Property Insurance: General

Written for Florida Insurance Council members by John Rollins of Rollins Analytics in Newberry, Florida

Property market conditions in Florida are poor by several economic measures.  Citizens Property Insurance Corporation, a risk pool backed by nearly all Florida taxpayers, remains the largest property insurer in Florida yet is billions of dollars underfunded for major hurricanes.  Many national insurers are overexposed in Florida, and reducing their market commitment.  Florida-based property insurers have stepped into the breach and collectively written millions of policies since the 2004-05 hurricanes. Florida-based insurers now face a one-two punch of increasing claims costs and declining premiums. This has resulted in the loss of precious claims-paying capital (surplus) and even some insolvencies.

Average premiums per policy have declined over 20% since 2007 and are still dropping. Florida insurers are getting paid over 20% less now for taking roughly the same risk they did when they paid out over $30 billion to rebuild the state after the hurricanes of 2004-05.

Florida-based insurers are currently paying out over $1.20 for every premium dollar written – not a path to success in any business.  The losses have eroded their policyholder protection reserves by over $100 million in 2009 alone.  These losses are driven by several factors.

One major factor behind the premium decline is wind loss mitigation credits of up to 90% per policy.  These credits are aggressively marketed by some inspection firms; a few bad apples perform sloppy or even fraudulent work, misleading consumers to think their homes are much safer than they may actually be.  Expected hurricane losses have not declined proportionately with premiums.

Insurers and the Florida Hurricane Catastrophe Fund continue to face mounting reopened Hurricane Wilma claims, often driven by aggressive public adjusters.  All Floridians pay when a few milk the system. The FHCF is still struggling to close claims from five seasons ago, recently asking for an additional $700 million funded by an increase and extension of the current assessments - hurricane taxes added to nearly all insurance policies - to the year 2016.  Check the front page of your home, auto, and business policies to see how much you are paying.

Finally, sinkhole claims often based on minimal evidence of damage continue to mount and spread around the state, again abetted by public adjusters.  Insurers must spend thousands on geologists and engineers to investigate small cracks and often pay tens of thousands in “replacement costs” to  homeowners who never repair their properties, as current law – unlike that of any other state - prohibits “holdback” of any claim amount until the repair is actually contracted.

Fortunately, legislators have addressed most of these cost drivers in CS/SB 2044, CS/SB 2108 and CS/HB 477. These initiatives improve the wind mitigation inspection process and paperwork, allow insurers to quickly agree with regulators on the proper rate adjustments for reinsurance costs and claims trends each season, tighten the neutral evaluation process for sinkhole claims, and bring Florida law back toward other states regarding management of replacement cost claims.

Most consumers will never get a warm, fuzzy feeling about paying for property insurance.  But we Floridians need to make sure an insurance promise on our largest asset – our homes – is real and strong when bad luck or disaster strikes.  Your legislators are making a good start in returning the market, particularly our hometown insurers, to stability and health.

The FHCF has a $4.5 billion cash balance (which includes $1.5 billion in premiums collected for the 2009/10 contract year), and has access to $3.5 billion in pre-event notes, providing the fund with approximately $8 billion in liquidity, plus the expectation of being able to bond approximately $11 billion

From the Senate Banking & Insurance Committee staff analysis on CS/SB 1460, February 16, 2010

The Florida Hurricane Catastrophe Fund (FHCF or “fund”)

The FHCF is a tax-exempt fund created in 1993 after Hurricane Andrew as a form of mandatory reinsurance for residential property insurers.3 All insurers that write residential property insurance in Florida are required to buy reimbursement coverage (reinsurance) on their residential property exposure through the FHCF. The FHCF is administered by the State Board of Administration (SBA) and is a tax-exempt source of reimbursement to property insurers for a selected percentage (45, 75, or 90 percent) of hurricane losses above the insurer’s retention (deductible).4

The FHCF provides insurers an additional source of reinsurance that is significantly less expensive than what is available in the private market, enabling insurers to generally write more residential property insurance in the state than would otherwise be written. Because of the low cost of coverage from the FHCF, the fund acts to lower residential property insurance premiums for consumers. The FHCF must charge insurers the “actuarially indicated” premium for the coverage provided, based on hurricane loss projection models found acceptable by the Florida Commission on Hurricane Loss Projection Methodology.

Insurers must first pay hurricane losses up to their “retention” for each hurricane, similar to a deductible, before being reimbursed by the FHCF coverage. The retention is adjusted annually
based on the FHCF’s exposure. For 2009 hurricane season, the retention was approximately
$7.223 billion for all insurers combined.

For the 2009 hurricane season the FHCF provided $17.175 billion in mandatory coverage for
186 insurers. That amount is adjusted annually based on the percentage growth in fund
exposure, but not to exceed the dollar growth in the cash balance of the fund. The maximum
coverage amount for each insurer is based on that insurer’s share of the total premiums paid
to the fund.

