Higher hurricane fees seen

Jun 2, 2008

Palm Beach Post–Friday, May 30, 2008

By RANDY DIAMOND
Palm Beach Post Staff Writer

Hurricane season begins Sunday, and if the worst-case scenario comes to pass, Florida residents will be facing a world of additional financial hurt on top of whatever damage they might suffer.

New estimates from the Florida Hurricane Catastrophe Fund show that every auto and homeowner insurance policyholder would pay a yearly surcharge of 5.35 percent for the next 30 years if the fund exhausts the $30 billion it has promised to give insurers to pay claims.

”It does keep me up at night,” said Jack Nicholson, the fund’s senior officer.

Until this month, the fund had estimated an assessment of 4.9 percent would be needed for 30 years in case of a Hurricane Katrina-style calamity, but the credit crunch roiling Wall Street has caused bond interest rates paid to investors to rise, Nicholson said Friday.

The worst-case scenario is a loss to insurers of $37.8 billion in the 2008 storm season. That would force the "cat fund" to seek $25.5 billion in bonds, Nicholson said.

For a family paying a combined $7,000 in yearly auto and homeowner premiums, that would mean a yearly surcharge of more than $350. Those surcharges would be levied in addition to possible surcharges from Citizens Property Insurance Corp., which could add the fees if it runs a deficit, as it did in the active hurricane seasons of 2004 and 2005.

Citizens has estimated a once-in-100-years event could cause an almost $24 billion payout and an assessment on auto and homeowner policyholders of as much as 24 percent of their policies, though much of the surcharge could be spread over 20 years.

”Everyone’s talking about the killer storm,” Citizens Board Chairman Bruce Douglas said Friday.

Douglas said such an event is not probable, but the insurance industry disagrees.

Bob Hartwig, an economist who serves as president of the industry-funded Insurance Information Institute, said the mega-catastrophe scenario seems more likely when you consider the fact that multiple hurricanes can occur and deplete the fund. The fund also is on the hook through the 2009 hurricane season to repay insurers’ losses, he said.

The massive charges to policyholders would come about because of the legislature and Gov. Charlie Crist’s plan to reduce property insurance by subsidizing insurance companies. During the January 2007 special session, the governor and lawmakers agreed to increase by $12 billion the amount of discounted reinsurance the cat fund sells to insurers.

Crist and the legislature also agreed to lower Citizens’ rates and cancel out rate increases, even though Citizens’ rates were not actuarially sound. Earlier this week, Crist signed a bill freezing Citizens’ rates for the third year in a row.

Nicholson said the catastrophe fund is exploring various options, including buying its own reinsurance, to help it manage potential losses in the event of a mega storm.

The Property Casualty Insurers Association of America, an industry trade group based in Des Plaines, Ill., said its study in January showed that 71 percent of Florida residents were unaware of the potential for surcharges.

”It’s very unfortunate,” spokesman Cliston Brown said Friday.