Insurance News Update:
While some analysts are predicting that the property insurance industry will be able to manage Hurricane Ian and its estimated $50 billion in insured losses, a few are now warning that the storm could significantly erode the Florida Hurricane Catastrophe Fund’s surplus, which could spell trouble for carriers who may face soaring reinsurance costs next year.
An analysis by Chicago-based Ian Gutter man, a longtime investor in insurance companies and founder of a startup homeowners insurance company, put it bluntly.
“From my point of view, the risk to the system is that the FHCF is the finger holding back the dam,” Gutterman wrote this week in a blog post. “If it gets removed, most of the local insurers are going to get washed away.”
The post has elicited a range of reactions from leaders in the Florida insurance industry.
“He’s not right on everything, but he’s pretty warm,” said John Rollins, an actuary and former chief financial officer at Olympus Insurance Co. in Florida.
The Florida cat fund’s chief operating officer was not available to talk about Ian’s impact on the state-created reinsurance fund. But a spokesperson said the program “is in a strong financial position,” with liquid resources of more than $16 billion and a bonding capacity of $8 billion.
The fund’s reserves, bonding capacity and other factors mean that Gutterman “has no idea what he’s talking about,” said Melissa Burt DeVriese, president of Security First Insurance Co., an Ormond Beach-headquartered carrier with some 160,000 policies in force in Florida.
Others said that while the cat fund will likely survive, Ian’s massive right hook, affecting more than 2.3 million properties, by some estimates, has exposed deeper issues and will push some Florida insurers to the brink. Industry insiders are now saying that a special session of the Florida Legislature is needed soon to salvage the industry and expand the cat fund before the 2023 reinsurance renewal deadlines.
Gutterman’s argument is essentially this: If insured losses from Hurricane Ian do, in fact, reach $50 billion, as some models have predicted, that’s probably around $30 billion in residential losses and enough to wipe out the cat fund’s $12.7 billion surplus, according to publicly available FHCF reports.
Yes, the cat fund will still have bonding capacity and other resources, Gutterman said. But it means that the program will be forced to sell bonds, perhaps at less-favorable rates, which would leave the fund with half the claims-paying capacity for next year’s catastrophe season. That would force insurers to seek more-expensive reinsurance from the gun-shy private reinsurance market.
“While private reinsurers could fill the void, the price they would charge is unaffordable,” Gutterman wrote. “Thus, private insurers (and Citizens) will be far more exposed to cat risk next summer.”
He called it a Hobbesian choice, noting that retaining more risk is not really an option: More insurers will lose their Demotech financial stability rating if they follow that path. That could lead to restructuring, rehabilitation, a structured run-off or even insolvency for some.
The predicted loss numbers for Ian may not be far off. As of early this week, the Florida Office of Insurance Regulation reported more than 222,000 have already been filed from policyholders affected by the storm – a fraction of what the final number will likely be. Citizens, which holds almost 13% of the Florida market, has estimated it will see 225,000 claims and some $3.8 billion in losses. Wednesday morning, Citizens had revised its estimate to $2.4 billion to $2.6 billion in losses, not including litigation costs.
By comparison, Hurricane Michael, which hit part of the less-populated Florida Panhandle in 2018, produced almost 159,000 claims and $9.1 billion in estimated total insured losses. Hurricane Irma, which raked across a large swath of the state in 2017, resulted in some 1.1 million claims and insured losses of $20.7 billion, the OIR reported. Hurricane Charley, a 2004 storm that made landfall on the same part of the coast as Ian, caused about $7 billion in insured losses, S&P Global rating firm reported. That’s about $11 billion in today’s dollars.
Pressure is building for a special legislative session, but probably not because of Hurricane Ian’s impact on the cat fund’s surplus, Handerhan said. He pointed out that the FHCF is not really in danger of losing all of its reserves this year, because it will likely take five years to pay all the Ian claims from insurance companies.
“Over that whole time, the cat fund is collecting premium,” he said.
Gutterman agreed that the cat fund could utilize a cash-basis accounting method to smooth over losses, but that is not without risks.
DeVriese, of Security First Insurance, said that the cat fund is not in trouble and probably won’t hurt insurers’ reinsurance costs next year, as Gutterman suggests.
Matlacha area near Fort Myers Beach (AP Photo/Gerald Herbert)
Gutterman’s math “is completely off because he’s not understanding how the FHCF provides only partial coverage to each company – there is private reinsurance coverage that goes below, around, and above the FHCF. So, for example, a $3.8 billion loss for Citizens does NOT mean that Citizens gets $3.8 billion from the FHCF, because the FHCF only covers a portion of the total loss of Citizens.”
Gutterman, contacted by the Insurance Journal, said that he could be missing something, but he believes DeVriese’s assessment is not entirely accurate.
“I’m not saying there’s no way out, but if you look at the risks to the system, the FHCF is the biggest risk, from what I see,” he said.
A bigger concern now, Handerhan argued, is the threat of another hurricane this fall. Two potential systems are brewing this week in the Atlantic Ocean. Another strike on Florida could force carriers to buy reinsurance to prepare for yet another storm before the season is over.
“Imagine our entire industry having to buy reinsurance for a third event,” Handerhan said. “We’re praying that there’s not another hurricane. That would be extremely disruptive.”
Top photo: After landfall on Florida’s southwest coast, Ian churned across the state, wrenching apart condo seawalls and hotel decks in Daytona Beach Shores. (Joe Burbank/Orlando Sentinel via AP)