Feb. 20--The question boggles the minds of policyholders facing rate hikes or being phased out of Citizens Property Insurance Corp. With a record surplus of nearly $6.2 billion, how could the state-backed insurer possibly be flirting with financial disaster?
They're not, for the moment, many analysts say. But Citizens is also one major storm away from catastrophe.
And therein lies the rub. Many homeowners are angered over the Citizens surplus and neverending rate increases. They want to deal in the present.
"Without a major hurricane impacting the state in six or seven years, they need to account for fees collected and how they've managed that to date," Christine Cherepy, president of the Golden Harbor Homeowner's Association in Boca Raton, said in a recent interview. "To increase fees or rates without accounting for how that money has been handled or mishandled is aggravating."
But lawmakers, state leaders and others who scrutinize Citizens are focused more on what could happen than what hasn't happened. They worry that if a major storm hits the Sunshine State in an upcoming hurricane season, that the surplus would quickly disappear, and Floridians -- both those who are Citizens policyholders and those who are not -- would by law be on the hook to cover the shortfall.
Dealing in the future, a murky future, could be horrendous. A catastrophic storm means residents with fire, auto, pet coverage and other types of insurance policies (see box) would be assessed statewide to make up the difference.
And that's a difference that could be in the billions.
Indeed, about $1 billion from the 2005 hurricane season is still being collected, according to Christine Ashburn, director of legislative and external affairs at Citizens. That assessment was approved for homeowners' policies at a rate of 1 percent of annual premiums for the 10-year period that began in 2007.
In the case of a once-in-a-hundred-years storm, Citizens' exposure in its high-risk coastal account could top $14.8 billion in damages, according to company models.
Here's how claims from Citizens' coastal policies (191,092 in Broward and 133,589 in Palm Beach) would get paid (based on year-end 2012 estimates):
STEP ONE: First up, Citizens' cash reserves earmarked for the coastal policies would be utilized. In this case, that's $2.91 billion.
"The first dollar we go to is our own surplus on hand," Ashburn said. This could be thought of loosely as Citizens paying a deductible, she explained.
STEP TWO: Next, Citizens would turn to the Florida Hurricane Catastrophe Fund along with its reserve cash on hand.
The so-called "CAT Fund" is almost like an insurance policy, Ashburn said. It pays up to 90 percent of what remains of Citizens' surplus after the first step. In this case, with an original surplus of $6.178 billion, there is $3.997 billion in CAT Fund cash that would go to cover coastal account damages. Simultaneously, Citizens would be paying its 10 percent share of that total, $444 million, plus $686 million to meet commercial and nonresidential claims, which are not covered by the CAT Fund. At this point, the portion of Citizen's current surplus earmarked for the coastal account losses would be used up, according to Citizens' analysis.
STEP THREE: With its reserves for the coastal account exhausted, the company data shows Citizens would then tap four successive sources of funds. Citizens policyholders would be levied a surcharge to raise $191 million. As damage payouts continued to rise, Citizens would pay claims from $750 million it secured through issuing catastrophe bonds and another $750 million it netted in the private reinsurance market, according to company reports. Following that, Citizens policyowners would once again be tapped to cover the continuing shortfall, this time at a cost of $397 million, according to published company calculations.
STEP FOUR: With some nearly $9 billion in claims paid out, Citizens' next source of cash would come from Floridians with homeowners coverage through other companies. These non-Citizens policyholders would, by Florida law, begin contributing 2 percent of their premiums to pay a total of $620 million toward Citizens' losses, Citizens' data shows.
Finally, to reach the total $14.8 billion in claims associated with this theoretical storm, emergency assessments of 1.22 percent added to all property and casualty insurance paid by Floridians would make up the final $5.231 billion it would take to cover the remainder of the damages, according to Citizens' reports. That means all policies for auto, boat, pet insurance, etc. would carry the up-charge over the ensuing decade. Only medical malpractice and workers comp coverage are exempt.
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Here is a sampling of policies (not in any particular order) that would be part of an emergency assessment if a major storm burned through Citizens' $6.2 billion surplus to pay claims:
Personal injury liability
Auto physical damage
Fidelity (a bond covering an employer's loss resulting from an employee's dishonest act)
Burglary and theft
Boiler and machinery
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