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Palm Beach Post: Commentary: Reinsurance a smart bet for Citizens, Cat Fund

Friday, August 15, 2014

By Bill Newton

Sometimes our memories are shorter than they ought to be. No kidding, you say? Seriously, every year, we’re are told to “get a plan,” harden our homes, and stock up on hurricane supplies. And, for eight years and counting we have been missed by major hurricanes. Little by little, Floridians begin to forget that it could happen here again.

Hurricane Wilma in 2005 — the last storm to batter Florida — caused more than $20 billion in damage, making landfall in Collier County and jetting back to the eastern side of the state before exiting to the Atlantic Ocean. It may be hard for some of us to fathom that we could suffer from another Wilma next week, in three weeks or in three months. And if we do, the reserves of Citizens Property Insurance Corp. and the Florida Hurricane Catastrophe Fund are going to be ripped apart like houses hit by a 150-mph wind. All our savings, gone.

Citizens’ continued purchase of out-of-state reinsurance is the fiscally prudent thing for Florida. It will allow Florida to financially survive a major storm or even a series of smaller storms. Citizens was created to be the insurer of last resort and stabilize the Florida insurance market. It should continue that work by securing reinsurance for homeowners so the risk of disaster is spread widely, not focused on Florida policyholders. That’s how insurance should work.

Purchasing reinsurance puts Floridians in a better financial position. Although Citizens still keeps a reserve of cash to pay claims, it is moving some of the risk into the open market, where it can be spread into the global financial markets. This reduces the threat of future borrowing by the state and decades of debt that will have to be paid by taxpayers. It’s a solid bet at a good price in today’s market.

The basic idea of insurance is to spread the risk by pooling the resources of many in case one has a problem. The financial markets can assess and price risk, making it possible to spread the risk to anyone willing to invest at the market price.

If the weather holds (a very big if) then we hope Floridians may see reduced insurance rates from Citizens and the private market. As more affordable private insurance becomes available, Citizens helps consumers return to a private carrier. In fact, under Florida law, Citizens is required to create programs to work with private-market insurance companies willing to offer coverage to Citizens policyholders. Since the beginning of this year, Citizens has shifted nearly 120,000 policies into the private market. This is on top of the more than 365,000 policies moved to the private market last year.

These are all smart steps designed by the Florida Legislature because as storms approach the state, as sinkholes form underneath homes and as tree branches fall through roofs, all Citizens policyholders and all Florida taxpayers end up on the hook. The potential for a super hurricane lurks just offshore, and with it, assessments could go up and additional taxpayer dollars would be spent, but for the protection of Citizens and the Cat Fund.

Stronger Safer Florida, a coalition of business groups, environmental groups, consumer groups, policy groups and others have advocated reforms for both Citizens and the Cat Fund for years.

Citizens reports that 18 cents of every dollar paid through premiums goes to pay claims from catastrophic events. As with the Cat Fund, a direct hit from a large-scale hurricane or a series of smaller storms could wipe out the savings that are in place, leaving Citizens without enough money to pay claims, back where it started. Then what?

By then, we will remember what we had previously forgotten — that hurricanes do more damage than we expect, that we can’t do anything to stop them, and that we wished we didn’t have to spend so much taxpayer money afterward.

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