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Above:  Colodny, Fass, Talenfeld, Karlinsky & Abate's Fred Karlinsky

Florida's property insurance reserves are at risk

Brian Bandell

Senior Reporter - South Florida Business Journal

Legislators were warned that a major hurricane could blast a huge hole in Florida's property insurance reserves, but little action was taken to address the problem during the session.

That means state-run Citizens Property Insurance Corp. and the Florida Hurricane Catastrophe Fund will have to hope for another light hurricane season and, in the event of a major storm, that Wall Street will have an appetite to finance billions of dollars in bonds funded by Florida insurance assessments. In the worst-case scenario - a one-in-100-year storm or multiple storms of that equivalent - expensive assessments would be charged to all Florida policyholders across most lines of insurance.

A February report by the Florida Financial Services Commission detailed just how severe the assessments could be. While Citizens could handle a one-in-50-year storm causing a $12 million shortfall with minimal assessments, a one-in-100-year storm causing a $6.4 billion shortfall in Citizens would lead to a 45 percent premium assessment for Citizens policyholders, an 8 percent assessment for non-Citizens policyholders and a 1 percent emergency assessment for all people with insurance.

For the Cat Fund, which provides reinsurance at discounted rates to both Citizens and private insurers in Florida, the projected $11.2 billion shortfall from a one-in-50-year storm would cause a nearly 3 percent assessment for all policyholders.

Only workers' compensation and medical malpractice insurance policies would be exempt from such assessments. Since homeowner and condominium association insurance policies would also be assessed, those living in such communities could get hit twice.

"Do people who are insured with Citizens really understand that they run the risk of getting a big assessment? I kind of doubt it," said Roger Desjadon, CEO of Boca Raton-based Florida Peninsula Insurance Co. "Do you think people with auto policies know it?"

The problem is that Citizens policyholders are not paying enough to cover the risk of their insurance, Desjadon said. Yet, those who choose to go with private insurers and pay the true cost of their policies still face the risk of getting hefty assessments because of the risks taken at the state-run insurer, he added.

Fred Karlinsky, a shareholder with Fort Lauderdale law firm Colodny Fass Talenfeld Karlinsky & Abate and general counsel for the Florida Property & Casualty Association, said the private insurance industry tried to persuade legislators to address the overexposure of Citizens and the Cat Fund to a major claims event, but there was not much appetite to tackle the problem in an election year.

"There are pitfalls everywhere you look," Karlinsky said. "The system needs to be looked at in total .... We aren't charging enough."

In 2006, then-Gov. Charlie Crist countered major property insurance rate increases - following several active hurricane seasons - by expanding both Citizens and the Cat Fund to effectively lower rates. Citizens had its rate increases capped at 10 percent a year, no matter the risk of its portfolio, and all insurers were forced to buy a larger portion of their reinsurance from the Cat Fund at discounted rates.

After six years without a significant hurricane, the cash positions of both Citizens and the Cat Fund have improved, but not nearly enough. Cat Fund COO Jack Nicholson explained that one of the biggest uncertainties for their ability to cover claims is Wall Street.

"In October 2006, we used to think we could issue $20 billion in debt, but after the subprime meltdown, our underwriters said we could only issue $3 billion in debt," Nicholson said. "It has become more difficult to finance because of volatility of the markets .... If you were an investor and wanted to buy, you will ask a lot of questions, especially if you see the name 'hurricane' and 'catastrophe' in the issuance."

In October, the Cat Fund discovered that its capacity to issue bonds was $3.2 billion less than it originally projected. That means both private insurance companies and Citizens did not have as much reinsurance as they thought, and a massive storm could have cut into their cash unless they were able to buy private reinsurance, Nicholson said.

Nicholson is worried about a "double whammy," in which the Cat Fund could not finance enough to fully pay Citizens for claims and, therefore, Citizens had a larger cash hole than before and it was unable to tap the bond market to fill it. The FFSC study did not consider that scenario. Nicholson said the chances of that happening in any one year are small, but very real. It could also occur after multiple years of devastating storms.

"Citizens is the state's insurance company, and the people of the state would expect the Legislature to crack the whip and get them paid," Nicholson said. "They may hear of high assessments, but they still expect to get paid. Look what happens when people don't get their houses rebuilt."

Sean Virtue, a regional VP with Mack, Mack & Waltz Insurance Group in Deerfield Beach, said if the Cat Fund explodes, it would take down many private insurance companies, and some would not be able to pay claims. He does not believe Citizens would be successful in issuing bonds to cover claims for a major hurricane.

"When you sell a policy that you can't pay a claim for, that's not a policy, that's a scam," he said. "That is what Citizens is right now."

Virtue recommends that clients use private insurance companies with high financial strength ratings. He believes that rates need to be higher to cover the true amount of risk.

Desjadon said he would like to see the Cat Fund slowly shrink, including the Citizens portion, to reduce exposure, even if it means higher rates.

Policyholders of Florida founder Sean Shaw, a consumer insurance dispute attorney from Tampa, recognizes that rates are too low, but he opposes allowing insurance companies to receive massive rate increases. In 2011, the Legislature passed laws that restricted sinkhole claims and were supposed to lead to lower rate and more private competition, but neither of those happened, Shaw said. The Legislature must take steps that reduce the massive exposure to the Cat Fund and Citizens.

"The Legislature is in a tough spot," Shaw said. "They have got to be responsible and do what needs to be done, and I would suggest that they are not."

Find this article at:  http://www.bizjournals.com/southflorida/print-edition/2012/03/23/floridas-property-insurance-reserve.html