Industry the April 2016 issue

Florida Facing Irma

Last year we asked if Florida could handle the next big storm. Here’s where they stand.
By Edward Pound

The pounding cost taxpayers a pretty penny: the legislature shifted $715 million from the state’s general fund to pay some losses, while state-controlled insurance programs imposed hurricane taxes on policyholders, raising billions in new revenue over the next several years.

And then nothing happened.

Not a single hurricane has touched Florida since. A state that averages a hurricane almost every other year has not seen one since 2005. As a result, Florida’s state-run insurance entities are flush, the property insurance market is again healthy and state officials are confident they can handle even the worst of storms. But can they?

One big storm could easily create fiscal calamity and public desperation, as demonstrated by the Great Miami Hurricane of 1926. Without today’s advanced tracking and communications systems, residents had little warning of the storm’s severity. Many were also hurricane newbies—Miami was in a period of growth. Accounts of the event recall people swelling into the streets thinking the storm was over, when it was actually just the eye passing through. After 35 minutes of calm, the storm raged again, catching many off guard. The 150-mile per hour winds, 10-foot storm surge and other forces killed at least 372 and caused $164 billion in property damage in today’s dollars.

“If Florida is hit by a major hurricane and then hit again the next year, it could very well plunge the state into a fiscal nightmare,” says Christian Camara, the Florida director of the R Street Institute, a Washington-based think tank. Camara closely monitors the state’s property insurance system and says state-sponsored insurance funds and private insurance companies have adequate reserves to cover losses from a major hurricane. But a near-term subsequent hurricane would tap out state reserves and force some private carriers into insolvency unless the state legislature once again comes to the rescue with a massive bailout, he says.

The economic consequences to Florida could be staggering. The Florida Department of Financial Services reported several years ago that a major hurricane would force many businesses to close, displace Floridians, and require years of rebuilding. Additionally, the agency said, industries such as tourism would be significantly affected, as thousands of visitors would be forced to go elsewhere.

Many expert hurricane watchers in Florida echo those concerns. Don Brown, a former chairman of the Florida House Insurance Committee, worries the state’s over-developed, 1,350-mile coastline, with a population of 18.3 million, is a disaster in waiting. “If Florida continues on its current path of growth, growth, growth,” he says, “the reality is we will have large, catastrophic losses at some point.”

According to the Insurance Information Institute, Florida remains the most hurricane-prone state in the United States. From 1985 to 2014, the Sunshine State accounted for $68 billion in insured catastrophic losses, or nearly 14% of the national total.

Given that risk, the cost of property insurance in Florida remains sky high. Homeowners pay an average of $2,084 annually in property insurance premiums, or double the national average, according to the National Association of Insurance Commissioners. Those premiums were increased, in part, because three state-controlled insurance organizations imposed $6.4 billion in special assessments—hurricane taxes—to cover hurricane claims and, indirectly, insurer insolvencies. Those assessments were levied on insurers and passed along to policyholders beginning in 2004.

If Florida is hit by a major hurricane and then hit again the next year, it could very well plunge the state into a fiscal nightmare.
Christian Camara, Florida director, R Street Institute

If Florida’s taxpayers are vulnerable, it’s because the state government is a huge player in the state’s insurance market. One of the state-sponsored organizations, Citizens Property Insurance Corp., is the largest property insurer in Florida. Along with the Florida Hurricane Catastrophe Fund, a reinsurer widely known as the Cat Fund, and the Florida Insurance Guaranty Association, Citizens helps form the foundation of Florida’s property insurance industry.

The Insurance Information Institute has compiled these stats on the most hurricane-prone state in the country.

  • From 1985 to 2014, Florida accounted for $68 billion in insured catastrophic losses, or nearly 14% of the national total.
  • Seven of the 10 costliest hurricanes in U.S. history have hit Florida—six of them occurred in 2004 and 2005.
  • Florida leads the nation with two million flood policies in force in 2014.
  • From 2000 to 2014, Florida’s coastal population grew from 15.6 million to 18.3 million people, a rise of 17.3%,.
  • The insured value of coastal properties totaled $2.9 trillion in 2013.
  •  Hurricane Andrew was Florida’s costliest hurricane, based on insured property losses. The 1992 storm caused $23.9 billion (in 2014 dollars) in damage to Florida and Louisiana.
  • Citizens Property Insurance Corporation provides multiperil and wind-only insurance to Florida homeowners, commercial residential and commercial business property owners.

All three appear to be in excellent financial shape. In short, the 10-year hurricane drought has been a godsend to Florida’s insurance industry. The unprecedented streak of good luck has permitted Citizens and the Cat Fund to build their cash reserves and improved the ability of private insurers to handle the next catastrophe, according to government and insurance analysts.

