Proctor: Charge rates commensurate with risks

“A serious threat to Florida’s economic recovery is the possibility that a major hurricane will strike a large metropolitan area”, District 20 State Representative Bill Proctor told Historic City News local St. Johns County news desk today.

In a letter received Monday, Proctor said that it is estimated that the resulting damage to residential and commercial properties in Florida could exceed $80 billion.

”Many of the claims would be the responsibility of the state. Unfortunately, the state’s two major property insurance entities – Citizens Property Insurance Corporation (Citizens) and the Florida Hurricane Catastrophe Fund (CAT Fund) – do not have the financial resources necessary to pay for losses of such magnitude.”, Proctor said.

Using Proctor’s numbers, Citizens, the primary insurer of Florida homeowners, will have about $4.2 billion cash on hand and $8.7 billion in expected reinsurance coverage (for a total of $12.9 billion) to meet its $21 billion obligation in the event of a 1 in 100 year storm during this year. Thus, Proctor estimates that Citizens could be underfunded by more than $8 billion.

Of equal concern to Proctor, is the fact that insurance companies would rely on approximately $23 billion in recoveries from the Florida Hurricane Catastrophe Fund. The Cat Fund projects just about $6.0 billion in cash for 2010 and may incur debt through bond issuances up to $17.173 billion to pay its claims.

Proctor explained that whatever debt Citizens and the CAT fund must acquire to settle claims would be paid by assessments, of an unknown amount and duration, on all Florida homeowners policies. Assessments might also be levied on boat, auto, and business policies. “These assessments could, in the event of an $80 million storm, total thousands of dollars in “hidden hurricane taxes” on Florida’s families and businesses”, Proctor said.

In his letter, Proctor says, “The threat to the state’s economic recovery arises from three possibilities: the necessary assessments may intensify the current recession; the state may not be able to issue enough bonds to pay all of Citizens’ and the Cat Fund’s claims; the state would have few resources with which to pay claims from a second major storm. These possibilities could occur in the hurricane season of 2010 or beyond, unless we abandon the policy of suppressing insurance rates below actual risks.”

Everyone has seen the private insurance market eroding. National companies are reducing their exposure or leaving the state; small domestic companies do not have the resources to fill the void. Florida insurance regulators recently reported that 102 out of 210 private insurers have reported losses during the second quarter of 2009, a period in which the state experienced no storms. Moreover, three domestic property insurers have become insolvent, another has been placed on administrative supervision, and others have been acquired to save the companies from insolvency. According to Proctor, “We must attract and retain private claims-paying capital; otherwise, the burden shifts to the state.”

Proctor believes that there is no immediate solution, but two actions are imperative. “Citizens must be required to charge rates commensurate with risks; otherwise, major assessments remain a threat to economic recovery. Additionally, private market rates must be “market based,” regulated by consumers in a competitive environment, not by government”, Proctor says.

“Some critics oppose allowing Citizens and private insurers to charge rates that reflect actual risks”, Proctor pointed out. “It is then the obligation of the critics to propose a solution that does not entail assessments of an unpredictable amount or duration.”

Proctor sums up his position by saying, “Florida cannot afford to wait for a solution from Congress – we must take action now to ensure the rates of Citizens and private insurers are actuarially sound, and to minimize the state’s role in the homeowners’ insurance business. Otherwise, we face the threat of bankrupting the state after a major hurricane.”