FL HO market: Undercapitalized?

Snagging some confidential documents from the Department of Insurance, Sarasota Herald-Tribune reporter Paige St. John questions the financial strength of several leading Florida homeowners insurers, including the state’s largest private HO writer – Universal P&C – and the Florida arms of Allstate and State Farm.

(Let’s add quickly: Allstate Florida and State Farm Florida are subsidiaries of much larger organizations. So the supposed threat to the Florida companies doesn’t extend to the parents.)

The problem: According to the documents, those companies don’t have the capital to withstand a 100-year hurricane. More than a half-dozen smaller companies have the same problem.

How does this happen? Looser regulation, according to the report. Until 2010, the state required them to show their ability to withstand a 100-year storm. But according to St. John, they gamed the process. Insurance Commissioner Kevin McCarthy removed that requirement, hoping premiums would fall.

And some insurers appear to have gamed the system. They used a tough model to set cat loads for their rates, resulting in higher rates. But they turned to a milder model for the report the state requires.

Other companies ignored the impact of demand surge, the very real inflation in construction costs that follow a storm.

Insurers defend themselves:

Almost all of the companies disputed the state-required test and said they could survive based on their own methods that predicted substantially smaller hurricane losses.

If the big one hits, St. John’s report concludes, hundreds of thousands of policyholders could lose their insurers, and the remaining insurers and taxpayers would end up with the bill.

Of course, the reporter herself appears to have played both ends of the cat modeling game. She excoriated insurers for depending on them to set rates, implying rates are too high. Now she criticizes insurers for failing to rely on them enough, implying insurers’ capital is too low.

Rather than wonder what the reporter really believes, I’ll just say that all insurers have an important interest in the capital adequacy of every insurer.

The story is here, and details on how all the state’s insurers fare on the state’s scenario test are here.

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