Florida Domestic Insurers Have Backup Plans If State Hurricane Funds Slow

Most of Florida’s smaller domestic property insurers have initiated backup financing plans in the event the state-backed hurricane fund can’t meet its obligations right after a major storm hits.

According to an actuary whose firm is reviewing 59 of the state’s domestic property insurers, the majority of them have developed contingency plans to pay claims until the Florida Hurricane Catastrophe Fund (FHCF) can obtain the funding it needs after a big storm to pay their reinsurance claims.

Joseph Petrelli, president of the actuarial services firm Demotech, based in Columbus, Ohio, said he believes that only about 6 to 10 of the Florida domestic carriers will flunk the contingency test and possibly be downgraded by his firm when all the data is in. A contingency plan is one of the factors weighed in the financial ratings his firm assigns to carriers.

Petrelli thinks consumers should know about the contingency planning the insurers have done and that the domestic carriers deserve credit for it.

“[T]he companies themselves have been, I think, very modest. They should be thumping their chests a little bit more about what they’ve done and how they’ve done it because there’s some fascinating programs in place for contingency plans,” Petrelli told Insurance Journal in a recent interview on the Florida property insurance market.

The HCFC, from which carriers buy mandatory and extra reinsurance, is a post-event funder. It’s essentially allowed to write some business before it actually has the funds in place to cover it, unlike a traditional insurance company.

Petrelli said that even though there is a shortfall in the state fund currently, he is confident that the FHCF will eventually be able to raise whatever funds it needs to pay claims after a storm.

But what Petrelli and his fellow Demotech actuaries are concerned about is a potential gap between when insurers have to pay policyholders and when the FHCF is able to repay insurers for claims that are covered under its reinsurance program.

“Whether it’s sold in the private bond markets or whether the federal government buys bonds or whether the state of Florida itself buys its own bonds from indirect obligation of its quasi-government entity, we think the money will be there,” Petrelli said. “So, what we talk to companies about is, ‘What are you going to do to continue to pay claims if the cat fund has a short-term liquidity problem?'”

His firm requires the carriers it reviews to have some sort of backup plan.

“What we say to our companies is, ‘OK, if you only get half your money, and it’s going to take them six months, eight months, whatever it might take to get you all of your money, how are you going to continue to honor claims during that period of time?'”

Florida’s domestic carriers have responded to the concern. Petrelli explains:

“So, basically, they’ve gone to a lender, they’ve gone to a third party, and they’ve indicated, ‘We’ve got millions of dollars of exposure. The Florida Hurricane Catastrophe Fund is our reinsurer. It’s got this post-funding capability. And there’s a possibility we may not get that money in a timely manner, and we’re going to need to borrow some of it.'”

He said carriers have taken different routes. Some have secured the contingency financing with their receivables, while others are using their holding company assets or a corporate resolution authorizing a loan from the holding company if the FHCF monies do not show in a timely manner.

Some insurers have even adopted a 100 percent cash solution. “Their philosophy is, their thought process is that if there’s a shortfall that cash will be king, and because they already have their entire investment portfolio in cash that they will be in a position to sort of float their way out of this. We thought that was sort of an interesting response,” Petrelli said.

It may be an interesting option but Demotech isn’t convinced that the cash approach is as strong a contingency plan as additional capital infusions or borrowing money from either the holding company or a lender. But he said the response “at least showed that they’d been thinking about this.”

Petrelli said that other carriers have responded by cutting back on their writings so that they have less exposure. “That’s an interesting approach, but it’s not one that benefits the marketplace. As a matter of fact, it’s sort of counterproductive to the marketplace,” Petrelli said.

Demotech has an expertise in smaller companies like the Florida domestics. It is known for rating carriers that other rating agencies won’t because they are too small or too new. Demotech began issuing its financial stability ratings in 1996 to what were then called the “take-out” companies. Its ratings are accepted by Fannie Mae and Freddie Mac when they sell mortgages to the secondary mortgage marketplace.

“We actively monitor 59 of the companies that are writing coverage in Florida. We’ve been doing it for 13 years. We’re very comfortable with what’s going on in Florida,” Petrelli said. “We require companies to have, typically, a more costly and more effective reinsurance program than they might need from an incorporation perspective and a licensing perspective. So, we’re doing a lot of things behind the scenes that are basically intended to assist those companies survive the big wind.”

Not all of Florida’s domestic carriers are doing well. People’s Trust has been told by state regulators to stop writing because it risked exceeding its capacity at the pace it was growing. In a worse situation, the state had to go in and take over Coral Insurance and is now cancelling all of that carrier’s policies.

But Petrelli has confidence in the domestic insurers and thinks these two are not representative of the whole group of domestics.

“I would say that they are isolated problems,” he told Insurance Journal. “The reason I say that is when we look at the companies that we have reviewed and rated from 1996 to date, many of those companies now are 10 and 12 and 13 years old. Even though we don’t rate and follow them anymore, they have gone on to get very good ratings from other services. We know we have been able to identify some very strong companies.”

Still, he warns, the Florida property insurance market has its troubles and the exit of top writer State Farm will only further disrupt the market. Where will this business go? Petrelli said the domestic insurers are not equipped to absorb all of this business. Also, none of the other large insurers such as Allstate or Farmers are looking to grow in Florida. Finally, it is unlikely there will be many new start-up companies, according to Petrelli.

“It is either going to be Citizens [state-backed property insurer] or it is going to be the startup companies. I think it is very difficult for a startup company… to replace 16 percent market share is, I think, dozens of startup companies. And I can’t at this point in time see how anybody would be particularly interested in getting into the situation in Florida. … I think it is a situation where the market needs to stabilize and losing someone of the substance of a State Farm does not help the stabilization. I think it destabilizes it.”

This story is from an interview on the Florida market with Petrelli by Insurance Journal’s Andrew Simpson. The complete interview with Demotech’s Petrelli is available for listening at www.insurancejournal.tv.