Introducing… The Florida Sinkhole Insurance Fund?

October 22, 2010

Will Floridians, who already support a state-backed property insurer and a catastrophe fund, support another public insurance entity for sinkhole coverage?

Such a fund might be the “best way to go,” according to John Auer, president of domestic insurer American Strategic Insurance. Auer said he likes the idea because it would “quantify the problem” of runaway sinkhole claims that are costing insurers millions and “could take some companies out.”

“I know a lot of other companies feel similarly,” Auer said.

The sinkhole insurance fund concept, which has been recommended in two academic studies as a possible solution to rising claims, was among the ideas bandied about during a special symposium in Orlando. The symposium was organized by the Office of Insurance Regulation (OIR) and Insurance Commissioner Kevin McCarty to bring together insurance industry representatives and policymakers on recommendations for improving the state’s property insurance market. It was titled “Moving the Market Forward.”

Actuary Missy Shelley of Florida Farm Bureau, another domestic insurer, cautioned that before the state launches any new sinkhole facility “an analysis needs to be done so we know what we are getting into.”

Symposium speakers suggested that loss mitigation programs are the best protection against hurricane losses. But, speakers noted, the system is not only vulnerable to major storms but also to non-catastrophic losses from sinkholes and reopened 2004 and 2005 claims.

Reinsurance broker Guy Carpenter’s Kevin Stokes told attendees that Florida’s non-hurricane losses are up 65 percent since 2007. He said two-thirds of the state’s 55 domestic property insurers are losing money.

Citizens Property Insurance has had to pay almost $100 million in sinkhole claims on only $20 million in collected premium. The state’s catastrophe fund had to request an additional $700 million in bonds five years after the Hurricane Wilma to cover reopened claims.

Insurance agent John Gardner, Lee County Insurance Agency, said the sinkhole crisis is affecting availability of coverage even in counties where sinkholes are not prevalent.

Jack Nicholson, director of the Florida Hurricane Catastrophe Fund, said he is frustrated because state law does not prevent public adjusters and attorneys from escalating and reopening claims.

McCarty and the speakers said they hope the conference will lead to consensus on things that might be done to get at cost drivers and attract more capital to the market. Speakers agreed that volatility in rates and rules should be avoided, that the industry and consumers are better off when rates rise incrementally rather than spike suddenly and when there is stability in the legislative and regulatory environment.

McCarty, lawmakers and the industry had reached a consensus on some of these same issues in the spring with an omnibus bill, SB2044, that addressed tighter regulation of public adjusters, replacement cost payments, and other matters. Gov. Charlie Crist, however, vetoed that bill over the advice of McCarty and the industry.

Symposium speakers also addressed how the state might attract more insurance capital, including from private reinsurers and cat bond investors. John Seo, Fermat Capital, said cat bond investors he represents are eager to participate in the Florida market. But Seo and others agreed that cat bonds can only supplement, not replace, reinsurance capital.

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