Florida in Better, Not Perfect, Insurance Shape Should Major Hurricane Hit

Florida property insurers are warning that a major hurricane is likely this season given the state’s history of storms.

At the same time, the industry says, the state-backed catastrophe reinsurance fund, the Florida Hurricane Catastrophe Fund, and the state’s property insurer, Citizens Property Insurance, are in better shape now than they were a year ago even though financial shortfalls still exist.

The Florida Insurance Council, which represents 200 companies that write insurance in the state, issued a white paper suggesting that the state may soon run out of luck after having gone three years without a major storm. The paper argues that history is not on Florida’s side. It notes that since the year 1900, on average, a hurricane makes landfall in Florida every other year and, on average, a Category 3 or stronger storm strikes Florida every four years.

The 2004 and 2005 hurricane seasons unleashed a series of eight storms across Florida that caused more than $30 billion in insured losses.

The total shortfall of the state-backed reinsurer, the Florida Hurricane Catastrophe Fund, is now estimated at about $6.8 billion. “That is not good news but a dramatic improvement over the recent past,” the report says, citing earlier predictions of a $19 billion shortfall.

The FHCF has sold reinsurance layers totaling about $23 billion. All insurers are required to participate in the lower level, the $17.2 billion basic program. The upper level, the Temporary Increase in Coverage Layer or TICL, is optional. TICL is presumed unfunded under current economic conditions and only a few private insurers opted to buy it this year, buying private reinsurance from markets instead.

“With some improvement in the New York bond markets and about 40 percent of TICL unsold, the potential shortfall of the Cat Fund has been dramatically reduced,” the white paper contends even as it acknowledges that the TICL is underfunded by $5.6 billion. When the TICL shortfall is combined with the $1.2 billion shortfall in the mandatory layer, the total shortfall of the fund is now estimated at about $6.8 billion.

The Cat Fund has $7.8 billion to pay claims from the 2009 hurricane season before it would have to sell additional bonds, according to the report. That is about $1 billion less than it paid out in all of 2004 and 2005.

Jack Nicholson, chief operating officer for FHCF, has said this liquidity, plus the improving New York markets for government-issued, tax-exempt bonds, will enable the Cat Fund to handle something substantially greater than a repeat of 2004/2005. The capacity estimate of $16 billion includes a projection of $8 billion in tax-exempt, post-hurricane debt that could be issued on the New York markets.

Wholesale activation of the Cat Fund in 2009 would take place after damages from a hurricane exceeding about $7.22 billion, which is the total retention that would be paid by private insurers, notes the Florida council.

As for the state-backed property insurer, Citizens, the report says its “claims-paying ability is solid, with access to $16 billion based on surplus, reinsurance, pre-event bonding and lines of credit.” This amount includes the results of a successful bond issuance of $1.64 billion combined with its $400 million credit line.