In an interview, David Altmaier, the deputy commissioner for property and casualty in the Florida Office of Insurance Regulation, says Florida insurers have benefited from a booming and competitive reinsurance market that’s awash in capital. He also points to a recent “catastrophe stress test’’ conducted by the state insurance office that demonstrated property insurers have sufficient financial cushion to withstand significant catastrophic losses.

Likewise, Barry Gilway, CEO and executive director of Citizens, is confident his company and private insurers could handle claims from a major hurricane or even back-to-back storms that caused perhaps $125 billion in losses. Gilway says if Florida were to have a $125 billion loss, “there would be a 50% insured loss for the entire industry. We write about 8% of the total exposure of the industry…or about $5 billion. Private companies would have the resources to cover the rest.” Citizens now has $19 billion in claims-paying capacity, he says, including $7.5 billion in surplus. “Financially,” Gilway says, “we simply have never been in better shape.”

Florida’s complex, government-run insurance system grew largely from the rubble of Hurricane Andrew, a 1992 Category 5 storm that tore through south Florida with winds of more than 165 miles per hour. The storm devastated parts of Miami-Dade County, including Homestead, Florida City and Miami, destroying or damaging tens of thousands of businesses and homes. Andrew killed at least 40 people and left 250,000 temporarily homeless, according to the National Hurricane Center.

“It actually woke people up in terms of how large a loss could be,” says Jack Nicholson, the longtime COO of the state’s Cat Fund. As Andrew approached landfall, the insurance industry underestimated the damage the hurricane could inflict (initial estimates were in the neighborhood of $4 billion to $5 billion). In reality, Nicholson says, the storm caused insured losses of $16 billion (in 1992 dollars).

Andrew changed everything—and not just for Florida.

“Hurricane Andrew forced individuals, insurers, legislators, insurance regulators and state governments to come to grips with the necessity of preparing both financially and physically for unprecedented natural disaster,” says Lynne McChristian, the Florida representative of the Insurance Information Institute.

Some insurers began to flee the state. Eight went under. Others required cash infusions from parent companies to pay claims and avoid bankruptcy. Business and homeowner policies were cancelled or not renewed, and some carriers sought large rate increases.

Florida officials knew they had to act decisively to protect customers and stabilize the market. So in 1993, the state placed a limit on the percentage of personal and commercial property-casualty policies that could be cancelled or non-renewed. The legislature also created the Office of Insurance Regulation to license companies and monitor their financial condition.

Three Florida state-run groups dominate insurance.

The Florida legislature created three organizations to financially support the private insurance industry and protect policyholders. To cover deficits, each entity can levy assessments that increase the premiums on property-casualty policies. Those assessments have totaled $6.4 billion since 2004. The organizations are:

The Florida Hurricane Catastrophe Fund. Known widely as the Cat Fund, the nonprofit, tax-exempt trust fund was created to stabilize Florida’s private insurance market after Hurricane Andrew ravaged the state in 1992. By law, private insurers must buy some of their property reinsurance from the Cat Fund. The Cat Fund’s 1.3% assessment was eliminated on most property insurance policies effective Jan. 1, 2015.
Total assessment: $3.3 billion.

Citizens Property Insurance Corporation. Created in 2002 and headquartered in Tallahassee, this nonprofit, tax-exempt government entity is designed to provide property insurance to Floridians who cannot find insurance coverage in the private market. Citizens is the largest property insurer in Florida, with about 485,000 policies in force and $143.5 billion in risk. The company stopped collecting its last assessment in July 2015.
Total assessments: $2.06 billion. (In addition, Citizens received a $715 million bailout from the legislature in 2006.)

Florida Insurance Guaranty Association. FIGA is a state-sponsored nonprofit established in 1970 as a “safety net’’ for consumers. The association, which consists of 600 property and casualty insurers, pays the outstanding claims of insolvent insurance concerns. FIGA’s last assessment was in 2012.
Total assessments: $1,077,289,174

The Cat Fund

That same year, the legislature created the Cat Fund, a tax-exempt state fund that sells reinsurance to companies that write residential property policies in Florida. By law, private insurers must buy some of their reinsurance from the Cat Fund; such premiums now total about $1.3 billion annually. If the Cat Fund runs out of funds to pay claims, its managers can raise money by issuing bonds. The fund’s financial health is critical to all state policyholders not only because they want any future claims paid but because the state agency can levy an assessment on most policies in Florida—including auto, boat, home and business—to pay off any debt.
Indeed, the ferocious hurricane seasons of 2004 and 2005 wiped out the Cat Fund’s $6 billion reserve, forcing the agency for the first time in its history to impose an assessment on all property-casualty policies. The Cat Fund used the proceeds from the special tax to retire bond debt issued to pay off remaining hurricane claims.

Finally, in January 2015—eight years after it was imposed—the assessment ceased on most property insurance. During that period, policyholders shelled out $3.3 billion to cover the fund’s obligations.

