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Insurers struggle as storms approach

With hurricane season looming, several insurance companies face liquidation because they can't find insurance coverage of their own.

Published May 4, 2006

Several Florida insurance companies are in danger of being forced into liquidation as hurricane season approaches, says a state insurance official charged with monitoring their finances.

The difficulty is finding affordable reinsurance to cover claims too large for the companies to handle out of their own capital.

If they can't find reinsurance, the companies could be liquidated and their policyholders forced to find other coverage - likely with the state-run Citizens Property Insurance Corp.

"I don't want to leave policyholders with a company that does not have adequate reinsurance," said Claude Mueller, director of property and casualty financial oversight for the Office of Insurance Regulation. "I have a handful of companies that I am concerned about."

He declined to say how many policies might be affected or to identify endangered insurers, although they are believed to be smaller companies.

Hurricane season begins June 1.

Insurance companies pay initial claims by using premiums and their own capital. For major hurricanes, they rely on reinsurance - which refers to an extra layer of insurance bought directly by insurers from companies such as Lloyd's of London and General Reinsurance Corp. to cover big losses that would not be covered by their own reserves or the state's Hurricane Catastrophe Fund (or CAT Fund).

So far the state has taken control of only one group of insurance companies - Poe Financial Group of Tampa - in the wake of the storms of 2005.

One of Poe's biggest problems was that it didn't have enough reinsurance, opting to keep too much risk for itself, Mueller said. As hurricane claims mounted, the company's capital dwindled to a dangerously low level.

In Florida, the hunt for reinsurance comes down to the wire as hurricane season looms because companies are waiting for the Legislature to determine how much coverage the state's CAT Fund will provide.

"Companies in almost every other state put the year's (reinsurance) program together in December, but ours can't until they know what they have from the CAT Fund," Mueller said.

While the House has already passed its omnibus insurance overhaul plan, the Senate had not yet considered its own proposal by late Wednesday. The session is set to adjourn Friday. House Speaker Allan Bense, R-Panama City, suggested for the first time Wednesday that a special session might be required, although Gov. Jeb Bush doesn't expect that to be necessary.

Proposals under consideration would:

nLower the level at which all insurers can buy CAT Fund reinsurance. Under the current system, insurers would have to suffer a combined loss of $5.3-billion after a hurricane before they'd see a penny from the state-backed fund.

nAllow small insurers that have taken out Citizens policies to buy additional reinsurance from the CAT Fund at much higher rates. The Senate leadership added the provision, which was proposed by the House, to the latest version of its plan filed Wednesday.

In addition, the Senate proposed an amendment Wednesday creating a new loan program that would match dollar-for-dollar new private investment an insurer can bring into the market. It's unclear whether the House will concur.

Absent additional state help, the insurance companies will have to depend on the private market for reinsurance.

"What insurers are trying to do is buy additional coverage either below or on top of what they can get from the state catastrophe fund,'' said Robert Hartwig, chief economist for the Insurance Information Institute, an industry trade group. "Generally speaking, there is reinsurance available, but it's at high prices. In many coastal areas of Florida, the increase has been 100 percent over last year."

In addition, he said some reinsurers reduce their risk by requiring primary insurance companies to pay more before reinsurance kicks in - the equivalent of a higher deductible.

Finding reinsurance can be a complicated process. Most of the companies are foreign, based in Bermuda or Europe, and contracts are individually negotiated.

"Reinsurers will look at each company's primary book of business, where their exposure lies, and they may be more or less likely to write it as a result," said Richard Attanasio, assistant vice president of A.M. Best Co., which rates the creditworthiness of insurance companies.

The storms of 2004 and 2005 have convinced many companies they need more reinsurance to cover their risks, Hartwig said. If reinsurance is too costly, they reduce risk by shedding policies, he said.

[Last modified May 4, 2006, 06:55:36]

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