Battening down the hatches: coastal-state homeowners are facing a crisis in finding homeowners insurance. And in cases where they can find it, they may not be able to afford it

Mortgage Banking, August, 2007 by Jack Milligan

Citizens' mission was to provide property insurance to residents who lived in high-risk areas and were unable to buy coverage from private insurers. After the 2004 and 2005 hurricane seasons, when Florida had been in the bull's eye for several major hurricanes, Citizens' underwriting volume expanded dramatically. At the time of its formation, Citizens had approximately 10 percent of the market; as of January 2007, its market share had climbed to 22 percent--making it the largest property insurer in Florida.

And in a recent move that should boost Citizens' market share even higher, the state legislature authorized it to combine hurricane-only wind coverage and traditional homeowners coverage for perils such as fire and theft in a single policy contract. Previously, the company had to sell these coverages separately. State officials believe the change will result in lower costs for Citizens and lower premiums for homeowners. The legislature also allowed residents to purchase coverage from Citizens when a comparable offer from a private insurer was just 15 percent greater than Citizens' best quote, compared with the previous requirement of 25 percent.

In a separate move, the state has also recapitalized the Florida Hurricane Catastrophe Fund, which was started after Hurricane Andrew for the purpose of providing reinsurance to private insurers in Florida. McCarty says the fund got up to $50 billion before being depleted after the 2004 and 2005 hurricane seasons. It has since been rebuilt to $30 billion, and provides reinsurance to private insurers at one-third the cost in the global reinsurance market.

Private insurers cry foul

Even though many private insurers backed away from the Florida market after 2004 and 2005, they are still critical of Florida's decision to set up a competing insurance company. For starters, they criticize a decision by the state legislature to place a cap on Citizens' premiums rates that will run until January 2009.

While this makes the company's policies more affordable for state residents, private insurers argue that the company's pricing does not reflect the true nature of the hurricane risk--a luxury they don't enjoy. "Citizens' [rates] are not actuarially sound," says Julie Pulliam, the public affairs director for the Washington, D.C.-based National Association of Mutual Insurance Companies' (NAMIC's) southeast region. "There's no way the private market can compete with them," she says.

The industry also argues that Citizens lacks the financial strength to survive a major storm like Katrina or Andrew. In the event that claims from some future catastrophic hurricane do exceed the company's capitalization, the Florida legislature has given it the authority to raise additional funds through assessments on most other forms of property/casualty insurance sold in the state. "A truly private insurance company wouldn't be propped up the way Citizens will be propped up when a big storm hits," says Elizabeth Reynolds, the state affairs manager for NAMIC's southeast region.