Robin Smith Westcott, Esq.
Insurance Consumer Advocate
June 24, 2013
Federal Insurance Office
Attention Study on Natural Catastrophes and Insurance, Room 1319
MT, Department of the Treasury
1500 Pennsylvania Avenue NW
Washington, D.C. 20220
RE: Florida Office of the Insurance Consumer Advocate Comments for Study on Natural
Catastrophes and Insurance
Dear Director McGrath:
The Florida Office of the Insurance Consumer Advocate offers the following comments
regarding the Study on Natural Catastrophes and Insurance as requested in Federal Register,
Volume 78, No. 79 on Wednesday, April 24, 2013.
Since Hurricane Andrew in 1992, Florida has been the epicenter for debate regarding the
availability and affordability of homeowners’ property insurance. Florida has not resolved these
issues, however, the state has responded by establishing market-stabilizing mechanisms like the
Florida Hurricane Catastrophe Fund (FHCF), which provides reinsurance for wind losses, and
the Florida Commission on Hurricane Loss Projection Methodology (the Commission), which
reviews and approves catastrophe models that are crucial for rate making by insurers.
Notwithstanding these stabilization efforts, Florida’s residual market - Citizens Property
Insurance Corporation (Citizens) - maintains nearly as many policies as immediately following
Hurricane Andrew.i
After Hurricane Andrew, many large national insurance companies began to recede from our
state or reduce exposure citing the vulnerability of exposing its capital base to large catastrophes
with concentrations of risk in a state vulnerable to hurricane catastrophe. Florida has witnessed
the growth of a domestic industry heavily reliant upon offshore catastrophe reinsurance in order
to access enough capital to support writing homeowners’ property insurance. Florida’s small
domestic companies now account for more than 58% of our marketplace based on premium
volume.ii Over the past 15 years, Florida has also had a very unstable political environment that
operated to expand the role of the residual market to openly compete with private companies. As
a result, the state has relied heavily upon the bonding capacity of Citizens and the FHCF to pay
claims in the event of a hurricane. These events have facilitated lower rates in the marketplace;
lower than what most would deem actuarially sound. Florida has implemented a 10% glide path
for rate increases to implement actuarial sound rates in Citizens which has resulted in at least
40% of the non-coastal account properties at a competitive market rate.iii Rates for inland risk
are approaching appropriate pricing and the effect of affordability can now be better evaluated
for those risks. Portions of the coastal areas have made progress but some areas in the coastal
zones remain far below actuarial sound rates.
Florida Residual Markets Catastrophe and Guaranty Funds
Historically, the state of Florida has requested hurricane relief funding for uninsured storm surge
and flood losses from the federal government, and the state may request supplemental funding
should the state be unable to issue post-event bonds sufficient to pay wind losses through its
three state-operated insurance entities: 1) The FHCF, 2) Citizens, and 3) the Florida Insurance
Guaranty Association (FIGA).
Fortunately, at this time both the FHCF and Citizens are in strong liquidity positions due to
several years of collecting premiums with very limited hurricane activity. FIGA does not collect
premiums and relies entirely upon post-event bonding and assessments to fund losses of failed
licensed insurers.
It is expected that for a 1 in 100 year storm event (estimated to be $55 billion of insured wind
loss and loss adjustment expense) the FHCF would deplete its $2.0 billion of pre-event bonding
and issue $5.3 billion in post-event bonds. Citizens would deplete its $5.0 billion of pre-event
bonding.
The Insurance Commissioner has reported that in the 2012 hurricane season, nearly all private
insurers in Florida purchased reinsurance up to at least a 1 in 100 year storm; however, the
financial impact of any given storm is expected to vary widely between insurers depending upon
their individual reinsurance programs and spread of risk. If companies have retained more risk
by engaging in reinsurance agreements where there is no recognizable risk transfer and have
over-leveraged surplus, it is conceivable that some private domestic insurers will fail in events
less than the 1 in 100 year storm. In such an event FIGA will be required to issue bonds and
assess policyholders. Consequently, the total post-event bonding requirements of all three
entities will probably exceed $5.3 billion as the FHCF and Citizens attempt to rebuild a total of
$7.0 billion of pre-event liquidity and FIGA issues post-event bonds
In summary, the federal government’s exposure to hurricane relief funding in Florida is expected
to come from two primary sources: 1) uninsured storm surge and flooding losses, and 2) wind
losses from subsequent storms after all sources of pre-event and post-event liquidity of the state
of Florida’s three state-operated insurance entities have been depleted.
