Citizens’ Insured Risk Outpaces Resources

The Tampa Tribune--Mar. 12, 2008
By RUSSELL RAY, The Tampa Tribune

TALLAHASSEE – The number of homeowners insured by state-run Citizens Property Insurance Corp. is expected to grow despite efforts to turn over policies to the private market.

And though its surpluses are expected to increase, Citizens could see a loss six times as great if a major storm hits the state, Citizens Chief Financial Officer Sharon Binnun said Tuesday.

She told state lawmakers that private insurers are expected to remove more than 300,000 homeowners policies from Citizens this year.

But at the same time, Binnun said, Citizens expects to add another 400,000 policies by year’s end, leaving Citizens with 1.4 million policyholders, up from 1.3 million now.

“That’s just based on historical numbers with respect to growth,” Binnun told the Senate Committee on Banking and Insurance.

Despite a recent surge in policies taken from Citizens, the number of policies written by it continues to exceed the number taken out by private insurers. Reversing that trend is one of the Legislature’s highest priorities, said Sen. Ted Deutch, D-Boca Raton.

“The goal is for Citizens to at some point cease being the largest insurance company in the state,” Deutch said.

More Private Insurers Needed

That will require more private companies writing new policies in places where Citizens is adding policyholders, Binnun said. She pointed to condo associations in South Florida, a high-risk market most want to avoid.

“Citizens’ growth is so dependent on the market itself,” she said.

Citizens’ cash surplus, the amount of cash available to pay claims, is expected to grow from $2.64 billion now to about $4 billion by the end of this year, Binnun said.

The problem is, Citizens already has too much exposure statewide – about $485 billion. Taking on more policies will make things worse, experts say.

The $4 billion is just a fraction of what Citizens will need to pay claims resulting from a major hurricane. If one major storm hit the state, Citizens’ losses could rise to $24 billion, Binnun said.

Binnun told the committee Citizens has almost $23 billion to pay in claims, including $12 billion from the state’s Hurricane Catastrophe Fund, $6.5 billion from lenders and about $4 billion in cash by year’s end.

“The cat fund is critical to Citizens with respect to our ability to pay claims,” Binnun said.

Based on Citizens’ current financial condition, about $5.8 billion of the $24 billion in losses resulting from a major hurricane would be paid by Floridians in the form of assessments on all auto and homeowner policies.

A proposal by House and Senate lawmakers to reduce the cat fund by $3 billion would reduce the risk now borne by Florida taxpayers and encourage private insurers to shoulder more. But cutting the cat fund, which provides low-cost reinsurance to the private market, could lead to higher rates for homeowners.

Higher rates are possible but not certain, Deutch said, adding that lower reinsurance costs may help keep rates steady.

“We need to look at the proposed cat fund reductions together with the efforts that Citizens is making to shift policyholders out of Citizens with the goal of reducing exposure,” Deutch said.

John Forney, a financial adviser for Raymond James & Associates, said if a major hurricane hit the state, assessments from the cat fund could reach $25 billion, the amount the state would have to borrow to cover claims.

Volatility And The Cat Fund

Considering the volatility of today’s financial markets, Forney questioned the cat fund’s ability to borrow that much.

“I am less comfortable with their ability to bond for very large amounts now than I have been in the past.”

Reducing the cat fund would be “a step in the right direction,” Forney said.

Citizens, established in 2002 as an insurer of last resort, is required by law to take on policies no other company wants.

Last year, the Legislature and Gov. Charlie Crist froze Citizens’ rates until 2009, allowing the state-backed company to compete with private insurers. It was Crist’s way of putting pressure on the industry to lower its rates.

As a result, Citizens’ extraordinary growth accelerated. Citizens’ policy count has grown from more than 810,000 in 2005 to more than 1.3 million now.

“We’re facing unprecedented issues at this time,” said Sen. JD Alexander, R-Winter Haven. “We have to try to figure out how to craft policy to protect the people of Florida.”