March 23, 2014, re-published from the Sun Sentinel
No doubt about it: The proposed transfer of $1.5 billion in risk from the Florida Hurricane Catastrophe Fund to the private, global reinsurance market is bad business for Floridians.
Property owners will be hit by higher premiums. Consumers across the state will face increased risk of assessments attached to their insurance policies. And, private insurance carriers will encounter higher costs for the reinsurance capital they need to pay claims after the wind blows.
Indeed, if CAT Fund Chief Operating Officer Jack Nicholson is permitted to move $1.5 billion into the global, private reinsurance market, the only clear beneficiaries of that action are the reinsurers themselves, based in Bermuda, London and other international locales.
Created in 1993 to stabilized property insurance premiums, the CAT Fund is the strongest it’s been to date. Thanks to the past eight years without a hurricane, the annual funds paid into the CAT Fund by Florida insurance carriers now adds up to about $11 billion. That surplus would not exist if Nicholson and crew previously had been permitted to shift money out of the CAT Fund and into the coffers of reinsurers.
And it makes no sense to start shipping Florida funds to Bermuda now. Especially since such a move means higher insurance rates for Floridians, according to Nicholson’s own recent public admission. We already pay more for property insurance than any other state. With big jumps in flood insurance rates looming on the horizon, Floridians can scarcely afford even modest increases in property insurance premiums.
Besides, the timing couldn’t be worse for Florida’s domestic insurance companies. As they’re heading into negotiations with Bermuda and other reinsurers, excess capacity in the international market is producing lower prices for reinsurance. If the CAT Fund upstreams $1.5 billion into the reinsurance market, that’ll just help them maintain the sky-high rates they’ve traditionally charged just as Florida consumers are poised for some relief.
Florida’s private market continues to grow, and it’s playing a vital role in taking policies out of Citizens Property Insurance Corp., while simultaneously decreasing the risk of assessments on all insurance consumers. The legislature acted boldly last year to reform Citizens while protecting policyholders, and this year balanced reforms for the CAT Fund are already enjoying bipartisan support.
But Bermuda isn’t giving up. They’ve got lots of lobbyists in Tallahassee with lots of cash.
And they’ve got friends in high places. Rep. Bill Hager, R-Boca Raton, is already lining up to help Nicholson and crew’s proposed billion-dollar Bermuda boondoggle. And he knows it’s a gift for Bermuda that will harm Floridians. That’s why he’s reported as saying he and his cronies must be sure to, “manage the message” carefully.
It’s no wonder Hager’s on board — and voters in his district should take note: He makes a living as a reinsurance expert and arbitrator. He works for them.
Even worse for insurance consumers is Hager’s pending bill (H.B. 333) that would permanently reduce the Fund’s capacity by $3 billion, which could easily result in double-digit premium increases down the road in a tight reinsurance market. Thankfully for Florida’s consumers, the legislature in Tallahassee wisely shut down Hager’s pro-reinsurer bills in previous sessions and is unlikely to approve them this year, either.
A short video from The Sunshine State News on YouTube.
FAIR members attend a legislative breakfast with, Senator Brandes, Representative Rodrigues, realtors, and others to prepare for a day of legislative meetings to lobby for the FAIR plan: flood, FIGA, and Florida Hurricane Cat Fund reforms to strengthen our competitive private property insurance market, reduce property insurance premiums to homeowners and businesses, and lower the risk of assessments to Florida insurance consumers.
Special Thanks to John Sebree, Senior Vice President, Florida Realtors
BY FRANK ARTILES
This year the Legislature is considering proposals that, if passed, would give massive subsidies to the private reinsurance industry, paid for by significantly higher rates for policy holders.
These unregulated, largely offshore reinsurers operate with no rate controls or consumer oversight. In stable markets, reinsurance is insurance for insurance companies, policies bought in relatively small amounts to protect carriers from the remote chance of a very large disaster.
The departure from Florida of national brand carriers like State Farm has led to an unstable market. Since 2005, over 2.5 million policies have been cancelled, resulting not only in the growth of Citizens Property Insurance Company but also of private insurance companies.
These Florida carriers now serve over half the homeowner’s insurance market and they are the only remaining private market carriers writing new business. Regulators and rating agencies require companies to annually demonstrate strict financial claims paying ability designed to ensure that they can pay claims from catastrophic storms.
In order to meet these financial requirements, they must purchase reinsurance every year. This additional annual expense for reinsurance is the biggest cause for the explosion in the cost of homeowner’s insurance.
The two sources for this reinsurance are private reinsurance companies and the Florida Hurricane Catastrophic Fund (Cat Fund), a state agency. Private reinsurance is extremely expensive, taking as much as half or more of every premium dollar collected from policyholders.
If there is no major storm, reinsurers pocket the premium. On average, reinsurers charge five times more than the actuarial risk of loss, meaning that 80 percent of the premium charged is pure profit.
