Citizens Board OK’s Private Offshore Reinsurance
May 24--The board of state-run Citizens Property Insurance Corp. on Tuesday approved spending $204 million for private offshore reinsurance. That represents more than one out of every five dollars its customers are expected to pay in premiums this year.
Last year, the state's insurance consumer advocate questioned the need for this level of spending by a company that bought no offshore coverage five years ago.
A telephone meeting of Citizens board members took less than 20 minutes to make the decision in a unanimous 8-0 vote.
After a decade without a hurricane, Citizens now has more than $7 billion in surplus and the backing of a state hurricane fund with $17 billion at hand. The offshore coverage provides more than $2 billion in supplemental claims-paying ability, but advocates have questioned the cost compared to the low likelihood it would be used.
Citizens is obligated to pay about $164 million this year for offshore reinsurance because of multi-year contracts, a spokesman said.
Documents posted for Tuesday's meeting show $40 million in additional spending. For example, records refer to a "shift of multi-year reinsurance coverage" to single-year coverage with "an incremental cost of approximately $15.4 million." A portion of the coverage kicks in earlier than some other offshore contracts, at a higher level of risk, officials said.
Chief Financial Officer Jennifer Montero said the reinsurance buy would help the company avoid spending all of its surplus even in a once-a-century storm.
Citizens has been shrinking fast -- along with its risk exposure. The company has fewer than 500,000 customers, down from about 1.5 million a few years ago. About a tenth of its customers live in Palm Beach County.
"I'm not second-guessing the reinsurance buy," Citizens president Barry Gilway said in December, but he said "it's clear we need to be as flexible as we can" on future purchases.
Last year, Citizens said it spent about $283 million on offshore reinsurance that did not pay for any claims. That amount is close to what the company said it paid for water-damage claims it blames for causing a crisis that is driving up rates in South Florida.
Proponents of offshore spending say it helps reduce the risk of "storm taxes," or assessments on policyholders statewide to bail out Citizens after a catastrophe.
Company officials say the back-up coverage helps guard against storm taxes even after a disaster worse than 1992's Andrew or any 2004-2005 storm -- a 1-in-100 year storm with a 1 percent chance of hitting this year.
The question is whether the cost is worthwhile. Private companies keep offshore spending if contracts are not needed. The money cannot be put in the Citizens surplus to grow and remain available to pay claims year after year.
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