Q: Why has the cost of property insurance skyrocketing recently?

A: The insurance industry has just in the last couple of months incurred increases in the cost of reinsurance (Insurance companies buy coverage to lessen the impact of large catastrophic claims) as the magnitude of the storms from 2005 are finally being realized.  Reinsurance carriers bore the brunt of the severe claims such as Katrina as well as the compounding effect of multiple storms in the last two years; Charley, Jeanne, Francis, Ivan, all in 2004, and Rita, Dennis Wilma and Katrina in 2005.  There have never been losses of this magnitude in the history of the insurance industry.  Reinsurers then passed the cost of these losses on to insurance companies in the rates for their reinsurance.  A lot of the reinsurance contracts renewed in January or April of 2006.  Reta il insurance companies then had to increase their rates to the consumers.  Many carriers opted to stop writing property insurance in the state of Florida as they just couldn't afford the reinsurance.  The State of Florida even opted to not buy reinsurance for their insurance funds.  Additionally, the rating bureaus, like AM Best, are now requiring carriers to hold more in their reserves for the risks that they write in wind storm areas and that has affected the amount of coverage they can write. 

 

Q: Why is an appraisal necessary now to buy property insurance?

A: Carriers found when they began paying their claims that the values that had been reported to them from insureds were grossly understated.  Property insurance is based on a rate per $100 of values.  If a policy has replacement coverage many carriers had to pay the replacement cost when they did not receive adequate premiums for the actual replacement costs as determined by their claims so they are requiring that appraisal be done. Higher values compound the effect a rate increase will have on the actual premiums, so many associations experienced a double hit this year in their premiums.

 

Q: What is the Citizens Pool?

A: The Citizens pool is a source of coverage for homes and other properties that are located in high risk areas near the coast and is run by the State of Florida.  It used to be thought of as the insurer of last resort, but it is now the largest writer of property insurance in the State of Florida.  The second largest carriers that was writing condominiums, Southern Family Insurance Company, has gone bankrupt and all polices are being dumped into Citizens along with other carriers who are choosing to no longer write condominiums such as Allstate, State Farm and Nationwide.  The Citizens fund is now dealing with a deficit of $2 billion.  Every poli cy written in Florida whether through Citizens or not, now carries an assessment of 6.84% to help bail out the Citizens fund.  These assessments will continue into the future.  Condominiums can buy property insurance through Citizens if they cannot buy insurance elsewhere.  Typically the rates are much higher than insurance companies and are expected to have rate increases in the next several months of any where from 100-300%.  On August 1, 2006 a rate increase in Lee County of 126% will go into effect.

 

Q: Why are carriers refusing to write property insurance for condominiums in Florida?

A: Either the cost of their reinsurance is prohibitive, or they are unable to obtain approval from the state of Florida for their rate increases, or they have simply used up their capacity to write windstorm risks under their reinsurance contracts.  Some carriers have simply decided that they do not want to write this class of business and they are either canceling or not writing coverage.

 

Q:  Is the State of Florida doing anything to rectify this situation?

A:  The governor has initiated an insurance committee that will be looking into the insurance crisis and many other insurance topics over the next year and making recommendations to the president of the House and Senate here in Florida.  They have not done a very good job of managing the funds in the state of Florida to date as they are all in a deficit position.

 

 

Q: What can we do to make our legislatures aware of the situation?

A: Write to your representatives and request that they find creative ways to incent insurance companies to come back to doing business in the State of Florida.  The Florida CAT fund was a good mechanism that provided affordable reinsurance to carriers doing business in Florida, but the state has used those funds for other purposes and there is no money in that fund.  We do not need any more state run programs as politicians should not try to be in the insurance business, what we need is more insurance companies willing to write windstorm insurance and competition will do what it does best, lower pricing.

 

Q: What can we expect to see next year as far as rate increases and the availability of coverage?

A: If we do not have any storms that cause major damage to any coastal areas in the US we could see capital being infused into the insurance industry as the rates are now very attractive to them and without losses, very profitable.  Rates will probably never return to what they used to be but with enough competition they may settle down a bit.  Since our renewal in June rates have continued to rise and coverage become even more difficult to obtain.