Making Sense of the Mysteries of Florida

Making Sense of the Mysteries of Florida | Risk & Insurance | No discussion of property-catastrophe reinsurance rates can be complete without pondering the mysteries of Florida policymakers, whose state lies at the epicenter of natural disaster paths but who are determined that property owners keep insurance rates comparable to other areas of the country.

By STEVE TUCKEY, who has written on insurance issues for a decade for several national media outlets

Three years ago, the Sunshine State expanded the capacity of its reinsurance fund of last resort, the Florida Hurricane Catastrophe Fund, in an attempt to provide primary insurers with the coverage they need to meet regulatory and ratings agencies solvency requirements, much to the chagrin of the traditional reinsurance industry.

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Today, it is generally agreed that fund is about $18 billion short of its liabilities and is not able make it up due to the constriction of the capital markets in the aftermath of the current crisis. The Florida legislators, meeting until early May, face a number of unpalatable choices, according to William Stander, Tallahassee-based assistant vice president for the Property Casualty Insurers Association of America.

"The most likely scenario will be for the legislators to somehow slowly shrink the liability of the FHCF," Stander said.

Primary insurers will then face ratings agency pressure to make up that lost capacity in the private marketplace, and so then question then becomes whether or not the regulators will allow companies to pass on those increased costs. If the current wrangle of the exit terms of State Farm leaving the state is any indication, that scenario seems unlikely.

Florida Gov. Charlie Crist could then attempt some sort of pre-event financing, like the state did last year when it purchased a $224 million financial instrument from Warren Buffett, allowing access to billions in case of a catastrophe.

"But that would cost a lot more than $224 million this year," says Stander.

Florida policymakers can only hope for a repeat of last year. The Insurance Services Office reported $25.2 billion in catastrophe losses across 37 events affecting residents and businesses, which was the fourth highest severity figure in a decade but the No. 1 in frequency. But Florida did not even rank in the top five affected states. Texas led the way with $10.2 billion in losses, followed by Louisiana with $2.2 billion and Minnesota with $1.6 billion.

Simmons says that the demise of Freddie Mac and Fannie Mae and the rise of their successor agencies in the public or private sector may put a new emphasis on earthquake insurance that does not currently exist now, which in turn could take some pressure off of Florida homeowners with their required burden of hurricane coverage. The severe temblors in China in May of last year only served to highlight this risk like never before.

April 15, 2009

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