The Cat Fund’s reinsurance program is a good bet for insurers writing residential policies, allowing them to spread their risk. Additionally, the fund sells its reinsurance more cheaply than private reinsurers. Its operating costs are less than 1% of the annual premiums collected from insurance companies, according to the Cat Fund’s most recent annual report.

If Florida continues on its current path of growth, growth, growth, the reality is we will have large, catastrophic losses at some point.
Don Brown, former chairman, Florida House Insurance Committee

In contrast, the Cat Fund says, the operating costs of private reinsurers can range from 10% to 15% of premium collected. The organization pays no reinsurance brokerage commissions, nor does it have any underwriting costs, due to the mandatory nature of carriers having to purchase its coverage. And as a tax-exempt entity, the fund does not pay state or federal income taxes. By law, the Cat Fund currently can reinsure $17 billion of risk—a figure its leadership would like to see lowered to protect consumers from additional assessments. According to the fund, over the past decade it has built a comfortable nest egg—$12.7 billion in surplus—that it can use to pay claims when the next hurricane strikes.

“Without any hurricanes in the past 10 years, says Cat Fund chief executive Nicholson, “we are really the strongest we have ever been.”

Citizens Property

Like the Cat Fund, the state-run Citizens Property Insurance Corp. has the legal authority to issue bonds and levy assessments on many insurance policies issued in the state. Citizens was set up in 2002 as the state’s “insurer of last resort”—that is, to provide property-casualty insurance to customers who couldn’t otherwise buy insurance in the private market.

But Citizens’ role in the marketplace changed dramatically in 2007 when the new governor, Charlie Crist, followed up on his campaign promise to cut insurance rates. Crist’s insurance reforms, adopted by the legislature in a special session, froze Citizens’ rates at 2006 levels, a move that critics describe as a de facto price control because it gave Citizens a big price advantage over private competitors. The new law also contained a provision substantially increasing eligibility for customers to buy insurance from Citizens. They couldn’t wait to sign on, and Citizens became the largest property insurer in Florida, with 1.5 million policies in force and $510 billion in risk.

Eventually, the legislature lifted the rate freeze, replacing it with a plan allowing Citizens to increase its rates by 10% a year. Even with those changes, Citizens’ rates in high-risk coastal areas remain too low, company officials say. In some areas, the company says, it would need to dramatically increase its rates to make them actuarially sound.

In the Tampa area, for example, the average premium for a multiperil policy is $1,558 annually, according to Citizens. To be actuarially sound, a premium should cost $2,876—meaning premiums are nearly 85% underpriced.

When asked why coastal policies generally remain underpriced, Citizens CEO Gilway doesn’t hesitate, laying the blame largely on the rate freeze approved by the legislature in 2007. “The coastal account started so much in the hole,’’ Gilway says, “that it does not matter what kind of increase [is levied]. We will never catch up.”

Citizens remains the largest property insurer in the state, but it has been moving in recent years to reduce its risk and the likelihood of future assessments. Under a program known as “depopulation,” private insurers can request approval from state insurance officials to “take out” policies from Citizens’ book of business.

Policyholders have the option to reject the transfer—and nearly half are doing just that. In 2015, Citizens says, 191,530 Citizens policyholders, or 46%, have declined to move to another insurer.

Nonetheless, Citizens says the depopulation program has been a roaring success. Over the years, the company has shed more than one million policies, and it now holds about 485,000 policies, including 195,000 policies in high-risk coastal areas. Its total risk has been drastically reduced to $143.5 billion, according to data Citizens provided to Leader’s Edge. The company says it plans further reductions, perhaps to 425,000 policies.

Citizens, too, has imposed assessments to recoup hurricane deficits created by Hurricane Wilma and the seven other hurricanes that pummeled Florida in 2004 and 2005. The assessments, first imposed in 2004 on property insurance policyholders, including those with Citizens, generated a total of $2.06 billion. The final assessment was eliminated last July, and Citizens’ officials are confident they won’t need to impose a new assessment any time soon.

Florida Insurance Guaranty Association

Finally, a third state-created organization, the Florida Insurance Guaranty Association, or FIGA, has imposed a total of $1.08 billion in assessments on property-casualty insurers. Created as a safety net for consumers, FIGA pays the outstanding claims of insolvent insurance companies. According to COO Thomas Streukens, FIGA last imposed an assessment in 2012. With $200 million in cash on hand, Streukens says, “we are in pretty good shape.”

Florida property owners certainly hope so. Florida’s potential exposure to hurricane damage was vividly demonstrated by Karen Clark & Co., a Boston-based computer modeling firm hired to estimate likely property damages and losses from hurricanes, earthquakes and other catastrophes. The firm’s study, which estimated losses from storm surge floods in coastal cities experiencing a powerful hurricane, placed four sites in Florida—Tampa-St. Petersburg, Miami, Fort Myers and Sarasota—among the eight most vulnerable areas in the United States.

