Fast Focus
	Florida’s approach to catastrophes is to use unrated or poorly rated carriers, raising questions about how much protection there really is.
	Every person and business with a Florida auto or property policy will be on the hook—unless the feds come to the rescue.

Committing Insurance Without a License

WHAT? ME WORRY? Florida's hurricane insurance reforms mean every Florida insurance consumer may be buried under surcharges piled atop surcharges--all to create cheap rates today. Some see a federal bailout in the offing.

By  Cheryl Arvidson

[Page 4 of 8]

“You’re talking about trying to access the markets for an unprecedented amount of money in what we all agree would be uncertain, stressed conditions in the economy,” John Forney, a financial advisor who works with both Citizens and the Cat Fund, testified at a legislative hearing on the insurance assessment situation. “It is difficult to overestimate the difficulty of this challenge.”

Nevertheless, Sharon Binnum, chief financial officer for Citizens, takes a “don’t worry be happy” approach to the whole situation, noting that Citizens enjoys strong credit because it has such unlimited and open-ended assessment ability.

“The assessment authority is one of the greatest components of the strong credit that Citizens enjoys,” Binnum says. “Also, the expansion of the Florida Hurricane Catastrophe Fund has given us more very affordable reinsurance. And in addition to assessment ability, our assessment base was recently enhanced.

“If a one-in-a-hundred hits Citizens, we could enjoy about $11 billion of Cat Fund coverage. Even if a smaller hurricane would hit, we would have reinsurance claims through the catastrophe fund,” Binnum says.

The Cat Fund has had some problems issuing bonds, but “we have not,” Binnum said. “The market has changed dramatically and it has tightened, but we have been able, with our strong credit, to draw investors.”

Nicholson, however, is not so sanguine. Last summer, he tried to issue around $7 billion in pre-event bonds to invest and provide some liquidity for the Cat Fund in the event of a significant hurricane and was only able to sell $3.5 billion of them, and those came with a higher interest rate than he had anticipated.

With that $3.5 billion and other cash and bond resources, Nicholson says the Cat Fund has around $8 billion or $9 billion in resources heading into the 2008 hurricane season. That could cover “a very large storm for the first 12 weeks or so” since claims routinely pay out over a long time frame. But after a few months, things could get dicey.

“The problem is that after a period of time, if the markets freeze up, we would have a liquidity crisis, and that may last a short time or may last a long time,” he says. “We would just keep knocking at the door until we were able to finance all of our needs, but certainly we are at the mercy of the markets to some extent. The problem would come into play if something happened and the markets froze up, and we didn’t have the ability to issue long-term bonds.”

For smaller storms, there would be more time to get the bonds sold. With the non-Katrina hurricanes of 2004 and 2005, it took almost a year to pay out the first $3 billion, he says.

“It’s just the mega event that would push everything to the limit that would be the big problem,” Nicholson says. “Companies ought to consider what our capabilities are as we move into the hurricane season and address those needs given the capability.”