News & Updates


VIEWPOINTS: Gathering Storm

March 15, 2009 08:00:00 AM 



The Florida Property insurance market today reminds me of the old cartoon depicting an insurance pitch which says: "Here’s a nice little policy with a real low premium – if you promise never to have any claims." When the insurance company making that pitch is unable to make good on its contractual promise to pay, the executives of that company are demonized (as they should be), accused of being corrupt or charged with stealing from an unsuspecting public.

But what if the executives of that insurance company are elected officials who, for personal political gain, use their pulpit and power at the expense of the public? Is the latter somehow more ethical than the former?

Amid all the political rhetoric the basic math on Gov. Charlie Crist’s insurance reform "plan" seems to be unraveling and consequently leading to higher costs than would have been the case had no reforms been implemented in 2007 and beyond.

Recently, several Florida newspapers reported the following statement from the senior adviser to the Florida Hurricane Catastrophe Fund:

"The state was potentially on the hook for $28 billion last hurricane season, but had access to only about $13 billion to reimburse insurers," Jack Nicholson told a Senate budget committee. "The shortfall could be even bigger this year, as much as $18 billion."

In a Feb. 5 op-ed in The Wall Street Journal, Gov. Crist took aim at a Journal editorial that was severely critical of his unraveling "plan." The governor said:

"Since beginning Florida’s insurance reform in 2007, the number of Citizens policyholders has dropped 18 percent, from more than 1.3 million to just over 1 million. This decline has been possible because 40 new companies have come to Florida, bringing more than $4 billion in new capital. This indicates reform is having the desired effect."

However, careful examination of slides 6 through 9 of Insurance Commissioner Kevin McCarty’s Jan. 13 presentation to the Florida Cabinet (which the governor attended) reveals the following:

l Slide 6 shows there were 10 new property insurers started in Florida in 2006 with total capital of $218.3 million.

l Slide 7 shows that in 2007 there were nine new carriers with $218 million in new capital.

l Slide 8 shows that in 2008 there were six new carriers bringing in a total of $110 million in capital. It goes on to note that the total for years 2006-2008 was $546.3 million and that there were 62 new companies licensed in Florida between 1992 and 2008.

However, slide 9 shows that from insurance companies formed between 2006 and 2008, the new capital referred to in the previous three slides wasn’t all new capital after all. In fact, $65.5 million of it was paid by the state of Florida itself. It is true that the Capital Build-Up Incentive Program generated additional new capital. According to Commissioner McCarty’s presentation, 13 insurance companies (seven of which were formed prior to 2006) took advantage of the program and contributed an additional $353.5 million in new capital. But $182 million of that was again paid by the state of Florida.

The problem is that the numbers still fail to add up to the governor’s $4 billion claim. The fact is the numbers presented by Commissioner McCarty indicate that the net new capital since 2006 is about $652.3 million.

Wow, that’s quite a difference! And the governor, in his Wall Street Journal op-ed, said that Florida had created $4 billion in new capital since his reforms. Let’s hope this was a mistake of the mind and not an intended misrepresentation to the people by The People’s Governor. Or perhaps he was just too enamored with the glowing tone of Commissioner McCarty’s presentation that he failed to actually comprehend the insignificance of millions in a world that deals in tens of billions.

You might also ask, "Where are the 62 newly licensed companies Commissioner McCarty mentioned?" How many are currently licensed and writing new business in Florida? And what happened to make that number shrink? Ever try to get the companies on the Office of Insurance Regulation’s Web site ( to actually answer the phone or sell you a policy?

Meanwhile, the governor and Commissioner McCarty speak as though they’ve introduced Florida to an oasis of available property insurance. If you were to use the words "wool," "pull" and "eyes" in a sentence, well, most of us get the picture. Yet, the master puller is in full swing.

The governor went on to say that since his reforms and the infusion of $4 billion in new capital, Citizens Insurance had reduced its policy count by 18 percent, or roughly 300,000 policies. But he never told you that all 300,000 of those policies were taken from Citizens and placed in the 25 thinly capitalized domestic takeout carriers the state of Florida gave $247.5 million to already ($65.5 million to companies formed in 2006 and after plus $182 million to companies formed prior to 2006.)

So, despite what the governor says (or fails to say), the true amount of new capital brought to Florida by his reforms is $652.3 million, not $4 billion as he wants you to believe.

Just to put that in perspective, consider State Farm’s departure. State Farm’s Probable Maximum Loss (PML) on a 100-year return period is roughly $7 billion. State Farm reinsures through the Florida Hurricane Cat Fund, despite the governor’s assertion in The Wall Street Journal. State Farm Florida’s recovery from the Cat Fund, in a worst-case hurricane, is roughly $3 billion. Most of the rest of its hurricane exposure is reinsured through its parent company State Farm Mutual. That’s $4 billion of reinsurance for about $500 million in premiums according to Gov. Crist’s Wall Street Journal assault.

Yet the governor and the Cat Fund paid Warren Buffett $224 million for a $4 billion line of credit that didn’t kick in until all other sources of money were gone. And that was money Gov. Crist and the Cat Fund would collect from you and me through assessments in order to repay Buffett if it was needed. Can you say "double standard"?

So when State Farm leaves Florida it takes with it the difference between its PML of $7 billion and what it gets from the Florida Hurricane Cat Fund – just less than $3 billion.

What that means to the property market in Florida is a net DECREASE in claims-paying ability of $4 billion – not the more than $4 billion Gov. Crist brags about. The ultimate math for Floridians is $652.3 million minus $4 billion.

And to this Gov. Crist says "good riddance" to State Farm? "Florida will be better off without them." Oh, are we, now?

I hope by now you’re asking where the governor thinks he’s going to find the other $3.4 billion in claims-paying capacity just before the coming hurricane season. Or maybe you’re hoping that Mother Nature will give Florida and the People’s Governor one more year of light winds. Warren Buffett has not chosen to gamble another year on the governor’s "plan."

Either way, in the aftermath of State Farm leaving, Gov. Crist and Commissioner McCarty will have presided over a $3.4 billion net decrease in private capital in the Florida property insurance market. And before we get to where Florida has $4 billion of new capital in the insurance market, on a net basis, Gov. Crist needs to find a mere $7.4 billion commitment.

With or without State Farm’s money on the line, think about the prospect that the Cat Fund can’t pay its obligations if there is a significant hurricane.

Donald D. Brown is an insurance agent in DeFuniak Springs, a Republican former state representative and a former chair of the House Insurance Committee.