[Mathguy]

Originally Posted by pbmaise

In Hawaii, hurricanes seem to stop dead in their tracks the closer they get to the tall volcanoes. Video, pictures, and history are on:

http://www.city-data.com/blogs/blog2...insurance.html

All Florida insurance money now goes just to cover damages in the next hurricane. That money makes investors richer and Florida poorer.

If we came up with a way to duplicate somehow what Hawaii has, would investing 10 or 100 billion dollars be a good idea?

Anyone have ideas?

1. Florida passed tougher building codes after Andrew and then revoked them since they were making construction "too expensive" so the odds of them spending a penny on hurricane prevention even if it could be done is not going to happen.

2. Hawaii is just a completely different animal, in a different ocean and so on and so forth.

3. "Investors" aren't getting rich of Florida hurricane coverage unless you cherry pick periods between hurricanes etc. Heck, on an EXPOSURE weighted basis, Citizens (the public insurer) has to be by far the most exposed "insurance carrier" in the state. They aren't a *real* insurance carrier though because if they were they wouldn't even be allowed to do business in the state since they lack the reserves and also are admittedly way below a long term sustainable price.

Pretty much, the best way to fix the issue is to make sure coastal or near coastal construction are built extremely well and continue to offer people incentives to retrofit their properties with the good old ounce of prevention.

[beachmouse]

Originally Posted by Mathguy

3. "Investors" aren't getting rich of Florida hurricane coverage unless you cherry pick periods between hurricanes etc.

A certain group of investors is getting hugely rich off the Florida reinsurance market. Here's an article from Paige St. John's series on the insurance situation down here that won her a Pulitzer prize:

http://www.cftnews.com/index.php?cmd=article&id=5965

In the end, Bermuda reinsurance investors saw a record return on equity, according to a Guy Carpenter analysis. Greenberg had a 26 percent return on Validus Holdings. Lancashire Re gave its New York private equity fund investors a 33 percent return. And in 2009, the largest reinsurer of Florida carriers reported a 38 percent return.

Being in Bermuda, the profits were tax-free.

On the other hand, Florida regulators limit property insurers to a 3.7 percent annual profit on their underwriting activities.

[Mathguy]

Originally Posted by beachmouse

A certain group of investors is getting hugely rich off the Florida reinsurance market. Here's an article from Paige St. John's series on the insurance situation down here that won her a Pulitzer prize:

Sarasota Herald-Tribune's Paige St. John Reports on Florida Reinsurance Issues - Resource Library - Colodny, Fass, Talenfeld, Karlinsky & Abate

I specifically noted not to cherry pick the years in-between major hurricanes and that is PART of the issue here. But let's not dwelll on that, there is a lot of good commentary there which begs the question WHY would a company in the business of selling insurance turn around and have to give so much of it away to reinsurers?

The writer did a nice job of gathering quite a bit of informaiton, however....she is a writer and not an actuary so here are some comments that she could have made that would have really added value.

The key here is the 3.7% underwriting profit they are limited too.

Insurance has layers of risk. The more predictive\less risky something is the lower the rate of return needs to be which is basic finance 101. This is driven by the states REQUIRED CAPITALIZATION (this was mentioned in her articles how some companies folded due to not having enough capital).

So, the insurance companies limited to a 3.7% underwriting profit and needing to return say....at least a 10% return on equity (with investment income being so small in current markets as to be de minimus) can only retain the portion of insurance that is less risky. This FORCES them to have to buy unregulated reinsurance which makes things more expensive for everyone.

Example: Insurance Co. A is required to have 100 of capital to write $300 of insurance business at a 3.7% profit. This means their return on equity is 300 x .037 / 100 or roughly 11.1% in this example.

If company A didn't buy reinsurance their capital requirement would be more like 1000 to write 1000 of premium resulting in an ROE of 3.7%

I once worked for a company that had a STATE MANDATED -7% underwriting profit for the product they wanted to sell there. In order to break even on that product US 5 year bonds would have to be around +7%.

So remember, the state makes all the rules and has for decades (they price controlled coastal insurance for decade until the market blew up in their faces after the last big hurricane season). As long as they have a scapegoat they are ok.

[beachmouse]

Part of the problem comes from the state trying to get out of the insurance business, and with so many established insurance companies refusing to pick up those Citizen's customers for any price, you end up with insurers with no financial history popping up, and in order to meet solvency requirements, they have to go to the reinsurers, who charge high prices for reinsurance both because of the lack of track record from the new guys, and because they're effectively a strong enough of a cartel/ group of mass colluders that makes OPEC at its peak look like a bunch of fuzzy harmless baby bunnies in comparison.

