Perils of Citizens' policy
As Florida lawmakers continue to deal with insurance problems, the insurance industry is not the only interest calling on them to look before they leap and avoid making matters worse for property owners, taxpayers and the state economy.
Associated Industries of Florida is recommending that the state's insurance officials and budget leaders proceed with caution as they work toward the overhauling of Citizens Property Insurance Corp.
Citizens plans to expand the types of coverage it can provide. Before expanding coverages, AIF recommends Citizens first determine the liability Florida will face, and if the state can cover future losses under existing coverages.
"Citizens has a responsibility to perform due diligence when they are asking to step into such risky territory as expanding coverage to 'all perils' in high risk territories and commercial properties," says Barney Bishop, president and CEO of AIF. "When Mother Nature's wrath strikes Florida again, Citizens may not have enough revenue to cover losses and our property owners will take an enormous hit in their pocketbooks through additional taxes on their insurance policies."
Associated Industries is encouraging Citizens to further research its current financial stability, the fiscal impact of expanding its coverage lines and to demonstrate that the company has the reasonable ability to pay potential losses, without relying on debt.
AIF commissioned a study, which was conducted by Towers Perrin, of recent legislative changes to Florida's property insurance market. The key findings if AIF's study should trigger concern among policymakers.
The key findings include:
- Recent Florida legislation will increase the amount of hurricane claims that will be financed post-event through bonds and future premium assessments to repay the principal and the interest charges associated with those bonds.
- Post event funding through bonds, to pay for claims in excess of cash resources, could range up to $50 billion or more if there is a major 2007 hurricane.
- Per household, total nominal assessment costs to pay off the bonds could range from approximately $1,700 for a moderate hurricane to $14,000 for a major hurricane; these costs would be spread over the next 10 to 30 years in the form of assessments on auto, homeowners and all lines of business insurance.
- Even a series of smaller storms across the state, similar to the 2004 season, would lead to assessments that exceed the incremental savings created by the legislation.
- The amount of savings and potential assessments vary across the state; an effect of post-event funding through assessments is to have lower hurricane risk areas subsidize higher risk area.
AIF's Bishop warns that if Citizens is expanded too quickly and without thorough examination, the state "could be building a financial house of cards that could easily collapse."
The result could be enormous debt for the state and additional taxes for insurance policyholders.