FL] Home Insurance Industry Is Fraught With Risks
February 27, 2010, Paige St. John, Sarasota Herald-Tribune [Excerpt]
Millions of Floridians now bet their homes on property insurers that teeter on the edge of financial failure, a Herald-Tribune investigation has found.
These companies look nothing like the Allstates and State Farms that insure the rest of America - legacy carriers that command bankrolls the size of small nations.
Instead, because State Farm and Allstate are fleeing Florida, a growing number of homeowners get their insurance from tiny, untested companies that have a few million dollars in the bank but insure billions worth of property they could never hope to rebuild on their own.
More Failures to Come
No one knows what will happen when the next big storm strikes Florida shores. But the indications are not promising.
Over the past year, without having to weather a single hurricane, Florida led the nation with a half-dozen property insurance failures. For the first time, state regulators openly warn that more failures will come, even if a storm does not.
The Herald-Tribune spent more than a year examining Florida's property insurers, tracing the ownership of more than 70 companies through shell corporations and reviewing the financial filings of each. It found:
One in three privately insured Florida homeowners relies on insurers that exhibit one or more signs of financial risk.
More than 100,000 homeowners relied on companies barely capable of paying for house fires, let alone hurricanes. These insurers' reserves come so close to the state's $4 million minimum requirement that they operate with only a few hundred thousand dollars of their own to pay claims.
During the 2009 hurricane season, at least 38,000 Florida homes were insured by companies state regulators knew would fail. Homeowners were not told until after hurricane season, when one company was shut down and the other had to sell.
Lawmakers and regulators have ignored warnings and encouraged private companies to stretch their limited cash further. They have pushed companies to insure more and more homes without increasing the money set aside to pay claims, a practice that put state residents farther out on a limb.
Larger dangers loom. Despite rising property values, one in three Florida carriers has decreased the cash set aside for storms.
The Florida-only carriers that provide the majority of hurricane coverage in this state now stretch their limited cash nearly twice as far as they did before 2004.
They do it by buying a form of backstop insurance, called reinsurance, that is supposed to kick in and prevent insurers from failing when major catastrophes strike.
But insurers still must have their own money to pay what amounts to a deductible. And after every storm they need cash to operate and pay claims until they can collect on backstop policies.
Experts point out that even companies with the best reinsurance policies can fail if they experience cash-flow problems.
'florida ponzi scheme'
In simplest terms, the average Floridian with a $350,000 house is insured by a company with less than $750 in hand to pay for that home. By contrast, the average carrier had $1,300 in 2003. Allstate and other well-funded insurers had nearly $4,000 banked for the same risk.
"It is the Florida Ponzi Scheme," said Miami agent Phil Lyons, secretary of the Independent Insurance Agents of South Florida.
Regulators, insurance executives and industry lobbyists argue that the system, perhaps flawed, is all that Florida has to fill the yawning hole left by the mass exodus of national insurers.
"What were the options?" asked Sam Miller, vice president of the Florida Insurance Council, the industry's largest trade group in the state. "I don't think any other plan would have worked."
Yet among insurance insiders there is unease and growing alarm. "There should be bells and whistles going off everywhere," said Jeff Grady, president of the Florida Association of Insurance Agents.
"On the surface it may appear things are OK, but below the surface, things are really troubling."
Beginning with Hurricane Andrew in 1992 and accelerating after Katrina in 2005, Florida's property insurance market changed dramatically.
State Farm and Allstate, combined protectors of one-third of Florida homeowners before 2004, led a wave of withdrawals, followed by Nationwide, USAA, Hartford and Travelers.
In their place arose what insurance expert Robert Klein, director of the Center for Risk Management and Insurance Research at Georgia State University, calls the "Florida-zation of cat risk."
These are the insurance companies that only do business in Florida, taking an all-or-nothing gamble on the state's weather.
In 1992, these concentrated risk-takers insured just 6 percent of Florida. Today, including the Florida-only subsidiaries of national insurers, they cover 71 percent.