Commentary: It is a Catastrophe that No One Listens to the Experts on Florida

“If you don’t read the newspaper, you are uninformed. If you do read the newspaper, you are misinformed.” Although the author is unknown, this comment is often attributed to Mark Twain or Thomas Jefferson.

Having spent more than 27 years of my professional career reviewing and rating the financial stability of insurance companies, including the last 20 years focused on the stabilization of property insurance marketplaces in catastrophe prone jurisdictions such as Florida, Louisiana and Texas, I have a sense of Twain’s or Jefferson’s frustration.

My frustration emanates because the same question is asked over and over until someone, anyone, provides a response that fits a headline as opposed to answering the question as it was posed.

In its August 21 (print) and 22 (online), 2016 editions, a Miami Herald headline asked “Will your homeowner insurance protect you if the Big One hits?” The article rehashed the turmoil that was created in the aftermath of Hurricane Andrew, i.e., numerous carriers failed (none of which were rated by Demotech) and the property insurance marketplace was abandoned by national carriers.

The article also included the gratuitous and obligatory comment that it has been so long since a major storm struck Florida, that the carriers that write property insurance today are untested. The article also commented on some of the recent rate filings that had been presented to the State of Florida Office of Insurance Regulation (OIR) by certain insurers.

Permit me to answer the original question: “Will your homeowner insurance protect you if the Big One hits?” Yes, if the “Big One” is a 1-in-100-year storm or less, or even a larger storm for most carriers.

For comparison purposes, Andrew was a 1-in-40 or 1-in-45-year storm. Colloquially speaking, a storm of Andrew’s intensity occurs about every 40 or 45 years. The storm that occurs once in 100 years is more severe than Andrew.

Furthermore, and perhaps more importantly, the reinsurance purchased by carriers reviewed and rated by Demotech, protects not only against the “Big One” but also against a series of smaller ones (a la 2004 and 2005). This level of reinsurance (or more) is purchased each year. The carriers must repurchase reinsurance annually, whether or not the wind blows.

In addition to meeting or exceeding Demotech’s requirement of their vertical (how big a storm) and horizontal (how many storms) reinsurance coverage purchased annually, carriers must submit to Demotech summarized catastrophe modeling results that utilize the intensity and travel path of past events to estimate the impact of a similar event on the insurer’s book of business.

Carriers must also submit to Demotech their catastrophe response plan (how a carrier inundated with claims from a storm will respond to its insureds) and the insurer’s own disaster recovery plan (what happens if the insurer’s facilities are struck?), among other factors reviewed annually and monitored quarterly by our agency.

As to the issue of being “untested,” I have a question of my own: Remember the national insurance companies that were here in the 1990s? Guess who employs the experienced (i.e., “tested”) claims personnel that they laid off when the nationals left the state or cut back on their operations in Florida? The domestic carriers that were capitalized to fill the void in the property insurance marketplace!

Not only is the human expertise associated with catastrophe responses and management transferable, the technological advances available to Florida domiciled carriers to enable monitoring and responding to potential events have mushroomed in the past 20 years.

Re-entering a catastrophe prone insurance marketplace requires a commitment to technology and innovative underwriting in addition to the purchase of reinsurance at a post-Andrew level that is likely to be inconsistent with the cost of writing similar business in an inland state. The state specialists that filled a void created 20 years ago have heavily invested in protecting their turf while protecting a resident’s home.

To accurately evaluate the financial stability of an insurance carrier, and answer that question of “will your homeowner insurance protect you if the Big One hits?” there needs to be an exhaustive review of the carrier’s reinsurance treaties, catastrophe modeling results, catastrophe response plan, disaster recovery protocol, and other insights that can be gained through frequent interaction with management. And such evaluation should be conducted by a credentialed insurance professional.

Let’s ask the question again: “Will your homeowner insurance protect you if the Big One hits?” Check out the Florida OIR website and peruse the results of its catastrophe stress tests.

This annual assessment evaluates the insurer’s ability to absorb specified hurricane scenarios. Insurers are required to provide data showing how their surplus position would be affected by one or more historical storm scenarios. OIR runs exposure data through the independent Florida model developed by Florida International University.

The reinsurance data call tests whether an insurance company can withstand a 1-in-100 year storm, for example, and the stress test determines how much a particular hurricane would affect the insurance company’s capital and surplus. A three storm scenario is also utilized.

In the “Annual Reinsurance Data Call,” OIR found that all insurers had sufficient reinsurance, capital and surplus to pay for the claims of its policyholders in a 1-in-100-year storm event or higher. Furthermore, each of the participating Florida property insurance companies would have more than the minimum capital and surplus amounts required by law following any of the three storm event scenarios.

Referring to these same tests, Insurance Commissioner David Altmaier stressed the readiness of Florida’s property insurance market, and highlighted the results of the financial “stress test” performed on Florida-based property insurance companies each year.

These tests are meant to model the pathway, destructive power and claims-paying costs of previous hurricanes to anticipate how companies’ finances would fare following high volumes of post-storm claims.

In 2015, each company that was tested passed this rigorous test. At a recent Wall of Wind press event in June, Commissioner Altmaier said, “Florida’s property insurance market is more stable and competitive than it has been in more than a decade. The Office of Insurance Regulation continually monitors insurance companies throughout the year to assess their financial position, review regulatory filings and catastrophe reinsurance programs.These efforts help to protect Florida’s consumers in the event of a disaster.”

So, “Will your homeowner insurance protect you if the Big One hits?”

The question has been asked and answered by insurance professionals, those at Demotech and those at OIR. My question is “why is the question still being asked?”

Perhaps the continuous asking of the same question and a deaf ear by newspapers despite an answer from qualified, credentialed professional is the reason that Napoleon said “I fear three newspapers more than a hundred thousand bayonets.”

Topics Florida Catastrophe Carriers Legislation Hurricane Reinsurance Homeowners Property