EXPOSING REINSURANCE – IS THERE A SCAM?
Reinsurance is the insurance that insurance companies buy to cover their losses in having to pay claims in the event of major loss. The Office of Insurance Regulation mandates a minimum level of reinsurance that all admitted carriers must purchase, and the total that all carriers have to buy is called the “retention level.” The cost of reinsurance is passed along to the consumer policy holder, and when reinsurance is bought in the private market it costs almost 50 cents of every premium dollar. However, private carriers always buy more reinsurance than is required, and once they satisfy the retention level requirement they purchase their reinsurance from the state CAT Fund. Reinsurance purchased from the CAT Fund is much cheaper – the cost is approximately only 10 cents of every premium dollar.
A bill was filed this year in the Florida Senate which would have reduced the amount of reinsurance that private carriers could purchase from the CAT Fund. This would mean that insurance companies would have to purchase more of their reinsurance from the private market – at the rate that is almost 5 times higher! This would significantly raise insurance premiums for consumers, which is bad for a number of reasons. First, the private reinsurers have enjoyed record profits and are often based in tax havens like Bermuda, while ordinary consumers have born the financial brunt of their legislative and regulatory manipulations for years. Moreover, a major goal for the state is to reduce the number of policies with Citizens – our prior post and background on Citizens appears here – the State of Florida needs to get out of the insurance business. But if reinsurance costs go up, the cost of private insurance will go up and Citizens policyholders will not leave Citizens because the private policies will cost so much more.
For these and other reasons, we should not reduce the amount of reinsurance available from the CAT fund; in fact, we should expand the amount of cheaper reinsurance available from the CAT fund. Senator Jeremy Ring agreed and proposed an amendment to the bill that would do just that. To cover the additional exposure to the CAT Fund from selling more cheaper reinsurance, he also proposed that the state expand its post event bond issuance capacity from one year to three years – a change that would raise at least an additional $10-12 billion dollars in the event of a major storm, more than enough to cover the potential $2 billion exposure. In a bipartisan display of the merits of his idea, the bill passed with four Republicans joining most Democrats on the committee to pass the amendment. Unfortunately, after the amendment passed the insurance industry was very upset and the bill was temporarily removed from consideration. It remains to be seen if the issue will return.
Florida has not had a hurricane in almost 8 years, yet insurance premiums continue to climb. In Florida, reinsurance has arguably become an insidious form of price gouging, allowing insurance companies to charge unjustified price increases. The Florida Justice Association (FJA) teamed up with FAIR (Florida Association for Insurance Reform) in supporting Senator Ring’s amendment that will protect consumers from this unwarranted price increase, thereby incentivizing homeowners to leave Citizens and return to a more reasonably priced private market.