Hurricane Debate on Florida's Horizon

BRADENTON, Fla. - Reform of Florida's residential insurance market likely will be a hot topic during the Legislature's annual session, which began on Tuesday,

A new nonprofit group called Shield Our State is proposing a new investment strategy to pay hurricane claims with tax-exempt debt, while lawmakers have filed bills aimed at restructuring the current system to protect residential property owners from storm losses.

In both cases, the goals are to stabilize the state's private residential insurance market, keep premiums affordable as the recession worsens, and find new ways to pay for losses as the credit markets remain destabilized.

Underscoring those problems is last month's announcement by State Farm Insurance Co. - Florida's second-largest residential insurer with more than 700,000 homeowner policies - that it intends to pull out of the state because regulators refused to allow it to increase premiums an average of 47%.

That means state-run, nonprofit Citizens Property Insurance Corp., already Florida's number-one insurer with more than one million policies and $400 billion in exposure, stands to get bigger, although state officials are trying to funnel most State Farm policyholders to smaller start-up companies.

The continuing liquidity crisis is affecting the ability of the Florida Hurricane Catastrophe Fund to prepare for the upcoming storm season with enough funds to pay claims. The Cat Fund is designed to provide low-cost reinsurance to private insurers as one way of stabilizing the residential insurance market.

But the fund would face a shortfall of between $15 billion and $20 billion if a large hurricane or series of hurricanes hits Florida, largely because of the deterioration in the financial markets, the Cat Fund's financial adviser said recently.

Both Citizens and the Cat Fund rely largely on post-hurricane tax-exempt bonding to pay claims. The debt is paid back by assessments or surcharges on most property and casualty insurance policies in the state.

That system is broken because both state-run entities charge artificially low rates and are not required to be appropriately funded, according to Dan Montgomery, a financial and insurance professional who has organized Shield Our State to push a new hurricane insurance structure and investment strategy.

"Simply stated ... property owners pay insurance premiums for something less than the solvency needed to pay losses, and after a loss event, everyone is surcharged for the difference between what remaining capital was available from the artificially low premiums and the actual capital needed to be raised to pay the losses," Montgomery said. "That is not a very reliable, financially secure system, as the property owners and-or prospective property purchasers are put in a position whereby they can never know what the cost of insurance and disaster recovery is going to be."

Shield Our State is proposing that all of the premiums paid for residential hurricane insurance coverage across the state be deposited into a tax-exempt Hurricane Insurance Pool dedicated to pay residential storm losses on a pre-event, tax-exempt basis as opposed to the current system, which uses post-hurricane assessments to pay back debt.

The pool would be managed by the state. It would attract investors by offering $1 million in tax-exempt contracts that are tradable securities. The contracts would be backed by 10-year Treasuries and an additional tax-exempt interest rate of 3%. Montgomery said his organization plans to obtain a private-letter ruling from the Internal Revenue Service to ensure that the contracts qualify for tax-exempt status.

"I am speaking at the moment with capital market interests and legal counsel to determine what the instrument would be," Montgomery said. "What makes the contract unique is that, as the Hurricane Insurance Pool annual premium retention increases in non-hurricane or minimal-hurricane years, the capital at risk in each contract decreases proportionally over the 10 years."

"Therefore, as risk of a hurricane increases over time, the capital at risk is decreasing, which provides an attractive investment balance," he said. "In the worst-case scenario, all of the capital being consumed in the first year to fund hurricane losses incurred, the repayment of the obligation comes from the premiums Floridians are paying now, without reliance on any surcharges over and above those premiums being required, as there would be no post-event financing need."

Montgomery said his idea would create a more solvent structure than the current structure and he has begun vetting it with Florida officials, some of them in the office of Gov. Charlie Crist. Montgomery said his plan would not affect the billions of dollars of outstanding debt that has been issued by Citizens or the Cat Fund.

So far, no one has opposed or supported Montgomery's plan. More details are available at www.shieldourstate.org.

Jack Nicholson, chief operating officer of the Cat Fund, said it is not clear how Montgomery's plan would work, except that it would require the state to assume all of the risk for wind, or hurricane, coverage.

"Right now, the state doesn't have all the risk and we're having a hard time with the financial markets," Nicholson said. "I'm not entirely comfortable with his assumptions and knowledge of the marketplace."

Citizens spokesman John Kuczwanski said the agency has reviewed Montgomery's proposal but would not comment on it, or any other plan.

Meanwhile, state Rep. Ellyn Bogdanoff and Sen. Mike Fasano, both Republicans, have filed HB 1157 and SB 2384, respectively, which would institute a new system to deal with hurricane insurance in the state.

Both bills conclude that the current structure of dealing with hurricane insurance - through regulation and market financing - is not working to stabilize the private market and keep premiums affordable.

The bills propose creating the Florida Hurricane Protection Program, which would assume all of the hurricane insurance policies and premiums from across the state. Right now, Citizens provides hurricane insurance to those who are in high-risk areas where private insurers have withdrawn coverage, while private insurers still offer policies in areas of the state considered less at risk from hurricane damage.

The Cat Fund would then administer the Hurricane Protection Program, sell debt to pay claims, and assess property insurance policies to pay back the debt.

The bills continue to rely on selling post-event debt and assessments to pay back the debt, but are subject to committee reviews and changes as the legislative session progresses.

It is not clear how the legislation would help stabilize the insurance market or keep premiums affordable, but they are being proposed to begin a dialogue to find a better way than the current system, said Fasano aide Gregory Giordano.

"This is a work in progress - a sketch - to look at a new way of doing things," Giordano said. "The senator is floating this [bill] to look at doing things in a different way so those in the industry can say whether it will work or not."

Revamping Florida's hurricane insurance system may not get done this legislative session, but Giordano said his boss believes the work must begin toward accomplishing that goal.

The Legislature's 60-day session runs through May 1.

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