Legislation enacted in 2007, increased the coverage limits of the FHCF for the 2007, 2008
and 2009 hurricane seasons by adding two additional layers of optional coverage that
property insurers may buy: Temporary Increase in Coverage Limit Options (“TICL”), that
allows residential property insurers to purchase additional reinsurance above the FHCF
mandatory coverage and Temporary Emergency Additional Coverage Options (“TEACO”), that allows such insurers to purchase additional coverage below each insurer’s market share of
the FHCF retention.5

In 2009, the Legislature implemented a provision to reduce the FHCF’s exposure and payout by phasing out the TICL layer of coverage over a 6 year period at a rate of $2 billion a year until the TICL coverage is completely phased out in year 2014.6 The legislation increased the price of the TICL layer by an additional multiple each year until TICL is eliminated in 6 years. The fund was also authorized to implement a "cash built up" factor which would increase the reimbursement premiums that the fund charges property insurers for the mandatory layer of coverage provided by the fund.

The fund also permits qualified “limited apportionment companies” (generally, insurers with
$25 million in surplus or less), insurers that purchased this layer of coverage in 2008, and
companies that qualified for the insurance capital build up incentive program, to purchase
coverage from the fund that reimburses the insurer for up to $10 million in losses, for each
of two hurricanes. As in past years, the coverage is priced at a 50 percent rate on line
(e.g., $5 million premium for $10 million in coverage) with a free reinstatement for a
second event.

The insurer’s minimum retention level for such coverage remains at 30 percent
of the company’s surplus. Similar coverage was offered to these insurers in 2006, 2007 and
2008. In 2009, the $10 million coverage option was purchased by 55 companies, for which
$110.3 million in premium was collected.7 This coverage option expires by operation of law
on December 31, 2011.

Reimbursements to insurers for losses above the current cash balance of the fund will have
to be financed through bonding. If a large storm triggered the full capacity of the FHCF,
bond issues totaling over $19 billion could be necessary for the fund to meet its maximum
obligations. Bonds would be funded by an assessment of up to 6 percent of premium on most
lines of property and casualty insurance for funding losses from a single year, and up to 10
percent of premium for funding losses from multiple years.

The State Board of Administration, as administrator of the FHCF, has considered options for purchasing reinsurance and risk transfer products available from the capital markets.

In 2009, the mandatory layer of FHCF coverage totaled $17.175 billion, for which insurers
were charged $1.069 billion in premiums. The optional TICL coverage was purchased by 73
insurers for the 2009 hurricane season. The FHCF provided $5.497 billion in TICL coverage in return for premiums totaling approximately $273 million. For the third consecutive year the
TEACO coverage was not selected by any insurers, presumably due to the cost, which is much higher than the mandatory coverage and the TICL coverage.

The FHCF has a $4.5 billion cash balance (which includes $1.5 billion in premiums collected for the 2009/10 contract year), and has access to $3.5 billion in pre-event notes, providing the fund with approximately $8 billion in liquidity, plus the expectation of being able to bond approximately $11 billion.

The total liabilities of the FHCF could have been up to approximately $23 billion based on
actual coverage options selected for the 2009/10 season. Losses above the fund’s liquidity
level are intended to be financed through the issuance of revenue bonds. However,
instability in the worldwide financial markets has greatly reduced the fund’s ability to
raise money through bonding. Based on historical loss patterns, the fund’s current liquidity
would enable it to timely reimburse insurers for the first 3 to 6 months after a hurricane
event, before its $8 billion in liquid resources would be exhausted, but it is anticipated
that the FHCF could issue $11 billion in bonds given the current financial markets over the
course of a 12 month period after the event.

The FHCF’s estimated $19 billion in capacity would fall short of funding the maximum statutory limit of $23 billion of coverage that was purchased for the 2009-2010 contract year. However, improvements in the financial markets could increase the fund’s bonding capacity and allow it to reach its maximum statutory limit of capacity. Federal legislation (Catastrophe Guarantee Obligation Act, see S. 886 and HR. 4014) has been filed that if passed would result in the federal government guaranteeing FHCF bonds.

3Section 215.555, F.S.
4 Retention is defined to mean the amount of losses below which an insurer is not entitled to reimbursement from the fund. A retention is calculated for each insurer based on itsproportionate share of fund premiums.
5 Ch. 2007-1, L.O.F. The TEACO options allow an insurer to select its share of a retention
level of $3 billion, $4 billion, or $5 billion, to cover 90 percent, 75 percent, or 45
percent of its losses up to the normal retention for the mandatory FHCF coverage. This
coverage option expires by operation of law on May 31, 2010.
6 Ch. 2009-87, L.O.F.
7 Forty two insurers were approved by the Office of Insurance Regulation as limited
apportionment companies; eight insurers qualified as purchasing FHCF coverage in 2008 and
five companies qualified for the insurance capital build up incentive program.