Good News Now, Question Marks Later, for Fla. Citizens

By | February 22, 2013

Coming on the heels of a major deal that transferred 31,000 coastal policies and $30 billion in gross exposure to private start-up Weston Insurance Co., Florida’s state-run Citizens Property Insurance Corp. is moving to shift even more risk to the private sector with a planned $250 million catastrophe bond issuance.

This will be Citizens’ second dip into the cat bond waters, following last year’s record $750 million Everglades Re transaction. And it also marks 2013 as the second year in a row that Citizens will boost the total amount of risk it transfers to the private reinsurance market, which has the added benefit of reducing its reliance on the also-shaky Florida Hurricane Catastrophe Fund.

In 2011, Citizens bought $575 million of private reinsurance, a total it nearly tripled with last year’s $1.5 billion. With the most recent cat bond transaction, Citizens now targets its 2013 reinsurance program at $1.75 billion, which could include another $250 million cat bond issuance at some point this year and as much as $750 million in traditional private reinsurance.

In other good news, another major player also has entered the depopulation game, as Bermuda-based Axis Capital is backing a start-up take-out insurer called Qorval that will be led by former Citizens President Bob Ricker. It’s not yet clear if Qorval will look for take-outs of the same size as the Weston deal, but it’s fair to conclude from these trends that the private market’s appetite for Florida risk is growing.

However, it’s important that state lawmakers not draw the wrong lessons from these encouraging developments. Citizens is still too big. It still charges too little. And state residents – both the roughly one-quarter who are Citizens policyholders and the three-quarters who are not – would still be on the hook for big assessments the next time a major hurricane barrels across the Florida peninsula.

As detailed in a recent Sun-Sentinel piece, Citizens’ coastal account would face up to $14.8 billion in claims should a 1-in-100-year storm hit South Florida. Its claims-paying resources for such an event include about $3.997 billion in reinsurance from the Florida Hurricane Catastrophe Fund (which has solvency concerns of its own) and about $2.91 billion in cash reserves. The latter category includes Citizens’ obligations to pay roughly $444 million under the 10 percent quota share it would owe under its Cat Fund reinsurance, as well as $686 million to pay commercial and nonresidential policies that aren’t covered by the Cat Fund.

An additional $191 million would be raised through assessments on Citizens existing policyholders and $1.5 billion could be recovered under the reinsurance package — half-cat bond, half-traditional — it placed last year. Once the private reinsurance was used up, Citizens policyholders would then be hit up again for a second round of assessments estimated to be about $397 million.

But that would still leave Citizens with about $5.8 billion in unpaid claims, at which point, it would be forced to borrow money in the capital markets. To pay off these post-event loans, the first step would be to raise $620 million through 2 percent assessments on non-Citizens homeowners policies. For the remaining more than $5 billion, assessments would be laid on policies for cars, businesses, pets – essentially every property/casualty insurance policy in the state except workers’ comp and medical malpractice – and those assessments could persist for as much as a decade. Floridians still have $1 billion in remaining assessments to pay from the 2005 hurricane season, and that was before Citizens’ massive legislative expansion in 2007.

By no means should the recent spell of good news make state lawmakers complacent about shrinking the size of the state’s insurance mechanisms, both Citizens and the Cat Fund. The progress is encouraging, but it all could be wiped away in an instant.

About Ray Lehmann

Lehmann is co-founder of the R Street Institute in Washington, D.C. where he serves as director, Finance, Insurance & Trade, and is a senior fellow. He can be reached at rlehmann@rstreet.org. More from Ray Lehmann

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