There is no effective reinsurance competition; the current system is set up in a location where neither USA nor EU can effectively break up the level of collusion that's happening in the market right now.

[Mathguy]

Originally Posted by beachmouse

Part of the problem comes from the state trying to get out of the insurance business, and with so many established insurance companies refusing to pick up those Citizen's customers for any price, you end up with insurers with no financial history popping up, and in order to meet solvency requirements, they have to go to the reinsurers, who charge high prices for reinsurance both because of the lack of track record from the new guys, and because they're effectively a strong enough of a cartel/ group of mass colluders that makes OPEC at its peak look like a bunch of fuzzy harmless baby bunnies in comparison.

There is no effective reinsurance competition; the current system is set up in a location where neither USA nor EU can effectively break up the level of collusion that's happening in the market right now.

1) Yeah. Citizens is unbelievably scary. Most Floridians have zero idea that Crist basically gambled the states bankruptcy on a bad hurricane season not occuring for a while. Imagine trying to pay something like $35billion in homeowners claims with only $6billion in assets? (The state paid Warren Buffets hundreds of millions for a letter of credit. )

2) I don't really believe that there is serious collusion amongst the reinsurers. There are dozens of them and they are direct competitors in many many types of business. Reinsuring in Florida is INCREDIBLY risky especially with global warming being bandied about at every turn. As years pass without a major event

Reinsurance prices shot up after the last hurricane but have been DECLINING since which tends to make the collusion argument fall flat. Just because prices are high (risk and return after all) doesn't mean collusion, it just means that the reinsurers aren't dumb in their pricing.

P.S. OPEC doesn't even have effective collusion, they all want to undercut each other. There are just too many reinsurers for effective collusion.

[beachmouse]

I remember Crist's gamble well, and it's kind of at the point where it might just pay off. Last few years, it seems like the biggie was TS Fay, and that's a essentially a national flood insurance problem and not general property.

As for the current status of reinsurance rates for the states, do you have a good link for price trends? I'm curious to see how that's all shaking out these days.

[Hialeah_Rules]

Insruance options are as old as beepers

there is no need to stop hurricanes. if you can't deal with hurricanes, don't live in Florida. hallo

[Mathguy]

Originally Posted by beachmouse

I remember Crist's gamble well, and it's kind of at the point where it might just pay off. Last few years, it seems like the biggie was TS Fay, and that's a essentially a national flood insurance problem and not general property.

As for the current status of reinsurance rates for the states, do you have a good link for price trends? I'm curious to see how that's all shaking out these days.

Sadly, from what I've read the rates Citizens charges is not a whole lot more than what is needed to cover the *normal* stuff and thus even without a major cat they have not accumulated a lot of additional surplus.

This article talks generally about the reinsurance market outlook (bleak)

http://www.businessinsurance.com/art...UE01/101109933

Specific to Florida CAT reinsurance the various insurance articles I see have it increasing this year 10-15% last year +15% and the previous year -15%.

----------------------------------------------------------------------

I found this while searching, here is a hillarious hack-job...it's about as heavy with the anti-business populist stupidity as my local paper.

Citizens Property Insurance continues to make money in Florida | HeraldTribune.com

Gee, the private insurers don't have a lot of capital on hand? Maybe that's because they reinsure most of it? LOL. They don't even have a clue about what they are analyzing.

[the-writer-guy]

He won't even go for trains, you think that guy will go for a volcano?... on second thought....

[beachmouse]

The Business Insurance article is paywalled.

As for Citizens, it sounds like Charlie's gamble is paying off, and that it's in better position to remain solvent than a lot of the private carriers. From that Trib article:

According to Citizens' actuaries, even with 1.3 million policyholders, the state-run insurer now has the ability to absorb the hit of hurricane so powerful it is likely to hit only once in 25 years.


What's more, Citizens could pay losses for the eight smaller hurricanes of 2004 and 2005 without triggering a public bailout.

So they're at the point where not only we (ie. Florida property owners regardless of insurance carrier) wouldn't have to bail them out again like we did after 04-05, but that they're actually financially healthy than a lot of the private insurers in the state, even though more than 90% of their customers say they cannot get private insurance at any cost? Sounds like they're doing a good job representing the public interest here.

Something that doesn't get much talked about is how difficulties in getting property insurance can be causing a general reluctance for new businesses to relocate or expand in the state. If it comes down to Atlanta or Orlando for your business, and most other things being equal, insurance costs in Atlanta are 1/3 of what they are in Orlando, then it's got to be playing a role in that business' decision matrix.