Gradual rate hikes sought amid concerns for Citizens

The solvency of the state’s storm damage insurance fund is a key issue for lawmakers. With rates likely to rise, the question has become by how much.

BY BEATRICE E. GARCIA
March 1, 2009

The respite from sharply rising homeowner insurance rates is about to end.

Unless extended during the legislative session that starts Tuesday, the rate freeze for state-run Citizens Property Insurance ends this year. Nearly 1.1 million homeowners statewide — about half in South Florida — will see higher insurance bills in 2009.

The question: How steep will the increases be? Most lawmakers would like to see Citizens rates rise gradually. At least one proposed bill would limit increases to 10 percent a year.

But what happens to rates charged by all Florida insurers is closely tied to the fate of the state’s hurricane catastrophe fund. Lawmakers and regulators must make sure this fund, created 17 years ago to back up Florida insurers in the event of a massive storm, can do its job this year.

The Florida Hurricane Catastrophe Fund can help lower rates because some insurers pass on savings from buying the fund’s lower-cost backup insurance to policyholders. Reinsurance in the private market costs more.

But here’s the rub. The CAT fund is at risk of not being able to cover claims if the big one hits this summer.

The fund can potentially sell up to $29 billion of backup insurance to insurers for the 2009 hurricane season. It doesn’t have that money in the bank. There’s about $7.6 billion on hand now.

Normally, it would sell bonds to make up the difference. But that likely would not work now, given the tight credit markets. At best, CAT fund officials estimate the fund could sell an estimated $3 billion.

That kind of shortfall means insurers who depend on the fund would likely not have enough money to pay claims after a major hurricane, leaving some homeowners stuck.

Barney Bishop, president of Associated Industries of Florida, a business lobbying group, contends the CAT fund is essentially broke. “If we have a bad hurricane season, it could bankrupt the state.”

A federal bailout could be one fix.

Gov. Charlie Crist and Insurance Commissioner Kevin McCarty have been to Washington, D.C., to ask the U.S. Treasury to back up the CAT fund.

U.S. Sen. Bill Nelson is once again pushing a bill to create a regional catastrophe fund, allowing multiple states to join together to help pay for each other’s disaster costs. It passed the U.S. House of Representatives in 2007. The bill contains a provision for federal low-interest loans to back up a state-run catastrophe fund when claims exceed resources.

But those are long shots and hurricane season starts June 1.

State officials and legislators know a fix needs to start in Tallahassee.

Florida’s insurance market has changed radically since the 2004 and 2005 hurricanes. Rates shot up. Many national insurers stopped writing new policies and dropped many already on their books.

Desperate lawmakers in 2007 expanded the catastrophe fund and required many companies to pass on the savings to policyholders in the form of lower premiums. Citizens’ rates were frozen.

Rates did fall. But now the financial market crisis could prevent the CAT fund from raising cash to provide the coverage it has sold to insurers. At the least, the sour market and huge amount of bonds the CAT fund would need to sell would mean higher interest rates than the fund would want to pay.

”We could do it if the price was right,” says Jack Nicholson, the CAT fund’s chief operating officer.

The CAT fund could turn to the private market as it did last year when it bought a put option — essentially a promise — from Berkshire Hathaway to purchase $4 billion in bonds. Cost to the CAT fund: $224 million.

Nicholson says he has talked to Berkshire about another go-round. This time, the giant insurance conglomerate would buy fewer bonds and the guarantee would cost more.

”We cannot continue to finance Florida’s insurance market with debt and not expect to wake up with a headache,” said state Rep. Don Brown, R-Defuniak Springs, former head of the House Insurance Committee.

State Farm Florida Insurance’s decision to leave Florida in three years ”is a clear signal that something isn’t working,” said Sean Shaw, the state’s insurance consumer advocate.

A bill from state Rep. Bryan Nelson, R-Apopka, would reduce the size of the CAT fund gradually and limit Citizens’ rate increases to 10 percent per year.

The Apopka lawmakers’s bill has a twist: Half of the premiums raised through the Citizens rate increase would be used to make grants to homeowners for mitigation through the My Safe Florida Home program.

State Sen. Mike Fasano, R-St. Petersburg, has introduced several insurance bills. One extends Citizens’ rate freeze through 2010. Another creates a statewide insurance pool for all the windstorm coverage. The private insurers would only provide fire, theft and liability.

Two consumer coalitions also have developed similar plans for wind pools to cover the entire state.

Making sure the CAT fund will meet its obligations is crucial to many Florida-based insurers.

These smaller companies cover the bulk of the homeowners in this state, especially since major national insurers have pared back their coverage.

The solvency of these smaller carriers was much discussed at a Florida Chamber of Commerce conference last week.

”Floridians have a right to know that the promise made by their insurance company to pay claims after a hurricane will be met regardless of [whether] your coverage is from a private insurance carrier or state-run insurers,” says Mark Wilson, president of the Florida Chamber of Commerce.