Hurricanes Decimating Florida's Insurance Industry
State governments in Florida, Louisiana, Mississippi and elsewhere created the insurers to cover homeowners unable to get policies from private companies that are retreating from higher-risk customers. But the unusually large number of hurricanes that have slammed into the region during the past 14 months threatens to overwhelm the government-backed insurers and could lead to sharply higher rates for every policyholder in those states.
...Even a glancing blow from a weakened Wilma, which is expected to make landfall today in southwestern Florida, would worsen the financial crisis because the storm will wreak damage throughout densely populated areas along both coasts where Citizens has heightened risk exposure.
"It is not a system that is working," says Jeffrey Grady, president of the Florida Association of Insurance Agents, a trade group in Tallahassee, Fla.
Actually, I was going to blog a conversation I had with a friend last week who works with one of the large insurance companies in the US, and we began discussing this very subject. If you have followed this blog, you will know that one of the main themes we have periodically dicussed is the issue of how precariously perched the insurance industry is as a result of things such as the need for terrorism insurance and the need for governments to backstop the primary providers of coverage. Well, one thing we haven't discussed is how climatic change in the gulf is affecting providers along the gulf coast. It's not a pretty picture.
My source told me among other things that Katrina imposed a $1.55 billion loss on Florida's largest insurer. Another one of the big 3 or 4 insurers in Florida has actually formed a seperate LLC in Florida that allows the parent company to be insulated from losses. By creating a seperate entity, this company can completely revamp its pricing structure to insulate itself from the increased incidence of catastrophic hurricanes. On a longer term basis, many of the insurers want to pull out of Florida altogether, but are being swayed by political pressure and state insurance commissioners (the Citizen's Fund) who need these companies to remain in place.
Faced with mounting losses, and no easy escape hatch, the plan is to first shy away from coastal regions, bump up premiums (some have received approval for 22% price hikes), and engage in a standardized policy of non-renewal for as many cases as possible (one of these insurers has already targeted 240,000 non-renewals).
The bigger issue here is how the potential loss of insurance coverage will affect the economies of the areas where non-renewal will become standard. If I were a business operating in a coastal area that couldn't get coverage, I'd probably think twice about investing too much into my business. The macro effects of these trends will become truly mind-boggling.