Insurance Crisis Not A Shortterm Problem Panelist Tells Forum
By Charlotte Libov
A scarcity of reinsurance, forecasts of an active hurricane season and a system that encourages fraud are to blame for an insurance crisis that has left businesses here scrambling for windstorm coverage, according to experts who spoke at a business forum last week.
"This is not a short-term problem. It’s a serious problem," said Tom Cornish, president and CEO of independent Seitlin Insurance.
He spoke to about 45 business leaders at the Beacon Council’s Real Estate Developers Forum. Other speakers included Sharon Binnun, deputy commissioner of the Florida Office of Insurance Regulation, and Michael Y. Cannon, director of consultancy Integra Realty Resources-South Florida.
Although they didn’t agree on what specifically has caused the crisis, they concurred that the state is facing a critical situation that could drive major employers to flee the state and deter out-of-state businesses from moving here.
"You can’t open a newspaper or go about your daily business without somebody talking about the insurance situation," said Frank Nero, Beacon Council president and CEO, in opening remarks. "I called it a crisis in the newspaper, and I was asked if I thought that was overstating the situation. But I’m probably understating it.
"The crisis started more than two years ago. The insurance industry is gong through a capital crisis and had been for years before this point," he said. Insurance traditionally is considered a bad investment because "it offers relatively low returns for high risks." As a result, he said, "there’s a lack of capital to absorb risk."
In recent years, Mr. Nero said, the insurance industry has been devastated by losses "mounting into the billions and billions of dollars – large, catastrophic losses from terrorism, floods, hurricanes and tornadoes, litigation expenses and other relevant returns in the marketplace."
But aggravating the problem, he said, is a "scarcity of reinsurance money in the state." He said reinsurance companies, which buy policies from primary insurers, "may feel badly about what’s happening in Florida when they wake up in London, New York and Zurich. But they try to see where they can reduce their risk and allocate capital where it makes the most sense." And in recent years, he said, that has not been in South Florida.
Ms. Binnun said a lack of reinsurance here is a large part of the problem that state regulators face. "During the past session, a lot of the legislation addressed residential insurance. The commercial problem didn’t smack us in the face until June," she said.
"A lot of investors want to start new companies, but it’s the reinsurance that’s the problem," she said. "Reinsurance is not regulated. It’s almost a commodity. We have a 70% supply of it and a 120% demand, so not everyone will get reinsurance, and they’ll have to pay more for it. The rates have gone up dramatically."
The Legislature has "a toolbox of solutions," she said. One possibility, because it could be established quickly, would be a state-run pool to provide commercial coverage similar to Citizens Property Insurance, which the state created as a last-resort insurer of residential property.
But "Citizens has taken a lot of lumps and we don’t want to create another one," Ms. Binnun said.
She said that even though Citizens was created as a last-resort insurer, there was concern that it was unfair competition for private insurers.
Mr. Cannon said his "first involvement with major hurricane claims was Hurricane Andrew. Some of the claims were legitimate and some were not. There was a lot of larceny out there."
He said he frequently saw claims for 17-inch television sets turned into large-screen TVs, people getting "new-clothes prices for used clothes" and homeowners cashing out of their property after receiving claim money instead of rebuilding, resulting in "houses selling for $10,000."
"No one is addressing the claims side," he said. He said the insurance industry "needs to beef up the side of the claims and maybe decrease the payments. The insurance industry removes the incentive to improve the property. We may be paying excess claims, and that’s causing the crisis."
The three speakers agreed that the crisis cannot be resolved quickly.
"We’ve gotten through two months of the hurricane season, and if we can get through the next four months without a major problem, a lot of people think this will turn around," said Mr. Cornish. But that won’t be the case, he said, because "unfortunately, there is not a magic pill to solve this problem." Advertisement