The very same national brand carriers that have fled Florida own some of them. State Farm, which has shed hundreds of thousands of Florida policies and continues to write lucrative auto coverage in Florida, is the largest shareholder in Da Vinci Reinsurance, a company specializing in selling reinsurance to start-up Florida-based carriers.
By contrast, reinsurance coverage from the Cat Fund costs much less, as little as 10 percent of the cost of private reinsurance. Also, unlike private reinsurance, unused premiums paid to the Cat Fund are available to pay claims in future seasons.
The reinsurance lobby understandably hates the existence of the Florida Cat Fund. Every dollar of reinsurance purchased from the Cat Fund costs private reinsurers nearly $1 billion in lost profits per year. In an effort to regain lost profits, the reinsurance lobby insists the Cat Fund won’t be able to raise enough bonding money to pay its bills, which they say would result in mass failures of insurance carriers, followed by general disaster and mayhem.
Bonding estimates prepared by market experts show that the Cat Fund has nearly $4.5 billion in excess bonding capacity over two years. But, according to state loss models, a 1:100 year storm (1 percent probability each year) would result in a less than 2 percent Cat Fund assessment on policyholders, about $60 per year for the average household.
A proposal recently debated in the Senate would have raised rates an estimated 5 to 10 percent by reducing the capacity of the Cat Fund by as much as $5 billion per year, coverage that would then have to be purchased from the private reinsurers.
In other words they want policy holders to accept a 100 percent chance of paying on average $150 to $300 per year to avoid a 1 percent chance of paying $60.
This nonsensical approach has already dug a deep hole. Florida carriers have paid $26 billion for private reinsurance over the last seven storm-free years, premiums that could have strengthened cash reserves in the Cat Fund, paid for a repeat of the 2004-2005 storms, and lowered rates by 20 percent, but instead left Florida forever as unregulated payments line the pockets of private reinsurers.
It’s time to stop digging. The consumer group, FAIR (Florida Association for Insurance Reform) has offered a modest alternative, which would expand the Cat Fund by $2 billion. This alone would reduce private carrier property insurance rates by at least 7 percent, making them more competitive with Citizens and giving a boost to Florida’s economy.
State Rep. Frank Artiles, R-Miami, has a Master of Law in Real Property Development from the University of Miami Law School and is a general contractor and public adjuster & appraiser.
In his guest editorial in the Herald Tribune, “If Citizens Loses We Will All Pay,” former Rep. Thomas Danson misstated key facts. The Citizens regular assessment levied on ratepayers with private companies after a major catastrophe is limited to 2% for one year, not a maximum of 18% as he stated. He also refers to over $500 billion of “hurricane risk.” That is actually the total insured value of all properties insured by Citizens. A series of storms would have to strike everywhere in the state all at once and literally level every insured building for that number to have any relevance.
The reality is that if the “big one” hits (a 1:100 year storm), Citizens rate payers are by far the hardest hit. They could see a one-time 45% surcharge on their property insurance bill at their next renewal. Private ratepayers would see a maximum one-time 2% surcharge. Virtually all ratepayers would see assessments from the Florida Hurricane Cat Fund (which backs all property insurers including Citizens) and the Florida Insurance Guarantee Association (FIGA) (which pays claims after private carriers go bust). Using 1:100 year projected total losses from Citizens and the Florida Insurance Consumer Advocate, starting at the second renewal after the storm, total assessments from the three entities would be about 5% a year for 30 years, hardly a scary number. In fact, Citizen’s ratepayers would actually pay more to subsidize losses from private companies than private rate payers to subsidize Citizens losses. Also, Citizens also has more surplus than all of the private carriers combined and is the only company other than USAA that has an A+ rating with the Weiss rating agency. Citizens had one assessment from the 2004-5 storm seasons which expires in a couple of years. FIGA just had an assessment last year when a private carrier went bust. Look for it on your next policy renewal.
Former Rep. Danson’s column is part of an orchestrated effort, a “chicken little” chorus of opinion columns from politicians, right-wing “free market” think tanks, and reinsurance industry shills designed to scare the legislature (about to start session in March) into raising property insurance rates. Already one powerful Senate committee has released a draft bill that would force private carriers to buy more expensive reinsurance, an extra cost that would be passed on to policyholders. Their logic goes something like this: Policyholders should pay 10 or 15% more in ‘reinsurance taxes’ every year (100% chance) to avoid a less than 1% chance of paying 5% more a year in assessments.
A rival proposal from FAIR would lower the rates paid by policyholders by at least 7% by replacing expensive private reinsurance with much cheaper Cat Fund reinsurance, helping to spur the real estate market and the Florida economy in general. It would also make the private carriers much more competitive with Citizens meaning more policies would move into the private market.
Take a moment to contact your legislators as to whether you would rather have a 7% rate cut or pay as much as 15% more in reinsurance taxes:
click here: CONTACT YOUR LEGISLATORS