National Flood Insurance Program
Florida has the highest number of National Flood Insurance Program (NFIP) policies in force of
any state in the country (2,100,000 compared to 169,000 in New York and 236,000 in New
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Jersey as of 9/30/12). With the highest participation rates in the NFIP, it could be argued Florida
heavily subsidizes flood risk for the nation. Certainly when the federal government intervenes
after an event like Super Storm Sandy, all Americans, including Floridians, bear the tax burden.
The effects and cost of Super Storm Sandy reinforced the need for reforms from the BiggertWaters Flood Insurance Reform and Modernization Act (the Act) of 2012.
The Act requires a actuarial sound rates which will result in rate increases for flood insurance,
however, the Act also requires the collection of data for wind and flood catastrophe and a more
active role by the federal government in the resolution of insurance claims disputes arising from
wind and water catastrophe. Florida already maintains much of the infrastructure that the federal
government needs in regards to reliable models and historical data. Entities such as the
Commission and the FHCF incorporate data collected in underwriting, loss data and mitigation
data by private companies.
Florida’s history of and experience in the review of models that predict hurricane catastrophe
losses for the use of the models in rate making make it a national leader in this regard. The
Commission was established by the Florida Legislature during the 1995 Regular Session. The
Legislature found that reliable projections of hurricane losses were necessary to assure that rates
for residential insurance are neither excessive nor inadequate and further that “it is the public
policy of this state to encourage the use of the most sophisticated actuarial methods to assure that
consumer are charged lawful rates for residential property insurance coverage…” Section
627.0628(1)(a), Florida Statutes.
Currently the Commission is exploring the addition of standards for the approved models to
incorporate flood surge or water catastrophe as a requirement for existing models. Florida’s own
“Public Model,” developed by the Florida International University and approved by the
Commission, received a legislative appropriation in this year’s budget, recently approved by the
Governor, to continue its development of a surge/water component.
Florida has also attempted standardizing of mitigation discounts and directing companies to give
insurance discounts for mitigation. While this measure has not met with astounding success, it
has provided the first data sets for mitigation features for residential property throughout the state
and serves as a very good starting point for data collection sufficient to create models and
standards for substantiating the effect mitigation has on wind loss.
Affordability and Availability in Florida
The financial market collapse, which exacerbated Florida’s real estate market collapse, makes
the issue of property insurance affordability difficult to assess. However, substantial increases
for NFIP policies coupled with Florida’s painfully slow economic recovery likely will make
property insurance unaffordable for most middle and lower income residents in areas with the
highest exposure to catastrophe. Floridians are required by federal agencies to purchase wind
coverage to secure and maintain any mortgage underwritten in this state. Flood coverage is also
required when deemed appropriate; however, other areas of the country with high susceptibility
to earthquake catastrophes do not have such requirements. When defining “natural catastrophe”
and ensuring its applicability to any federal program in addressing the insurability of these risks,
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the definition and its application should be comprehensive and consider all perils that exist
throughout the United States. This will go a long way to promote equity in the federal
government’s involvement with those risks.
The availability of personal residential property insurance in Florida appears to depend as much
upon the potential for large catastrophe losses than upon the adequacy of residual market rates.
Private insurer market shares are much lower in high catastrophe loss prone areas within the state
even though private insurer rates are relatively low compared to residual market rates. For
example, most private insurer rates in Miami-Dade County are lower than the insurer of last
resort, Citizens, yet, private insurers write relatively few policies in Miami-Dade County.
The implication here for policy makers is that higher rates may not necessarily result in more
private market participation in large catastrophe prone areas. The concentration of risk and the
corresponding exposure are barriers to both affordability and availability.
