The Last Insurer Standing

It looks as though the only major property insurer committed to stay in Florida is Florida's own Citizen's Property Insurance Corporation. Allstate bailed out; now State Farm.

As far back as June I, 2006, ABC News said, "After $72 billion in claims, the home insurance industry is running for cover in Florida. Twenty-five insurance companies have either pulled out or limited new policies... The problem isn't just Florida. Allstate is not writing policies in 14 Texas counties... Metlife and Allstate say they will not write new policies in Long Island, N.Y..."

The last hurricane to hit Long Island occurred in 1938. (I was a kid in Jersey City and remember it.) Meteorologists believe that the probability for a major hurricane there within the next several years is high.

In 2007 State Farm announced it was pulling out of Mississippi because of the "untenable" legal and business environment there. All insurers have scaled down writing new policies in Louisiana and other gulf states after Hurricane Katrina.

The chaos all started with Hurricane Andrew in 1992 with its then unheard of losses of $15 billion, as many insurers discovered they had miscalculated their exposure to hurricanes. Andrew was the needed realty check for property insurers.

Hernando Today published columns I wrote in 2006, 2007 and August 2008, before State Farm pulled out of Florida, all suggesting that property windstorm insurance is beyond the ability of the private industry to provide at affordable rates. (We brought this on ourselves by building in all the worst possible coastal regions.)

The Florida Mutual Hurricane Fund (FMHF), formerly The Florida Reinsurance Corporation that I wrote about, has proposed an idea worth considering: Remove windstorm coverage from the private market and Citizens and create a state-owned corporation that would handle claims much like federal flood insurance through private insurers on a fee basis. It would be useful to examine their proposal at www.floridareinsurance.com.

In effect, the FMHF would be a single peril insurer (windstorm) with no sales force, no federal tax expenses and no investor returns. FMHF would determine actuarially sound premiums which would go to them and not the private insurers. That would leave the insurance market to do what it traditionally does best - underwrite the mundane non-catastrophic risks such as fire, liability, etc.

This approach is not unreasonable. In the Netherlands, private flood insurance has always been considered unrealistic because flooding is the most important natural peril, with potential catastrophic losses that would bankrupt insurers, thus making a strong government role inevitable. Claims of Dutch citizens are paid by the government on an ad hoc basis through the Calamities Compensation Act. Experts point out that 70 percent of the Dutch GNP is earned below sea level! That's an interesting way of looking at it.

So, OK, think about the hurricane exposure in the Gulf states and eastern seaboard of the U.S. It could be argued that 100 percent of Florida's GNP is earned in hurricane prone areas.

And in Japan the likelihood of catastrophic earthquake losses - and thus insurer bankruptcies - is high. So losses are shared among all private insurers and the government through reinsurance, under the Japan Earthquake Reinsurance Co. The liability sharing scheme makes the government a big player. Private insurers are on the hook for the first 75 billion yen. That sounds like a lot, but one billion yen equals "only" $10 million U.S. (called a "yard" in currency slang.) That's $750 million U.S. Interestingly, the Florida Poe Insurance group that went belly-up because of the unreal 2005-06 hurricane seasons, cost the Florida Insurance Guarantee Fund only a bit more than what would be 75 billion yen. Yet in Japan after 75 billion yen, the government picks up 50 percent of the tab until 1,311 billion yen, and then they pick up 95 percent of the losses.

That brings us to California where earthquake fears - unlike hurricanes - are a daily fact of life. Yet 86 percent of homeowners do not have earthquake coverage despite most all having mortgages. Fannie Mae and Freddie Mac do not require earthquake insurance, so if the big one hits, mortgage foreclosures would be out of sight, accelerating an already troublesome mortgage meltdown. Most homeowners believe the coverage is too expensive and feel the FEMA will come to their rescue. (Most major insurers offer California Earthquake Authority (CEA) policies that allows them to transfer the risk to the CEA, which has built up $3 billion in capital.)

The U.S. Geological Survey predicts a 62 percent chance of a quake with a magnitude of 6.7 hitting the Bay area before 2032. And there have been earthquakes in 39 states since 1900 with experts predicting a 40 to 60 percent chance of a major quake in the eastern U.S. in the next 20 years. Everyone knows California, like Japan, is an earthquake waiting to happen.

The U.S. has a wider variety of natural disasters than anywhere else on the planet, and they have more than doubled since 1980. Yet being a young country, we haven't come to grips with the fallout from disasters with legislative schemes such as the Netherlands and Japan have, just to name two first world countries.

The Dutch started building dikes and canals in the 11th century. We don't have the slightest idea what natural disasters struck the North American continent way back then. But we do know that in 1811 the New Madrid earthquake struck with enough force to change the Mississippi River and ring church bells on the east coast. Experts predict up to a 63 percent chance of a 6.0 magnitude New Madrid quake in the next 15 years.

While in my view a national multi-peril solution is more desirable - or even a regional hurricane insurance mechanism - the FMHF is a sensible idea that needs serious consideration. The core leadership behind it is a veteran group of insurance pros, not legislators or academics.

The traditional U.S. property insurance model has failed us because our population growth has exploded. We need a new insurance model. If we don't do something, a failed Citizens - on legislative crutches - will be the last insurer standing.