Florida Insurance System in Better Shape Should Major Storm Hit

August 26, 2009

Florida property insurers are warning residents that a major hurricane is likely this season given the state’s history of storms.

At the same time, the industry says the state-backed catastrophe reinsurance fund, the Florida Hurricane Catastrophe Fund, and the state’s property insurer, Citizens Insurance, are in better shape now than they were a year ago but financial shortfalls still exist.

The Florida Insurance Council, which represents 200 companies that write insurance in the state, has produced a white paper suggesting that the state may soon run out of luck after having gone three years without a major storm. The paper argues that history is not on Florida’s side. It notes that since the year 1900, on average, a hurricane makes landfall in Florida every other year and, on average, a Category 3 or stronger storm strikes Florida every four years.

The insurance group originally issued a white paper quoting a meteorologist — Jeff Masters, director of meteorology at the University of Michigan, and blogger at weatherunderground.com — writing that current weather patterns indicate a major storm season like that of 2004-2005 is likely but later withdrew that paper because it was based on year-old commentary by the meteorologist.

The 2004 and 2005 hurricane seasons unleashed a series of eight storms across Florida causing more than $30 billion in insured losses.

The report says the total shortfall of the state-backed reinsurer, the Florida Hurricane Catastrophe Fund, is now estimated at about $6.8 billion. “That is not good news but a dramatic improvement over the recent past,” it says.

The white paper cites a Citizens Property Insurance Corp. report that this state-backed property insurer’s “claims-paying ability is solid, with access to $16 billion based on surplus, reinsurance, pre-event bonding and lines of credit.”

The white paper is being released on the 17th anniversary of Hurricane Andrew’s Florida landfall.

The white paper is reprinted below and is also available online.

Florida Insurance Council White Paper
History of Hurricane Strikes in Florida Reveals Luck is Not on Our Side
Cat Fund Much Stronger Than Last Year

Florida has been spared from a major hurricane strike for three years, but the history of hurricanes shows clearly this lucky streak cannot continue, that Florida is the most hurricane-prone state in the nation.

Since the year 1900, on average, a hurricane makes landfall in Florida every other year and, on average, a Category 3 or stronger storm strikes Florida every four years.

This paper discusses historical as well as meteorological indications that a landfall in Florida is overdue. It also details the financial condition of the Florida Hurricane Catastrophe Fund, noting that there are still funding shortfalls in the state-back reinsurance program, but the Fund is much stronger than this time a year ago.

The White Paper comes as Florida heads into the heart of the 2009 hurricane season, and is being released on this, the 17th anniversary of Hurricane Andrew’s Florida landfall.

Cat Fund Shortfall Reduced to $1.2 Billion in Basic Program and $6.6 Billion Overall

Heading into the current hurricane season, the Cat Fund has sold reinsurance totaling about $23 billion. The program is broken into two layers. All insurers are required to participate in the lower level, the $17.2 billion basic program. The upper level, the Temporary Increase in Coverage Layer or TICL, is optional. TICL is presumed unfunded under current economic conditions and few private insurers opted to buy it this year, focusing instead on private reinsurance markets in Europe and Bermuda. The Cat Fund sold only $5.6 billion of the $10 billion authorized by the Legislature and $3.5 billion of that went to Citizens Property Insurance Corporation, the government-run program which is the largest property insurer in the state.

With some improvement in the New York bond markets and about 40 percent of TICL unsold, the potential shortfall of the Cat Fund has been dramatically reduced. In a report to the Governor and Cabinet earlier this summer, Ashe Williams, State Board of Administration Executive Director, said the total estimated loss reimbursement capacity of the Cat Fund is $16 billion, leaving a potential $1.2 billion shortfall in the $17.2 billion basic program which would be activated partially or totally by a major hurricane season. At the start of 2009, the shortfall in the mandatory layer was as high as $6.7 billion.

TICL was and still is presumed unfunded. When Williams reported to the Cabinet, the potential TICL deficit was $10 billion. When the Cat Fund finalized agreements with TICL clients in July, the picture was different. The TICL shortfall is $5.6 billion, the amount sold to Citizens and other insurers who apparently assume the money would be found somewhere even if after a delay. When the TICL shortfall is combined with the $1.2 billion shortfall in the mandatory layer, the total shortfall of the fund is now estimated at about $6.8 billion. That is not good news but a dramatic improvement over the recent past. The Senate Banking & Insurance Committee late last year projected the Cat Fund potential shortfall at up to $19 billion.

The condition of the TICL layer of the Cat Fund prompted the 2009 Florida Legislature to allow private insurers to replace or back up Cat Fund coverage and recoup the costs by including reinsurance in base rates, even if it duplicates the Cat Fund coverage. The cost recovery provision was an essential change in state law for insurers’ ability to financially withstand the impact of hurricanes in this, the most hurricane-prone state in the country.

Cat Fund Enters 2009 Hurricane Season in Much Better Shape Than Last Year
The Cat Fund has $7.8 billion to pay claims from the 2009 hurricane season before it would have to sell additional bonds. That is only about $1 billion less than it paid out in all of 2004 and 2005.

