Long ‘Hurricane Tail’ Whips Up Florida Insurance Rates

The following article was published in The Sunshine State News on December 5, 2011:

Long ‘Hurricane Tail’ Whips up Florida Insurance Rates

By Kenric Ward

Florida hasn’t been hit by a hurricane in six years, but a long “hurricane tail” continues to lash the insurance industry, a new report shows.

The 2011 storm season, which ended Nov. 30, continued the longest stretch without a hurricane in Florida since the nine-year gap between Opal (1995) and Charley (2004).

The last hurricane to hit the Sunshine State was Wilma, which first struck the southwest peninsula as a Category 3 storm in October 2005.

So why aren’t property insurance rates dying down like the winds?

“Because insurers know the cycle won’t last, and that the costs associated with a hurricane’s long tail require building up the reserves to pay those damages,” said the Insurance Information Institute.

In other words, III says, “While major storms last for hours, dealing with costs happens years in advance.”

Property insurers say they’re still recovering from the eight storms that slammed into Florida in 2004 and 2005.

Statewide, the industry’s average return on net worth for property insurance dropped 183.3 percent in 2004, followed by a 53.4 percent decline in 2005, III reported.

“Insurance companies have been operating in the red in Florida since Hurricane Andrew in 1992,” said Lynne McChristian, Florida representative for the institute.

Unlike the state-run Citizens Property Insurance and Florida Hurricane Catastrophe Fund, private insurers do not borrow money after a hurricane to pay claims. Insurance regulations require private insurers to have money on hand, in advance, to pay for major storms.

III says that regular premiums collected in any given year are typically sufficient to cover damages sustained by one property at a time, such as house fires or bursting water pipes. But they are insufficient to pay the enormous volume of claims resulting from natural disasters, such as hurricanes and earthquakes.

To pay these costs, insurers use historical data to factor in a catastrophe’s “long tail” to smooth out rates over the years and build the necessary reserves.

During the past summer, state regulators approved 32 home insurance rate increases ranging from 6 to 34 percent.

Historically, Florida’s average return on net worth for property insurance is well below the national average. In storm-free years, the rate of return outpaces the nation, yet the bottom drops out with powerful storms that can wipe out years of cash reserves in a single day.

From 2000 to 2009, the U.S. rate of return on net worth was 4.7 percent for homeowners insurers; Florida’s rate of return on net worth for the same time period was 0.5 percent.

“To say that Florida is a challenging market for insurers is certainly an understatement,” McChristian said.

“Profitability is subjected to both high winds and legislative whims, and when some private insurance companies felt they could not appropriately price insurance policies to deal with the vast volatility, they retreated from the market.”

In recent years, private insurers, including State Farm, have dropped hundreds of thousands of homeowner policies, most of which were picked up by the state-backed Citizens.

Other coastal states have had their return on net worth impacted in the past decade by major storms as well, most recently Hurricane Katrina, which devastated Louisiana and other Gulf Coast states.

Southeast Atlantic states to Florida’s north, however, including the Carolinas, were only lightly impacted by tropical events between 2000 and 2009, contributing to higher profits in the region.

Florida’s hurricane history translates into a 46 percent chance that one will strike each year, according to a report on hurricane frequency and damage costs by the Florida State University Storm Risk Management Center.

Insurance rates are based on that reality, as well as the fact that profits made in storm-free years are more than wiped out when hurricanes strike.

More hurricanes strike Florida than any other state — a total of 110 storms since 1851, according to the National Hurricane Center. (Texas ranks second with 59 hurricanes.)

The longest hurricane-free period for Florida was 20 years, dating back to the NHC’s earliest records: 1851-1871.

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