In a Quiet Storm Season, State Debates Insurance

With the 2009 hurricane season waning, Florida appears likely to go another year without a major storm. But at the same time, state officials continue taking steps to reduce the state's future financial risk when the inevitable happens and another major hurricane strikes the state.

In one move, state regulators are expected to let Citizens, which is now the state's largest residential property insurer with more than 1 million policies, lift a rate freeze and impose its first rate increase since 2007 in an effort to strengthen the company's ability to pay claims after a major storm without having to resort to taxpayer bailouts or assessments on other insurance policyholders across the state.

In Tuesday's hearing, state regulators reviewed Citizens request to increase its rates for 636,000 policyholders, including an average 5.4 percent hike for homeowners. Citizens will make its case for a rate increase for another 419,000 customers in largely coastal "high risk" areas in a Nov. 10 hearing that will include a 7.7 percent average increase for homeowners.

No individual policyholder will pay more than a 10 percent increase, while a number of Citizens' customers, particularly in interior counties, could see their rates decrease up to 10 percent.

The rate request was criticized by one of the state's largest business lobbying groups which argued that Citizens ought to impose an across-the-board 10 percent increase for all its customers in order to make the company more financially sound.

Not imposing a 10 percent increase or even letting some customers reduce their rates "is absolutely astonishing to those who follow this closely," said Barney Bishop, head of Associated Industries of Florida.

Bishop said a 10 percent increase was necessary since Citizens could face a $22.5 billion liability after a major hurricane but only has about $4 billion in surplus funds, leaving an $18.5 billion deficit that would have to be paid off either by tax dollars or an assessment on insurance policies across the state.

"We know exactly what the right thing to do is," Bishop said. "We're all dumbfounded by this action."

But Bishop's remarks drew a strong rebuttal from state insurance regulators who said Citizens was following a new law that directed the company to impose "actuarially sound" rates based on potential losses from a major storm.

If lawmakers wanted Citizens to impose a 10 percent across-the-board increase, they could have directed that but it would have led to inequities in the rates, said Steve Parton, the general counsel for the state Office of Insurance Regulation. Lawmakers would have to say "it's OK for the farmer in the middle of the state subsidizing the rich guy on the coast," Parton said. "I think we'll follow the law," said Deputy Insurance Commissioner Belinda Miller.

The same shaky financial outlook for Citizens also remains for the state-created backup fund for property insurance.

A group of financial advisers on Tuesday concluded that a big storm could wipe out the Florida Hurricane Catastrophe Fund and leave it unable to pay off insurance claims, although the situation is much better than it was a year ago.

Florida allows private companies and Citizens to purchase reinsurance from this fund at a cheaper rate than private companies. The fund has the power to place a charge on most insurance policies - including those for auto insurance - if it doesn't have enough money to pay off losses. Floridians are still paying off charges related to claims stemming from the eight storms that hit the state earlier this decade.

A new outlook adopted by an advisory council on Tuesday concludes the fund could come up with $19 billion to pay off claims stemming from a major hurricane, leaving it $4.1 billion short. But this shortfall has dramatically fallen from last year when estimates pegged the shortfall as big as $15 billion. The fund's financial outlook has improved because the credit markets are better now than at the height of last year's credit crisis and because state lawmakers this spring scaled back the size of the fund.

John Forney, the lead financial advisor for the fund who works for Raymond James & Associates, said there was only about a 5 percent chance that a major storm would wipe out the fund.

But Jack Nicholson, chief operating officer of the fund, warned that while the fund could likely withstand a major hurricane or an active storm season it could not handle back to back years like there was in 2004 and 2005.

"We are basically right now a one-storm wonder," said Nicholson.

But while the fund's financial situation has improved there's still a chance that homeowners, motorists and other Floridians may still get hit with higher fees early next year. Nicholson said that the fund is still paying off claims related to past storms, especially claims associated with Hurricane Wilma, which struck South Florida in 2005. He said that it appears the fund could run $300 million to $600 million short of what's needed.

The fund cannot use money it collects from insurance companies now to pay off these past claims. Nicholson estimated that the extra fee - which would have to be approved by Gov. Charlie Crist and other state officials - could wind up pushing up insurance bills by $6 or $7 a year for most Floridians.