Perspectives: Big Decisions Regarding Homeowners Insurance Again Face Florida Legislators, Regulators

AM Best–January 12, 2009

By Chad Hemenway, associate editor, BestWeek

OLDWICK, N.J. January 12 (BestWire) – Florida began the new year by losing a $224 million bet to billionaire Warren Buffett. That’s a lot of T-bone steaks.

Florida could not afford to play the same odds game Buffett could. The state needed to turn to Buffett and fork over hundreds of millions to his Berkshire Hathaway in 2008 in exchange for a promise that Berkshire would purchase $4 billion in bonds if a major hurricane struck the Sunshine State. One didn’t.

Entering 2009, Florida might have to turn around and do the exact same thing. That’ll be up to Florida’s elected officials as the legislative session approaches.

On Jan. 14, the Florida Senate’s Committee on Banking and Insurance is scheduled to give a second report that is meant to enlighten lawmakers before the session. The committee’s report in early December 2008 on the status of the Florida Hurricane Catastrophe Fund did not necessarily bring good news.

The report indicated Florida is in the same boat in 2009 – with “Shortfall” painted on the bow. The FHCF has a possible $19 billion deficit this year. Lawmakers in 2007 chose to expand the catastrophe fund to $28 million and required insurers doing business in the state to purchase cheaper reinsurance from the fund but it doesn’t have the money to cover all losses if the FHCF is tapped.

The fund only has about $10.5 billion in reserves. Even the reported reserve estimate includes the assumption that $3 billion in bonds can be sold in a 12-month period, and the whole thing counts on the sale of those bonds.

There is another option the legislature will consider: dropping the fund’s exposure and putting more reinsurance back into the private market. Here we have the balancing act, because in exchange for the capacity in the private market, homeowners rates could increase.

Reinsurance away from the cat fund is more expensive, and it could be going up. Remember that active hurricane season? Add those catastrophes with the turmoil in the credit market and you get a reinsurance landscape that “remains highly volatile,” says a report from risk and reinsurance specialist Guy Carpenter & Co. The first half of 2009 will be a waiting game, the company said. Does Florida have the time to wait? Can its residents afford increases in homeowners rates, especially under these economic conditions?

The fresh year already saw a group of state leaders, industry officials and consumer advocates – the Mission Review Task Force – report on its study of Florida’s “last-resort” insurer – Citizens Property Insurance Corp. State-run Citizens has become the largest homeowners insurer in the state, as lawmakers chose to freeze its rates the past two years, and permitted residents to seek out the insurer if rates they were getting from the private market were 15% higher than those at Citizens.

Citizens rates fell well below the actuarially sound level. The freeze will be lifted after 2009. For starters, the task force reviewing Citizens suggests an average statewide rate increase of 10% beginning January 2010. On its way to rates that reflect the true risk, maybe Citizens can make its exit from competition with the private market and again attain its moniker as a last-resort insurer, the group says, which will meet again with state officials on Jan. 22.

The industry will also keep an eye on Insurance Commissioner Kevin McCarty’s final ruling, due this week, on a rate filing by State Farm Florida that requested a 47% increase. The company can’t do business in Florida without the increase, it says, and the interesting thing here is that State Farm Florida buys its reinsurance from State Farm Mutual. McCarty already denied the filing – a decision upheld by the Florida Division of Administrative Hearings.