percent, hopes to be on its way to further downsizing and — dare we say it — perhaps even going (willingly) out of business someday if the private market rebounds.

The not-so-good news? Most of the heavyweight and experienced property insurance companies — including State Farm and Allstate — that once dominated the Florida property insurance business are nowhere to be found or, at best, are selectively dipping their toes back into the state market.

That leaves a slew of smaller companies — some less than a year old — to absorb, service and be financially responsible for the hundreds of thousands of policyholders Citizens has handed off in bulk.

Citizens has proved clumsy at best in trying to hand off policyholders to private insurers, in the process alienating many Florida homeowners.

Are these newer insurers up to the task?

That's proved to be a hot topic for debate in recent years. State regulators swear they are monitoring the financial soundness and management expertise of these youngster companies.

Yet according to one market analysis, of the 761,000 policies that were transferred out of Citizens between 2007 and 2011, nearly 40 percent have returned, as insurers went under or wary customers dropped the new coverage.

Last year, Florida Insurance Commissioner Kevin McCarty pointed out that over the previous decade, 12 homeowners insurance companies failed in Florida, and eight of those had assumed policies from state-backed Citizens Property or its predecessor.

His point? That's not a big trend given the 119-plus companies providing homeowners coverage in Florida.

Just keep in mind that virtually no hurricanes have hit Florida in the past 10 years, which might make one wonder: How did 12 insurers manage to fail in such a low-risk period?

McCarty also took steps in recent years to raise the minimum capital requirement that any new insurance company must meet. That minimum is $15 million. Before it was just $5 million.

That may help. But those numbers are chicken feed should a Category 5 hurricane strike one of Florida's major metro areas. Such a catastrophe would throw the state's fragile insurance market back to the drawing board in a hurry.

Florida's hardly alone in its insurance challenge, as other Gulf Coast states learned from Hurricane Katrina in 2005, and New Jersey suffered in 2012 from "Superstorm" Sandy — the second-costliest hurricane in U.S. history. But as Florida grows — now officially the country's No. 3 state in terms of population — it's inevitable that more people and their property will stand in harm's expensive way.

Contact Robert Trigaux at rtrigaux@tampabay.com. Follow @venturetampabay.