May 15, 2007

From Florida Insurance Council staff

The Property Casualty Insurers Association of America (PCI) today released the results from a study it commissioned to review the economic impact of property insurance reforms enacted in Florida’s January Special Legislative Session. The findings are consistent with conclusions reached from a similar study done by Associated Industries of Florida. Both studies conclude that the legislation helps reduce homeowners’ insurance premiums, but does so at great taxpayer risk.

PCI’s study was conducted by Milliman, Inc., while the AIF study was commissioned by the Tillinghast. Both are independent consulting firms.

The Milliman study shows that recently passed legislation in Florida (from the special session) will mean that homeowners will pay less for property insurance, while motorists and small business owners will pay more if an average to large storm hits Florida.

Furthermore, in announcing the findings of the study, William Stander, PCI’s assistant vice president and regional manager, says legislation passed in the regular session that just concluded, will only magnify the problem.

Joseph Annotti, Senior Vice President, Public Affairs for PCI said the Florida Legislature passed the legislation hoping the wind does not blow this year. "Hope is not a good business strategy and not a good economic strategy," he said.

The Tillinghast study released in March found similar conclusions. It estimated that per household, total nominal assessment costs to pay off bonds that likely will be needed to provide the state-run insurer, Citizens, with the cash it needs to pay claims, would range from $1,700 for a moderate hurricane to $14,000 for a major hurricane spread over the next 10 to 30 years and spread to homeowners, auto owners and business owners.

Here are the key findings of the Milliman study:

The study ran several scenarios for the 2007 hurricane season, ranging from light to severe, and estimated the financial impact of projected losses on Citizens Property Insurance Company (Citizens), Florida’s state-run insurer; the Florida Hurricane Catastrophe Fund (FHCF), the state-sponsored reinsurance fund; and the associated cost or benefit to Florida policyholders.

Among the key findings:

The Milliman study shows that recently passed Florida legislation will mean that homeowners will pay less for property insurance. Motorists and small business owners will pay more for insurance if an average to large storm hits.
The biggest beneficiaries of the legislation will be homeowners living in southern coastal counties with estimated premium reductions for the average homeowner reaching $1,096 in Dade County and $1,587 in Monroe County under a no hurricane scenario.

Homeowners living in non-coastal or northern counties will see only modest reductions in their premiums, with premiums down an average of $47 in Orange County, $36 in Duval County and $28 in Leon County under a no hurricane scenario.
Motorists receive no direct benefit from the legislation, but could see a net increase in 2008 assessments that range from $45 to $182 per vehicle, depending upon location, if an average to large storm hits. Total assessments for motorists could reach 20% of the total auto premium per year under the new legislation.

Small business owners will receive no direct benefit from the legislation, but could see an increase in assessments ranging from $171 to $402 per year if an average to large storm hits.

The approximately 30% of Florida households who rent will not see any direct benefit from the January 2007 Special Session legislation, but could see their auto insurance costs rise if a storm hits. Similarly, those homeowners who do not carry homeowners insurance will not see any direct benefit from the legislation but could see their auto insurance costs rise if a storm hits.

Under the new law, Citizens will suffer a deficit of $3.7 billion and the FHCF will suffer a deficit of $22.3 billion if a 1-in-25 year hurricane hits Florida.

To pay for claims resulting from a large storm Citizens and the FHCF will likely have to raise capital in bond markets. The amount of total capital needed after a storm could be very large - as much as $26 billion from a 1-in-25 year storm to $69 billion from a 1-in-250 year event. To put these potential bond issues in perspective, the largest single municipal bond offering from 1947 - 2005 was a $10 billion offering by the State of Illinois in 2003.

A bond offering as large as the one that would be required to finance a loss may take time to arrange and could negatively affect how quickly financial obligations can be paid. Large bond offerings may also have to be guaranteed by the State of Florida, which could negatively impact the state’s credit rating and/or require a higher interest rate for repayment.

By reducing premiums in high-risk areas such as Dade and Monroe Counties, future development in storm prone regions is made cheaper by the legislation.

Increased development of high-risk areas will raise losses from future storms, which will in turn increase future assessments and rates for all areas.

To pay off losses from a large storm, consumers would be required to pay approximately 10% assessments and surcharges for up to 7 years in the case of the FHCF and approximately another 10% for 8 years in the case of Citizens. Given the combination of assessments and surcharges from Citizens and the FHCF, consumers could be facing additional charges of about 20% of their policy premium for a number of years.

If large storms hit in consecutive years, policyholders could face multiple additional charges on their policies and could see these charges exceed 20% and/or last for even more years than the 7 to 8 projected by the Milliman report.

"The bottom line," PCI’s William Stander concluded, "is that consumers, insurers and public policymakers have a long way to go to reach our shared goal of making people safer, buildings stronger, and the insurance market stable and reliable over the long term. We want to work with legislators in a less politically-charged environment to carefully consider a variety of options to establish a system that will deliver increased competition, greater consumer choice and long-term market stability for Floridians in all parts of the state."