I want to complement Mr. Lockhart on his clear and concise discussion of this situation. Such a knowledgable and factual encapsulation, without hyperbole or generalization, does a real service to readers. Many thanks.
There is no guarantee whatsoever. What is driving the problem right now is the massive losses the industry has suffered in the last two years. If we look at 2005, which was the worst of the two:
The industry paid $57 billion in catastrophe losses (not counting flood losses, which are covered by the Federal Flood Program), plus all their other normal expected losses;
After all profits from all other lines of property/casualty insurance (excl life and health, which is written by different cos), and after all recoveries from reinsurers, the industry lost $5 billion.
The industry\’s combined ratio
(losses + expenses)/earned premium was 101.9%. 100% is breakeven.
However, the reinsurance indsutry\’s combined ratio was 144.8%.
That is why most reinsurers have abandoned the Gulf States and those very few still remaining have drastically raised their rates.
After the last two years, there simply is not enough capacity in the industry to handle the current windstorm exposure.
Now the real question is why the reinsurers have abandoned these states, and the answer lies in the way the building codes were weakened from the late 60\’s until just after Andrew. There simply is to much construction in Fl and the other Gulf States that will simply blow away if a storm of any strength hits.
Wilma was at best, a minimal category 2 (gusts to 125 mph) storm when it hit S. Florida, and it did $10.3 billion of wind damage. What if it had been a category 3 or 4 (remember when, as it crossed the Gulf toward, us it was, for a while, a Category 5?).
The reinsurers have simply looked at the situation and decided that, until the substandard construction has all blown away, it simply is not possible to make a profit here. In fact, to continue to write would be risking their entire companies.
Avoiding privately owned insurance companies isnt much of asolution either. Citizen\’s, and it\’s counterparts in the other Gulf States, are all technically bankrupt. We are being assesed 6.8% on all property policies to make up for Citizen\’s 2004 deficit. How to recover it\’s 2005 deficit has not yet been decided.
The Florida State Reinsurance Fund, established to offer inexpensive reinsurance to insurers willing to write windstorm insurance in Florida, is also technically bankrupt. It is selling a bond issue to make up it\’s deficit, the bond to be paid back by a 1% surcharge on all policies other than WC and life and health, the surcharge to apply until the bond has been paid off.
So the state run companies are not doing any better, and the surcharges to make up their deficits are piling up, one on top of another.
The Commercial JUA is being set up to offer some coverage to busineses, but it is starting up with $0 in the bank. It has no capitalization at all, no money to start paying claims. Any deficits it runs will be recovered by, you guessed it, more surcharges.
The basic problem underlying all this is simply the tremendous number of buildings built from the late 60\’s until 1994 (and some thereafter, not to mention those off the coast in the panhandle) which have no chance of surviving a serious storm without tremendous damage, and there is no way to fix this problem, until they have all blown away.
All the gubernatorial candidates are blowing smoke into our eyes.
They are all trying to get elected. And there is no other sure fire way to get elected other than give hope to ideas that may be doomed to fail.
I asked about the free-market rate setting b/c that is one of the things I am hearing from Hartwig of III as something that is necessary so that insurance companies can continue to do business in risky areas. The result being that premiums would go up to the point where at least they would break even. While right now as you point out they are losing money.
While its more important that insurance companies at least provide coverage for gulf residents, the problem is that many hope that it becomes affordable enough for poor homeowners.
Because living without proper insurance is far too risky as we are all probably aware.
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Is there any guarantee that this would reduce rates?
I want to complement Mr. Lockhart on his clear and concise discussion of this situation. Such a knowledgable and factual encapsulation, without hyperbole or generalization, does a real service to readers. Many thanks.
Sorry for my haste, but it should read \”compliments\”, and I really mean it.
Government controlled pricing is the only way to go. Commrade Nixon used on sugar in the 70\’s.
Your commrade, Vlad
There is no guarantee whatsoever. What is driving the problem right now is the massive losses the industry has suffered in the last two years. If we look at 2005, which was the worst of the two:
The industry paid $57 billion in catastrophe losses (not counting flood losses, which are covered by the Federal Flood Program), plus all their other normal expected losses;
After all profits from all other lines of property/casualty insurance (excl life and health, which is written by different cos), and after all recoveries from reinsurers, the industry lost $5 billion.
The industry\’s combined ratio
(losses + expenses)/earned premium was 101.9%. 100% is breakeven.
However, the reinsurance indsutry\’s combined ratio was 144.8%.
That is why most reinsurers have abandoned the Gulf States and those very few still remaining have drastically raised their rates.
After the last two years, there simply is not enough capacity in the industry to handle the current windstorm exposure.
Now the real question is why the reinsurers have abandoned these states, and the answer lies in the way the building codes were weakened from the late 60\’s until just after Andrew. There simply is to much construction in Fl and the other Gulf States that will simply blow away if a storm of any strength hits.
Wilma was at best, a minimal category 2 (gusts to 125 mph) storm when it hit S. Florida, and it did $10.3 billion of wind damage. What if it had been a category 3 or 4 (remember when, as it crossed the Gulf toward, us it was, for a while, a Category 5?).
The reinsurers have simply looked at the situation and decided that, until the substandard construction has all blown away, it simply is not possible to make a profit here. In fact, to continue to write would be risking their entire companies.
Avoiding privately owned insurance companies isnt much of asolution either. Citizen\’s, and it\’s counterparts in the other Gulf States, are all technically bankrupt. We are being assesed 6.8% on all property policies to make up for Citizen\’s 2004 deficit. How to recover it\’s 2005 deficit has not yet been decided.
The Florida State Reinsurance Fund, established to offer inexpensive reinsurance to insurers willing to write windstorm insurance in Florida, is also technically bankrupt. It is selling a bond issue to make up it\’s deficit, the bond to be paid back by a 1% surcharge on all policies other than WC and life and health, the surcharge to apply until the bond has been paid off.
So the state run companies are not doing any better, and the surcharges to make up their deficits are piling up, one on top of another.
The Commercial JUA is being set up to offer some coverage to busineses, but it is starting up with $0 in the bank. It has no capitalization at all, no money to start paying claims. Any deficits it runs will be recovered by, you guessed it, more surcharges.
The basic problem underlying all this is simply the tremendous number of buildings built from the late 60\’s until 1994 (and some thereafter, not to mention those off the coast in the panhandle) which have no chance of surviving a serious storm without tremendous damage, and there is no way to fix this problem, until they have all blown away.
All the gubernatorial candidates are blowing smoke into our eyes.
They are all trying to get elected. And there is no other sure fire way to get elected other than give hope to ideas that may be doomed to fail.
I asked about the free-market rate setting b/c that is one of the things I am hearing from Hartwig of III as something that is necessary so that insurance companies can continue to do business in risky areas. The result being that premiums would go up to the point where at least they would break even. While right now as you point out they are losing money.
While its more important that insurance companies at least provide coverage for gulf residents, the problem is that many hope that it becomes affordable enough for poor homeowners.
Because living without proper insurance is far too risky as we are all probably aware.