Property/casualty insurers in Florida believe they are being overcharged for coverage from the state’s hurricane fund and some of them are looking for a refund.
Insurers contend that the state fund is only financially able to reimburse them for about $16.2 billion in losses but is charging them for $28 billion in coverage.
Insurers say they are being charged $1.3 billion in premium by the Florida Hurricane Catastrophe Fund for what is supposed to be $28 billion in reinsurance coverage. But since the Cat Fund only has the capacity to provide about half that coverage, they say the premium should be lowered.
The Cat Fund reinsures insurers for a portion of their hurricane losses on residential properties.
The request to lower the premium originated with Tower Hill Insurance Group, which last month petitioned the Florida State Board of Administration (SBA) for the premium recalculation on behalf of its five member companies. The SBA, which administers the Cat Fund, has itself calculated that the fund only has enough money to pay at most $13.2 billion in claims over the next six to 12 months.
Even if the Cat Fund were to issue bonds to raise money, it would still fall short of its promised $28 billion capacity by as much as $14.5 billion, the SBA calculates.
Tower Hill said it is being overcharged about 45 percent. It is being charged $30 million by the Cat Fund for the full reinsurance, when an actuarially appropriate rate for the coverage that is available would be closer to $16.4 million, according to Tower Hill. It doesn’t want to pay the extra $13.6 million.
Now the Florida Property and Casualty Association (FPCA), representing Florida insurers, has filed a petition for intervention to make sure that if the SBA agrees that the premium should be recalculated for Tower Hill, then all so-called “similarly situated” carriers will benefit from the recalculation as well.
For the 2008 hurricane season, 2001 insurers paid $996 million for the mandatory $16.35 billion in coverage from the Cat Fund. Another 133 insurers also bought optional coverage of $11.43 billion for $217 million in additional premium.
FPCA counsel Mike Colodny says his group isn’t necessarily siding with Tower Hill on the merits of its request but does want all insurers to be treated fairly if there is a change in the premiums charged.
Tower Hill’s petition asks the SBA to lower its premium payment to one that “more accurately reflects the level of coverage actually available to insurers under the reimbursement contracts.”
Tower Hill maintains that the implications of being overcharged are significant and go beyond just having to use funds on nonexistent coverage. Rating agencies could lower insurers’ ratings due to the credit status of the Cat Fund and private reinsurers could begin charging more for the extra layers of reinsurance out of concern that the Cat Fund can’t meet its obligations, the insurer’s petition says.
The company also notes that the state has required insurers to reduce rates to consumers to reflect supposed savings from being able to purchase the extra reinsurance from the Cat Fund instead of in the private market.
A recent report from the Senate Banking and Insurance Committee suggested the Legislature may need to consider alternative funding for the Cat Fund.
The industry’s Florida Insurance Council has urged the Legislature to establish a more realistic exposure level for the Cat Fund of about $16.5 billion, which represents the basic program minus the $11-12 billion expansion approved in the January 2007 special session.
The industry argues that reducing the exposure level would prompt all insurance companies– including the government-run Citizens Property Insurance Co. — to purchase the upper limits of their reinsurance on the private market. But then policy makers must allow insurers to include all costs of their private reinsurance program in their rates, the industry has argued.
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