Insurance Law

Florida: insurance decisions keep getting stranger and stranger

By David Rossmiller

I'm not sure what to think about Florida's possible decision to strip cash from the underfunded state-run insurer, as reported in the Miami Herald, and give it to start-up insurers that might blow away the first time a hurricane comes by.  Well, yes I am sure -- the governing classes have lost their minds.

Citizens Property was formerly the state insurer of last resort.  However, due to the fact that regulators and lawmakers impose price controls more successfully on Citizens than on private insurers, it has to provide coverage at actuarially unsound rates -- officials know, of course, that ultimately Citizens is backed by the wallets of all insurance purchasers in the state, who are in line for a special surcharge on insurance premiums if a bailout is needed.

Martin Grace has more at RiskProf.

Also, see this post by the Truck Insurance Extremist, which includes the following:

So weird has the Florida insurance market become that contrary to Governor Crist’s hopes that Citizens would foster competition, it has actually had the opposite effect. Private insurers treat Citizens with kit gloves and pray that it grows rich and strong. That’s the only hope for avoiding a gigantic assessment bill. As with Florida’s regulatory culture the assessment risk presented by Citizens only adds to the state’s unattractiveness.

With one exception: "Take Out" speculators love Florida. The speculators who form these thinly capitalized insurance companies do little more than bet on hurricanes. Here’s how the scheme works. You capitalize an insurance company in this state for $5,000,000. Simultaneously you start a management company to operate the insurance company. You then offer to take over (take out) a chunk of policies from Citizens Insurance Company. It is not uncommon to see these small take-out companies write $50 to $200 million in premium. You then pay your management company a fee of 10 to 15% of the premium income. The management company quickly recoups the initial $5,000,000 investment. Everything after that represents pure profit. A few years without a storm and you’ve made a fortune. Best of all, if a hurricane ever causes you to go bust; the state insurance guarantee fund picks up all the claims. For obvious reasons most of us would not regard speculation as a permanent solution to the state's insurance difficulties.

Full post as published by Insurance Coverage Law Blog on December 31, 1969 (boomark / email).