When the storm is over and the streets are safe again, Floridians will be checking what has become of their homes. They may also want to check on their insurers.
The big national carriers like State Farm and Allstate pulled out of Florida’s homeowners’ market years ago, citing catastrophic risks and unhelpful state regulators. Those departures left a vacuum that the state filled, initially, with a state-owned insurer, Citizens Property Insurance. Eventually, the state offered incentives to coax some brave new insurers into the market.
As a result, all that may seem to stand between Florida’s homeowners and potential ruin is one state-owned insurer and dozens of relatively little-known companies that do all or most of their business in the state. They all have the benefit of the Florida Hurricane Catastrophe Fund, which, with no major storms in the past 12 years, has $17 billion at the ready — a sum that may not be nearly enough.
“This can really be a hurricane that can bust the insurance industry,” said Shahid Hamid, a finance professor at Florida International University’s International Hurricane Research Center. “When I saw Irma’s track, I was tremendously concerned.”
Whether policyholders can be made whole may depend on reinsurance — the custom-tailored insurance that the Florida insurers themselves take out — and other financial vehicles that they have to fall back on. But with the number of variables at play — the exact path of the storm, the companies’ balance sheets and the details of their reinsurance contracts — some insurers could stand strong while others are washed out.
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But, fortunately, some forecasters sharply rolled back their damage estimates late Sunday, as Irma moved up the Florida peninsula and lost strength.
“There may yet be a Florida insurance market on Tuesday,” said Charles C. Watson Jr. of Enki Holdings L.L.C., who had been projecting losses of $172 billion on Sunday morning but just $49 billion by evening.
Insurer strength could be more of an issue in Florida than in eastern Texas, where most of Hurricane Harvey’s damage was caused by inland flooding. Homeowners’ insurers do not generally provide flood insurance. In Florida, flooding was expected, too, but because of Hurricane Irma’s size and path, much of the destruction will be from high winds, a peril that is covered by standard homeowners’ policies.
Investors dumped the stocks of Florida insurers last week as they anticipated the resulting claims and losses. Not all the insurers are publicly traded, but the second largest in the Florida market, Universal Property & Casualty Insurance, saw the shares of its corporate parent, Universal Insurance Holdings, drop by 15 percent on Thursday.
Shares of two medium-size insurers, Heritage Property & Casualty Company and Federated National Holding Company, fell to 52-week lows on Friday. (The biggest, Citizens, is state-owned and does not issue shares of stock.)
Mr. Hamid said it was impossible to tell yet which insurers might be vulnerable, because the companies’ exposures vary by region and the terms of their reinsurance contracts are not known. He led the development of the Florida Public Hurricane Loss Model, which is used by state regulators to assess insurers’ financial strength, among other things.
Long before Hurricane Irma started bearing down, Mr. Hamid stress-tested the larger homeowners’ insurers in Florida and found that they would withstand a worst-case scenario, as he defined it at the time: a storm like Hurricane Andrew.
Until now, Andrew was ranked as Florida’s most destructive storm, causing $27 billion in damage — $47 billion in today’s dollars — when it struck in 1992. Twenty-two insurers went under, leaving a million policyholders without coverage.
Joseph L. Petrelli, president of Demotech, an Ohio-based company that reviews and rates regional and specialty insurers — including about 50 in Florida — suggested that Irma could be more significant because it would cause such a wide swath of damage.
“It’s about 350 miles wide,” he said of the storm, “so the entire state is going to be hit by just one event. It’s the first time in history that every county in Florida was on hurricane watch.”
Using the same benchmark as Mr. Hamid, Mr. Petrelli said he believed his Florida client insurers could withstand a storm like Hurricane Andrew, mainly because they currently hold more reinsurance than ever. He said he could not speak for the other insurers because he does not rate them.
Reinsurance allows companies to transfer some of their exposure to other, well-capitalized companies, adding capacity but reducing profits. Mr. Petrelli said that was why the national insurers left Florida — their reinsurance needs in other states were far less expensive and did not undermine profits.
“We make them buy more reinsurance every year,” he said of his Florida clients, “because the value of homes goes up every year, the number of homes goes up every year, and the cost of repairs goes up every year.”
The insurers pass at least some of the cost on to their customers. Homeowners in Florida spent about $1 billion on insurance in 1991, the year before Hurricane Andrew. Last year, they spent nearly $9 billion.
“Insurance rates are pretty high,” said Mr. Hamid. “The average rate for $300,000 coverage, built pre-1992, is $11,500, and it’s higher if you’re near the coast.”
He said the state’s building codes had improved since Hurricane Andrew, and people who upgrade older houses to the new standards can get “a huge discount” on their premiums. His own home, about 20 miles from the cost, costs about $7,000 a year to insure, he said.
“People complain a lot, but they’re really afraid of losing their coverage,” he said. After a series of hurricanes in 2004 and 2005, polls showed that Florida residents were more worried about affordable homeowners’ insurance than any other issue except public education.
The largest homeowners’ insurance company in Florida remains Citizens Property Insurance. It was formed in 1993, the year after Hurricane Andrew, and for many years it dominated the market in Florida, causing consternation because its size meant the state was bearing significant risk, stoking worries that a really big storm would mean a taxpayer bailout.
By 2011, Citizens estimated that a 100-year storm would cause $24.5 billion in losses, and it had the resources — including the state catastrophe fund and reinsurance — to cover just $13 billion.
That year, Citizens opened up its books and let the private insurers buy its most profitable policies, in big batches. The goal was to reduce the role of the state, so that while big risks would still be there, for-profit companies would bear more of them.
The initiative succeeded, said a company spokesman, Michael Peltier. Today, Citizens is about one-third its former size. With fewer policyholders, it estimated that it would get only $6.6 billion in claims in a 100-year storm. It has enough resources to cover that without taxpayers getting involved, company projections show. Citizens now screens prospective customers to make sure it takes only those deemed too risky for the companies to insure, like homeowners near the coasts.
Citizens builds reserves, buys reinsurance and issues catastrophe bonds to sophisticated investors, just as the private insurers do, Mr. Peltier said. But Citizens also has a risk-management tool that private companies do not: the taxing power of the state. If Hurricane Irma turns out to be devastating enough to use up all existing resources, Citizens has the authority to assess virtually all policyholders in the state, no matter what type of insurance they hold or whether they bought it from Citizens.
The private companies have nothing like that. If one of them blows through all its existing resources, it will end up insolvent. In such cases the company is typically closed, and a state-led “guarantee” mechanism takes over, seeking to pay homeowners as much as possible from what is left and assessments on other insurers. Homeowners would be unlikely to be paid the full cost of their claims.
But whether Hurricane Irma will be bad enough to cause insolvencies remains unknown.
The problem, Mr. Petrelli said, is that insurers base their risk-management strategies on what their catastrophe models tell them they need. “Nobody has ever seen a storm of this particular path and size,” he said. “In all candor, it hasn’t been factored into the catastrophe models.”
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