Florida Insurance companies on Brink of Danger!

The announcement that three Florida insurance companies face closure was just a start.Soon, Florida regulators acknowledge they will need to name the rest of those in trouble.
The state's property insurance market is teetering.The danger to Florida's development-based economy — built on mortgaged home sales that require insurance — is troubling.
"I'm not trying to raise anybody's rates, but at the end of the day, the single biggest issue that will cause the state's economy to stop is not handling this insurance situation correctly," warns state Sen. J.D. Alexander, a senior banking committee member.This isn't bad luck. It is the result of two decades of reform that steadily has shifted hurricane risk to state residents.Not only do Florida policyholders pay more for less coverage, higher deductibles, and policy exclusions, they are liable for mountainous deficits of the state's three bailout funds.
Solutions proposed by the Legislature penalize vacation homeowners and mansion dwellers but don't deal with this elephant in the room."I think it's a crisis," Alexander said. "I've asked the Senate president and the governor to consider letting us to put it into a special session. I think it's that important."
Roller coaster
After almost a decade of storm-free years, Florida's insurance funds, Citizens Property Insurance and the Florida Hurricane Catastrophe Fund, seemed strong.They entered the 2004 hurricane season with $7.7 billion in cash from years of payments by policyholders.
Two years and eight hurricanes later, the money is spent, and residents must cover $3.5 billion in deficits. If there are more storm losses this year, Floridians likely will get the entire bill for all-but-certain 2006 deficits.Late in 2004, Tom Gallagher, the state's chief financial officer, said deficits and assessments are an important part of the structure he helped create to aid Florida's recovery from Hurricane Andrew.
"The idea is although over a bunch of years you build up a cash reserve of $6 billion, you could just as easily have a bunch of years where you have a $15 billion deficit," Gallagher said."It could go like this" — he moved his hand like a roller coaster — "and that's by design."Over 100 years, it should be neutral."
Adding it up
The potential for debt that consumers pay back is huge:
• Florida's Hurricane Catastrophe Fund, which sells reinsurance coverage to insurance companies at below-market costs, has the ability to take on $30 billion in debt, paid off by consumers.• Citizens Property Insurance, which insures those turned away by the private market and is close to being the largest insurance company in Florida, has no deficit limit. In any year, its three business accounts can add up to a combined 60 percent surcharge to insurance bills. That's $600 on top of every $1,000 in premiums paid.
• The Florida Insurance Guaranty Association,— which pays claims of insolvent insurers, also has no debt limit, but its yearly assessments are capped at 2 percent.Still, home premiums in many cases have doubled since 2004, and 27 insurers have pulled out of Florida and dropped 295,000 policyholders.Now three insurers have been declared insolvent.
"We've never seen this market like this. Absolutely," Naples agent Bill Ashworth said.
Factors of a crisis
How did consumers' risk get so huge?• There is political pressure to keep insurance rates low. Atlantic Preferred earlier this year asked for an 18.6 percent rate boost when its studies indicated 57 percent was needed.
• Quick fixes are attractive. What started a decade ago as a lawmaker's idea to pay insurers bonuses to take policies that were dropped after Hurricane Andrew has changed the face of Florida's insurance market.A third of the state's property is now insured by small companies created to reap those bonuses. The business model calls for little cash up front and a lot of risk — as much as 90 percent covered not by cash reserves but by reinsurance.No other state has anything like it.
• Years of accelerated development in Florida's most vulnerable areas make the state a bad bet in active storm seasons.This spring's computer models increase the predicted cost of hurricanes by about 50 percent, which drives up reinsurance rates.
Florida's small insurers are unable to afford the backup coverage — if they can find it. Without it, those companies cannot survive big losses.
More to come
Regulators, including Insurance Commissioner Kevin McCarty, refuse to say whether more insurers in trouble.Financial records suggest they are.Maitland-based Vanguard Fire & Casualty was allowed to back-date $10.6 million from its parent corporation, treating money received in late February as though it existed in December. Otherwise, the agent-owned insurer's balance sheet would have shown a $2.5 million deficit.
Sunshine State, built from policies taken over from the state insurance pool, reports less assets than required for the second year in a row.That could allow regulators to take over the company.
"I'm afraid there are a lot more out there," Senate Banking and Insurance Chairman Rudy Garcia said.
More risk coming
After spending the legislative session working up to a taxpayer bailout of the Citizens deficit and rate increases for beach mansions, lawmakers are just now publicly contending with the bigger threat of collapse.Their proposals shift yet more risk to Floridians.Alexander suggests a gamble — a $1 billion state loan program to match any new money insurance companies raise.
"We want enough investment in our state that they're just not going to fall apart the first time something happens," Alexander said.