News & Updates


Four tests that helped to generate property insurers’ safety scores

By Paige St. John

Published: Sunday, February 28, 2010 at 1:00 a.m.
Last Modified: Saturday, February 27, 2010 at 10:20 p.m.

In the absence of publicly reported safety scores for Florida property insurers, the Herald-Tribune used standard industry measures to generate its own.

After consulting with industry regulators, academics, consumer watchdogs and industry insiders, the newspaper chose four tests based on financial and exposure data that companies must report to state government. The experts, along with industry standards, also guided the newspaper in establishing what scores placed insurers in the danger zone.

The Herald-Tribune found that industry experts sometimes disagreed on where lines should be drawn. But in all cases, the newspaper chose a danger zone at the conservative end of the spectrum, giving insurance companies the benefit of the doubt.

Experts warned that no single test can predict if a company will fail. But all agreed that the following four tests can be used to raise red flags:


Florida law requires insurers — no matter how many policies they write — to always have a minimum of $4 million set aside for future claims. The amount is widely regarded as insufficient. Some within the insurance industry say Florida carriers need $25 million or more. The Florida Office of Insurance Regulation argues companies need $10 million and has unofficially adopted that benchmark for start-up companies. The Herald-Tribune used $10 million as the cutoff for this test. 

HIGH RISK-TO-CAPITAL RATIO (Risk-based capital score)

Florida uses national standards that determine when insurers carry too much risk for their assets. Officials do not publish the score, a ratio set by a complicated formula that weighs investments and policies written. Companies scoring below 200 must file a remediation plan and those below 150 trigger regulatory action. Some in the industry say action is needed earlier. The National Association of Insurance Commissioners is considering making insurers in high-risk areas carry enough additional capital to equate to a score of 230. Aon Benfield, one of the world’s largest insurance brokers, regards anything below 300 a concern. Using company-reported data, the Herald-Tribune calculated the current regulatory score for insurers and assigned 230 as the red zone. 


Insurance companies buy reinsurance so they can leverage the cash they have and write even more policies. But experts agree that heavy leveraging is dangerous because companies can become too reliant on cash they do not have to pay claims. There is no single standard for unsafe amounts of leveraging. However, Florida’s Tower Hill carriers were downgraded in 2009 by A.M. Best for over-dependence on reinsurance when the companies fell to less than $100 in assets set aside per $100,000 insured. The Herald-Tribune used that benchmark. 


Insurance companies cut the risk of extreme losses by spreading policies across a large area, reducing the chance a single event will deliver a killing blow. The Herald-Tribune tested for insurers that have concentrated more than 39 percent of their risk in Miami-Dade, Broward and Palm Beach counties, the nation’s riskiest hurricane coast. Even Citizens, the state-run program that covers homeowners others will not, carries less exposure there.