The Tampa-St. Petersburg area, on Florida’s west coast, ranked as the most vulnerable. The area would likely experience $175 billion in losses, according to the review. The storm, the report said, would “cause an enormous buildup of water that [would] become trapped in the bay and inundate large areas of Tampa and St. Petersburg.”

Miami ranked number four with an estimated loss of $80 billion. Fort Myers was the fifth most vulnerable with loss estimates of $70 billion. Sarasota, ranked seventh, would sustain an estimated loss of $50 billion.

Financially, we simply have never been in better shape.
Barry Gilway, CEO and executive director, Citizens Property Insurance Corp.

Florida is now the nation’s third most populous state, with 19.9 million residents, and the vast majority live in high-risk coastal areas, where the development of residential and commercial property has exploded over the past decade. Coastal risk has grown from $1.9 trillion in 2004 to nearly $3 trillion today. At the same time, according to insurance industry experts, stronger building codes may have made newly constructed homes more hurricane-resistant.

In an overview of Florida’s insurance market, the Insurance Information Institute wrote: “Stronger building codes were adopted in 2002, and an analysis of insurance loss data from the 2004-2005 hurricane seasons concluded that homes built to the new building codes experienced losses that were significantly less than structures built prior to 2002.” But the institute added one big caveat: “It is important to keep in mind that building codes represent the minimum construction standard, not the highest standard, and in the most vulnerable locations, building only to code is not a guarantee of minimal damage.”

Bottom line: There are no certainties with hurricanes except for their inevitability and the great risk that accompanies them. “We’ve been lucky the past 10 years, that’s for certain,” says Dominic Calabro, president of Florida TaxWatch, which keeps close tabs on the state’s insurance operations. “The state is in better shape right now, but there are things you really can’t control. Only nature decides the intensity, path and risk that the next hurricane will bring.”

Mother Nature put Florida through two years of hell.

Florida deserves some good fortune. The state was walloped by a series of eight hurricanes in 2004 and 2005.

The tumultuous hurricane seasons struck the pocketbooks of property-casualty policyholders, as state-run insurance organizations assessed them to pay off substantial claims. The 2004 season was particularly maddening: four hurricanes hit Florida in only a few weeks.

Here is the list of the 2004-2005 storms, compiled from the National Hurricane Center, other federal agencies and news accounts:


CHARLEY—A small but ferocious storm with winds near 150 mph, Charley made landfall in southwest Florida, just north of Captiva Island, on Aug. 13. The hurricane slammed other states, including South Carolina, North Carolina and Virginia. U.S. damage was estimated at $15 billion. Charley accounted for 10 deaths in the U.S., four in Cuba, and one in Jamaica.

FRANCES—The hurricane struck Florida’s east coast three weeks after Charley. Frances caused widespread heavy rains and flooding over much of the eastern United States. Frances killed five people in Florida and left $9 billion in damage in the U.S., most of it in Florida.

IVAN—A few weeks later, Ivan struck the panhandle of Florida, near Pensacola, after roaring through eastern Alabama. The storm caused 25 deaths in the U.S., including eight in Florida, and a total of $14.2 billion in damage.

JEANNE—The center of Jeanne’s 60-mile-wide eye crossed Florida’s east coast near Stuart on Sept. 26. Jeanne weakened as it moved across central Florida but left three people dead. Overall, damage across the United States totaled an estimated $6.9 billion. Jeanne was far more lethal in Haiti, killing 3,000 people and leaving 200,000 homeless.


DENNIS—Dennis made landfall on July 10 near Navarre Beach. The hurricane caused considerable damage in the western Florida Panhandle, including widespread utility and communications outages, according to the National Hurricane Center. All told, the storm caused 42 deaths—22 in Haiti, 16 in Cuba, three in the United States, and one in Jamaica.  U.S. damage was estimated at $2.2 billion.

KATRINA—Making landfall in late August, Katrina became one of the most devastating hurricanes in American history, flooding New Orleans and its eastern suburbs and killing about 1,000 people in Louisiana and 200 in Mississippi. Katrina was far less lethal in Florida: the hurricane caused wind and water damage in Dade and Broward counties.

RITA—In September, just a few weeks after Katrina, Rita’s fierce winds paid a visit to Florida, causing flooding of up to five feet above normal levels in the Keys. Rita also terrorized parts of Louisiana and Mississippi, causing seven deaths and an estimated $10 billion in damage.
WILMA—The final hurricane to make landfall in Florida, Wilma, left behind five dead and more than $20 billion in damage in the Florida Keys and southwestern Florida. The National Weather Service said the October storm created “the highest storm surge observed in the Keys since Hurricane Betsy” 40 years earlier.

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