A key indicator of the availability of property insurance is the market share of the residual
market provider. Citizens is a tax-exempt government entity established principally to provide
property insurance for those unable to procure it in the voluntary market. Citizens’ statewide
market share for all types of personal residential insurance policies was 23.7% as of September
30, 2012.
However, this market share varies considerably among Florida’s 67 counties, and is not highly
correlated (20.0% or less Pearson Correlation Coefficient squared, depending upon wind
mitigation features) with Citizens’ competitive rate position within each county, particularly in
the densely populated areas of the state.
For example, Citizens wrote 57.1% of the personal residential policies in Miami-Dade County
even though 75.0% or more of private insurers (depending upon wind mitigation features) had
lower rates in Miami-Dade County. In contrast, Citizens’ market share in Hillsborough County
(near Tampa) was only 26.1%, nearer the statewide average of 23.7%, even though 79.2% or
more of private insurers (depending upon wind mitigation features) had higher rates than
Citizens. Both counties are densely populated, but Miami-Dade is much more vulnerable to
hurricanes than the more inland Hillsborough County, which has a higher risk of flooding.
Property Mitigation
Whether we are speaking of exposure to risk for post-catastrophe by federal, state and local
governments or addressing risk for loss exposure to encourage affordability and availability of
property insurance, the answer lies in decreasing the exposure risk by promoting property
mitigation. As of 2012 less than 6% of FEMA funding goes into residential retrofit mitigation.iv
Using information regarding Citizens’ coastal exposure and current systems for wind property
mitigation, the potential for reducing risk and the resulting financial impact is most impressive.
The state’s greatest risk of hurricane losses is approximately 400,000 homes in Citizens’
Property Insurance Corporation Coastal Account. In Miami-Dade, Broward and Palm Beach
Counties, all of the land area east of I-95 is eligible for inclusion in the Coastal Account, which,
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in some instances, extends as far as five miles from the coast. Elsewhere in the state, Coastal
Account coverage is generally limited to a distance within 1,000 to 1,500 feet from the coast.
Seventy five percent of the homes in Citizens’ Coastal Account do not have hurricane impact
opening protection. In an effort to quantify the effect of new mitigation technologies on
Citizens’ exposure in the Coastal Account, the estimated cost to install deployable, Miami-Dade
approved, nylon fabric panels to protect all window, door and garage door openings is $2,600 per
home. They are expected to reduce wind losses by 20.0%, and have useful lives of 10 years.
Their estimated payback period is 5.0 years with an estimated internal rate of return on
investment and reduction of the probably maximum loss for the coastal exposure of 20.0%.
Recommendations
PARTNER WITH FLORIDA
Florida already has much of the infrastructure needed to support data collection and modeling
capabilities required under the Biggert-Waters Flood Insurance Reform and Modernization Act
of 2012. The mechanism and information in Florida could be used to expedite and formulate a
comprehensive solution for identifying and addressing wind vs. water loss exposure.
REDUCE EXPOSURE BY MITIGATATION
The expansion of State Housing Initiatives Partnership (SHIP) grants and Community
Development Block Grants to pre-catastrophe funding for property mitigation, matching grant
programs or other direct funding to support mitigation efforts, which could include cost-sharing
programs between federal and state entities likely would reduce exposure for Floridians to future
assessments and reduce the federal government’s exposure for storm relief and cleanup costs. If
significant savings can be quantified for a relatively simple mitigation effort, the savings would
be exponential for more aggressive and comprehensive mitigation.
With regards,
Robin Smith Westcott, Esq.
i
As of May 31, 2013, Citizens had 1.26 million policies in force, Combined Month End Reports for May 2013,
Citizens Property Insurance Corporation.
ii
OIR QUASRng data as of December 31,2012 includes: 1) State Farm FL Ins Co, 2) Nationwide Ins Co of FL (a
Florida exclusive Ohio domestic), 3) Castle Key Indemnity Co and Castle Key Insurance Co (Florida exclusive
Illinois domestics)
iii
Citizens Property Insurance Corporation Depopulation Committee Meeting, May 29, 2013
iv
Make Mitigation Happen Locally Power Point by the Florida’s Foundation and the Florida Division of Emergency
Management revised 5/10/12
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