Will All Floridians Have to Pay for Ian’s Destruction if Insurance Falls Short?

South Florida may be spared a direct hit from Hurricane Ian, but insurance customers in the region and across the state may be forced to help pay the bill if the storm causes significant damage along its final path.

Source: Sun Sentinel | Published on September 30, 2022

Florida insurance reforms

While it is too early to predict how much damage the storm will cause, industry analysts have been studying computer models to try to predict how much the storm will cost.

Some estimates ranged between $17 billion and $30 billion in insured wind damage and $2 billion to $2.5 billion in flood damage before the storm made landfall near Fort Myers on Wednesday. Hurricane Irma, on the other hand, caused $32 billion in insured losses in 2017, according to Reinsurance News.

With Ian's recorded wind speeds intensifying to near-Category 5 strength before landfall, insured losses may exceed previously estimated amounts.

"The storm will cause significant damage, both insured and uninsured," said Locke Burt, chairman and CEO of Security First Insurance Co. "The wind speed has increased, and as the wind speed increases, so does the damage amount."

Ian was expected to cause widespread damage and flooding not only along its primary path, but also in other parts of the state that will experience secondary effects such as heavy rain, flooding, and tornadoes.

According to Mark Friedlander, communications director for the industry-funded Insurance Information Institute, Ian could cause up to $35 billion in property losses, with flooding accounting for the majority of it.

Wind-driven flooding is not covered by property insurance. The Federal Emergency Management Agency's National Flood Insurance Program primarily covers rising flood waters, including storm surge floods. Despite this, only 13% of Floridians have flood insurance, according to him.

"Those who do not have flood insurance will have to rely on FEMA emergency grants, which will only cover a portion of their losses," he said. "FEMA funds are not intended to replace insurance coverage."

Ian arrives at a bad time for Florida's insurance market, which has suffered five consecutive years of collective operating losses and was on track to lose $1 billion in 2022 even without Ian's arrival.

Homeowners' premiums have more than doubled in the last four years, and they now pay the highest average premiums of any of the 50 states. Increasing weather severity, claims fraud, and high rates of litigation all contributed to the insolvency of six insurers this year, and an unknown number of surviving companies were unable to secure as much reinsurance — the money insurance companies pay — as they had planned.

Customers of the state-owned Citizens Property Insurance Corp. could face assessments and surcharges in the hundreds of dollars if surpluses and reinsurance of any or all of the company's coastal, personal lines, or commercial accounts are depleted. The "insurer of last resort," which now has over 1 million policyholders, did not purchase as much reinsurance as it desired this year and now has a $6.8 billion surplus, plus another $6.7 billion in reinsurance and catastrophe bonds spread across the three accounts.

If Citizens' combined losses in the three accounts exceed $13.5 billion, state law allows the company to be reimbursed in the following ways:

• By charging Citizens customers up to 15% of their premium for each of the three Citizens accounts. Citizens policyholders with typical $3,000 premiums could be charged 15% times three accounts for a total of 45%, or $1,350.

• If those surcharges are insufficient, private-market home and auto insurance customers across the state will face additional surcharges of up to 2% of their premiums. Citizens estimates that each policyholder could earn up to $60.

• If that isn't enough, all customers — Citizens and private-market — could face a "emergency assessment" of up to 30% of their premiums. These levies could raise up to $900 per customer.

In the worst-case scenario, typical Citizens customers with a $3,000 insurance premium could be charged an additional $2,250, while private-market insurance customers could be charged $960.

Smaller private-market insurers that spend 15% of their surplus and all of their private-market reinsurance will be eligible to access the $16 billion in claims-paying capacity of the Florida Hurricane Catastrophe Fund. This includes $12.6 billion in cash and $3.5 billion in pre-event bonds. If the CAT Fund suffers a significant loss, state law allows it to recoup that money by imposing assessments on the majority of the state's property and casualty customers.

Meanwhile, if Ian forces any other company into bankruptcy, Florida insurance customers will pay the outstanding claims of those companies through surcharges of up to 2% of their insurance bills levied by the Florida Insurance Guaranty Association. The guarantor, known as FIGA, is already charging policyholders to cover the debts of five failed insurers and may soon charge policyholders to cover the debts of a sixth, FedNat Insurance Co., which was declared insolvent last week.

In a Tuesday commentary, A.M. Best noted that Ian will put to the test whether the $2 billion "Reinsurance to Assist Policyholders" (RAP) program enacted during a special legislative session in May was sufficient to help stabilize the market.

The president of the consumer-focused nonprofit Federal Association for Insurance Reform, Paul Handerhan, expressed concern about Ian's potential impact on the cost and availability of reinsurance next year.

Prior to June 1, many insurers struggled to find affordable reinsurance capacity. The majority of the companies declared insolvent did so because they were unable to obtain the state-mandated levels of reinsurance.

"No one is talking about how this storm will further reduce the reinsurance market's appetite to cover catastrophic risk in the future, or what will happen to those primary insurers who are unable to obtain reinsurance to complete their future reinsurance programs," Handerhan said.

Not all businesses are dealing with Ian on shaky ground.

People's Trust Insurance, based in Deerfield Beach, has "more than what the state requires financially, and we are prepared to make good on all covered losses," according to Amy Rosen, chief marketing officer.

"This is why we're here," she added. Every day of the year, we prepare for situations like Ian."

Security First Insurance Co. president and secretary Melissa Burt Devriese said her company's modeling indicates that Ian will play out similarly to 2017's Hurricane Irma across its book of business, which is concentrated along the Interstate 4 corridor that connects Tampa to Daytona Beach.

With approximately 169,000 policies, the company anticipates 20,000 claims and insured losses ranging from $200 million to $250 million.

According to Devriese, the company has $700 million in reinsurance capacity on hand. "I see this as a chance," she said. "Our job is to demonstrate to our customers that we will be there when the storm hits."