FHCF COO Jack Nicholson has said this liquidity, plus the improving New York markets for government-issued, tax-exempt bonds, will enable the Cat Fund to handle something substantially greater than a repeat of 2004/2005.

The capacity estimate of $16 billion includes a projection of $8 billion in tax-exempt, post-hurricane debt that could be issued on the New York markets. Last October, the Cat Fund Advisory Council projected only $3 billion in post-event bonding and there was skepticism that even this goal could be met.

The Cat Fund’s $7.8 billion in liquidity is produced by $4.3 billion in cash projected at the end of this year, plus $3.5 billion from bonds issued in 2007. This is one of the strongest liquidity positions in the 16-year history of the Cat Fund.

Insurers Pay First $7 Billion in Major Hurricane

Wholesale activation of the Cat Fund in 2009 would take place after damages from a hurricane exceeding about $7.22 billion, the “industry retention.” The term “wholesale activation” is significant because each company has an individual retention, its proportionate share of the industry retention. A carrier taking unusually heavy losses from a storm could qualify for Cat Fund reimbursement, while other insurers might not. This was common during the 2004 and 2005 hurricane seasons. The full industry retention and an insurer’s share applies for each of the two largest hurricanes in a multi-event season. The retention would be reduced to $2 billion and an insurer’s share of that for additional hurricanes in the same year.

In addition to a retention or deductible, insurers are required to make a “co-payment” with their Cat Fund coverage. Three levels of co-payment are available, but most carriers choose 90 percent Cat Fund coverage in the basic program, leaving them responsible for 10 percent of their losses, or their co-pay. Industry co-payments in the basic program are estimated at about $2 billion during the 2009 hurricane season.

The Cat Fund does not cover commercial risks, including shopping centers and individual businesses. It is a residential reinsurance program which does include “commercial-residential,” condos and apartments. Conventional commercial risks like stores and businesses were covered initially, but were excluded in 1994 when legislators determined the private market for business insurance was sound and that the Cat Fund should focus on the troubled residential property insurance market.

Citizens Also Has Substantial Cash in the Bank

Citizens Property Insurance Corporation is outlining a $16 billion claims-paying program for 2009, although that includes Cat Fund coverage in both the basic and TICL programs.

Here is a June 1 news release by Citizens Property Insurance Corporation:

TALLAHASSEE: Citizens has secured pre-event financing to ensure claims are paid in a
timely manner if a storm hits Florida. Citizens’ claims-paying ability is solid, with access to $16 billion based on surplus, reinsurance, pre-event bonding and lines of credit.

“We are very pleased with the successful bond issuance of $1.64B for the High Risk Account, especially in the difficult financial market environment,” said Sharon Binnun, Chief Financial Officer for Citizens.

“Combined with the $400M credit line for the Personal and Commercial Lines Accounts from a syndicate of banks, this $2B of additional liquidity helped us achieve the $16 billion of total liquidity, in preparation for the 2009 hurricane season.”

Citizens’ issuance of multi-year bonds in laddered maturities from a broad investor base ensures a financially responsible approach to providing some permanent liquidity financing and signals a strong endorsement of and demand for Citizens’ bonds.

Hurricane History is Not on Our Side

While Florida may have been spared a major hit for the past three years, history is not on our side.

Here are some factoids regarding hurricanes and Florida:

  • Since the year 1900, on average, a hurricane makes landfall in Florida every other year.
  • A Category 3 or stronger storm strikes the state every 4 years, on average.
  • 37% of all hurricane landfalls occur in Florida; 38% of those are Category 3 or higher.
  • Two Category 5 hurricanes made landfall in North America in 2007; they just didn’t strike the U.S. A Category 5 storm striking Florida in 2009 could easily produce losses exceeding $50 billion.
    22 percent of all U.S. catastrophe losses since 1980 occurred in Florida.

  • The value of insured coastal property in Florida ranks first in the US and now exceeds $2 trillion.
  • Hurricanes are more likely to hit Florida than any other U.S. State.
  • Eight of the 10 most expensive hurricanes ever to make landfall in U.S. history hit Florida, causing more than $60 billion in insured losses (1992’s Hurricane Andrew, 2004’s Hurricanes Charley, Frances, Ivan and Jeanne, and 2005’s Hurricanes Katrina, Rita and Wilma).
  • Tropical storms can wreak havoc as well. Just last year, Tropical Storm Fay which slogged through most of Florida in August, caused a reported $248.3 million of insured damage.

Fay, the sixth named storm of the 2008 hurricane season, made landfall four separate times as it snaked up the East Coast. The storm had maintained winds of about 60 mph, never gaining hurricane strength, but dumping large amounts of rain on Florida and bordering states. It caused downed trees and power lines and spawned several tornadoes.

2004/2005’s Bleak Track Record

The 2004 Hurricane season brought Florida four major storms that caused about $20 billion in insured losses:

Hurricane Charley
Hurricane Francis
Hurricane Jeanne
Hurricane Ivan
The 2005 Hurricane season brought Florida four major storms as well causing some $12 billion in losses:

Hurricane Dennis
Hurricane Katrina
Hurricane Rita
Hurricane Wilma

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