Insuring the Sunshine State

Q. Describe Florida’s unique storm exposures.

A. Florida is considered to be a “super peak” in terms of its exposure and we have seen a rather dramatic increase in Florida homeowners’ insurance. Florida tripled its exposure between 1995 and 2009 and today homeowners’ exposure is valued at $2.3trn. So that is really significant in terms of raw numbers, but also given Florida’s coastline. Florida has basically the same exposure as the State of New York but with ten times the coastline and with a considerably higher risk of frequency of storms and catastrophic severity.

Q. Do people still flock to the Florida coastline?

A. That has changed fairly dramatically – even through hurricane seasons 2004 and 2005 we had approximately 1,000 people moving here per day. During the height of the recession we actually felt a net migration out of Florida of just a few hundred people a month. Now Florida’s population has stabilised.

Q. What are some of the challenges in insuring Floridians, given the exposures and development along the coastline?

A. The challenge is two-fold. We are trying to grow capital and minimise catastrophic exposure and that dynamic is put under a lot of pressure if you continue to add more housing stock and continue to grow.

The problem is we did not get here overnight. For the past 30 years Florida has advertised itself as a place for cheap land, cheap housing, inexpensive insurance and a great place to live and work. We have to deal with the current housing stock we have, 70% of which were built before modern housing codes. So we have to retrofit those homes and make them more wind resistant and we are looking at the new structures that are being built and ensuring they are built to code.

But we are simply overexposed. Our $2.3trn homeowners’ exposure is more exposure than there is capital available for coverage. So we need to continue to provide incentives for capital to come to Florida. We need to explore going beyond traditional reinsurance and look at tapping into capital markets to augment private capital investment.

Q. How do windstorm mitigation credits work?

A. Credits and discounts have been around for a number of years, they were just increased to actuarial indications back in 2006 and that has since been the source of a great deal of controversy. A number of insurers were unaware of just how much of their housing stock that they insured already qualified for discounts and credits. So without any changes to the property, a number of homeowners were receiving discounts. This has reduced the insurers’ overall premium and has created a problem in recent years.

Q. How does the private insurance market work with the residual market to provide cover in the state?

A. The Cat Fund [Florida Hurricane Catastrophe Fund] has been around since Hurricane Andrew and was created to address the issue of the lack of capacity in the reinsurance market and the contraction of players who did not purchase a lot of reinsurance. It works very well with the private sector because the insurance companies are part of the solution. It provides low cost reinsurance which is then augmented by private sector reinsurance.

Citizens [Property Insurance Corporation] has historically been our market of last resort. In 2004 and 2005 we had another contraction of the reinsurance market place and upward pressure on rates, so we expanded the Cat Fund on a temporary basis and Citizens grew.  Citizens grew to its all-time high in 2007 and now it is back down having reduced its exposure by 20%. While not a total solution, we think the growth in capital has done a great deal to depopulate Citizens, but it is still probably larger than everyone’s comfort level.

Q. How confident do you feel that Florida can cope with an active hurricane season this year?

A. We still have a lot of challenges in our system but I am cautiously optimistic. Citizens is in its strongest financial position since its creation. They have $4bn in surplus and they have $14bn in claims paying capacity. The Cat Fund is also in a strong financial position with a projected balance of $6.2bn and a claims paying capacity of over $25bn.

We also are focusing on our domestic companies and we have “weeded out” some of the weaker companies prior to hurricane season. We are in the process of conducting stress testing both horizontally as well as vertically. We want to make sure companies can deal with multiple storms like we had in 2004 and 2005 – four or five smaller storms as oppose to one mega-catastrophe. So we have asked companies to alter and change their reinsurance programmes and have made some companies return to the reinsurance market and purchase more reinsurance.

Lloyd’s is a huge part of our market. Lloyd’s and Bermuda combined are probably over 60% of our market, and we hope Florida continues to be a good place for them to do

business.

Q. While hurricane season has only just begun it must feel like a catastrophe has already occurred with the oil slick from Deepwater Horizon moving down the Florida coastline. How is the state coping with this?

A. This is a huge manmade catastrophe and it is not over – we are still in the throes of it with thousands of barrels a day coming out. Florida does not have offshore oil rigs because we have been very protective of our beaches, our fisheries and our marine and wildlife habitats which are so important for our economic development. The beauty of our beaches and the sunshine are the reason why tourism is the number one industry in our state and that of course is being challenged today as tar balls are washing up on the beaches of Pensacola.

We are obviously deeply concerned and saddened by the events that are occurring in the Gulf of Mexico. It has precipitated a debate in our state on whether we should permanently ban offshore drilling and what challenges that means for renewable energy sources and what the government should do in terms of regulation. 

How much more can the Gulf take after being battered and beaten over the years from hurricanes and now the worst manmade disaster in terms of oil in our history? It is hard to conceptualise a recovery and we look forward to the ultimate capping that is suppose to occur in August to relieve the pressure, so we can begin to deal with the aftermath.

Q. With the financial crisis, Gulf oil slick and predictions for an active hurricane season this year, Floridians must feel like they’re under siege.

A. Florida is being hit really hard by the recession in addition to the oil slick threatening our tourism, which is such an important part of our economy. So yes, Floridians have been feeling particularly vulnerable in the last couple of years and certainly are hopeful and prayerful that the disaster in the Gulf can be addressed as soon as possible.

Q. Climate change was a big topic on the agenda when you visited Lloyd’s in 2008 with Governor Crist. Is that still a key concern?

A. Governor Crist has championed a number of green efforts in our state and we are cognisant of the studies that have been done on how a changing climate would impact Florida. With Florida being so close to sea level, the melting of glaciers and rising water levels would obviously have a big impact in the long term.

In the short term there is considerable debate to whether global climate change will contribute to the increased frequency and severity of storms. There is considerable evidence that we are probably in a more active cycle, particularly in the Atlantic basin, but whether that will result in higher severity of storms is difficult to predict. What we do know is that we have to be fully engaged in terms of our ability to respond to a catastrophe event. The insurance industry’s role is in providing the economic lubricant to restart the engine of commerce in our state after a catastrophe occurs.

 

Comments

No comments