In a letter sent Monday to Cat Fund chief operating officer Jack Nicholson, the frequent insurance industry critic and chairman of theJoint Administrative Procedures Committee said he will call meetings if the policy isn’t changed.

“Dr. Nicholson, with all due respect, you and your staff have overstepped statutory authority. The rule not only affects the individual unit owner it impacts the master plan, which impacts all units,” the letter states. “Your rule interpretation will have dire consequences on condo associations and their residents throughout the state. This rule will only contribute to that rate increasing dramatically.

“If you do not take action immediately I will ask the Speaker of the House and the President of the Senate to authorize an emergency meeting of JAPSC so we can take care of this legislatively.”

Fasano began the spat last week, questioning whether a provision in the Cat Fund contract, which began June 1, excluding coverage for condominiums that are rented out six or more times per year, is contrary to state laws. He cited state statutes defining condominiums as residential properties, and thus eligible for Cat Fund coverage.

Nicholson responded with a missive Friday, asserting other state statutes prevent the Cat Fund from covering “transient rentals,” which are considered commercial property.

Fasano’s latest letter in response worries that condos rented out for short periods several times during a year will lead to homeowners being excluded from Cat Fund coverage because they own a “transient rental,” even if it is a homesteaded property.

“Under the Cat Fund rule, six or more rentals, regardless of their individual or cumulative duration, would cause the condominium to lose its residential status/classification. Thus, rental for six weekends for a total of 12 days during the course of a 12-month period would cause the condominium to be declared commercial rather than (residential),” the letter states.

The exclusion of coverage for condos rented out six or more times has been in the Cat Fund contract since the 2008 hurricane season, but condo managers and insurance agents say the rule is being interpreted differently, pushing developments to secure more expensive reinsurance in the private market.

The reimbursement contract for the Florida Hurricane Catastrophe Fund, or Cat Fund, for the 2013 hurricane season provides a specific exemption from coverage to condo units and developments that are rented out six or more times in a year. The contract took effect June 1, the start of hurricane season, and was approved by Gov. Rick Scott and Cabinet officers last month.

Adam Lopatin, senior vice president of commercial lines at Wells Fargo, said that the lack of Cat Fund coverage, which is cheaper than private reinsurance, is likely to lead to sharp increases in costs for some condo associations.

“In some cases it could drive up the cost 30 percent to 100 percent,” Lopatin said, adding that some might not see an increase at all. Larger developments would be more likely to feel the impact, he said.

Rep. Mike Fasano, R-New Port Richey, thinks the exemption of the rental properties is contrary to state law. He wrote a letter to Cat Fund Chief Operating Officer Jack Nicholsonthis week questioning the provision and cited statutes that define condo units as residential properties. The letter was written in Fasano’s capacity as chairman of the Joint Administrative Procedures Committee, which oversees agency actions to ensure compliance with state law.

Nicholson responded Friday with a letter asserting that “transient rentals” are excluded from Cat Fund coverage under state law. If a condo unit is being rented out six times or more in a year, it’s considered a commercial property not covered by state-backed reinsurance, he contends. He also parses the definition of “condominium,” saying the statute Fasano referred to applies to condo associations and developments and not individual units.

“By this definition, a particular condominium unit, as distinguished from a ‘condominium,’ would not be subject to the automatic classification as residential property. In addition, a structure that includes some condominium units but also includes other types of property, such as office or retail space, would not be subject to the automatic classification as residential property,” Nicholson’s letter states.

Fasano isn’t buying Nicholson’s argument.

“I believe he is totally wrong on this. I believe his agency is in violation of state statutes,” Fasano told The Florida Current. “He can use all of the legalese and mumbo jumbo he wants to, but the fact is we made it very clear: Condos are to be treated as residential properties.”

When the contract was developed during a rule workshop in August, insurance companies complained the exemption was arbitrary and hard to enforce.

“We are doing underwriting. Our policies are defined to write certain types of occupancies. One of the types of occupancies is someone that occasionally or more than occasionally rents it out,”Werner Kruck, chief operating officer of Security First Insurance Co., told Cat Fund officials during the workshop.

“All I’m telling you is it is really almost impossible for us to keep track of that. That is a rule of real life. It is very difficult for us to adhere to.”

In addition to the condo rental exemption, specific exclusions for Cat Fund coverage have grown rapidly in recent years. Specific exclusions have almost doubled from 15 in the 2003 contract year to 28 this year. In 1997 there were only eight specific exclusions to Cat Fund coverage. The exclusions mean barns, barns with apartments, recreational vehicles, boats and policies covering only additional living expense are not covered by the Cat Fund.

But there are also several other exemptions that poke further holes in state reimbursement coverage, pushing insurance companies to seek more expensive private reinsurance. Those costs are eventually passed on to consumers.

In its most recent briefing report, Guy Carpenter says higher yields are drawing investors to the alternative reinsurance market, which over the last 18 months has produced approximately $10 billion in new capital in the form of catastrophe bonds, sidecars and collateralized structures. The capital emanating from the alternative market has grown significantly over this period accounting for an estimated $45 billion, approximately 14 percent of global property limit.

This influx of capital is changing “the nature of the sector’s capital structure as investors grow increasingly comfortable with supplying capacity,” the briefing says. The change is impacting reinsurance pricing for peak property catastrophe risk in the U.S., driving June 1 renewal rates downward and likely through the rest of this year.

Global Head of Business Intelligence at Guy Carpenter, David Flandro, says the changes are continuing unabated and new sources of capital continue to emerge, adding, “The reinsurance sector has exited the fairly consistent post-Katrina Florida property catastrophe pricing range.”

Lara Mowery, Global Head of Property Specialty at Guy Carpenter, says the alternative market is setting prices at rates no longer tied to the traditional markets, indicating a level of comfort they did not have previously. This is producing lower reinsurance rates “in the traditional market as it seeks to remain competitive.”

For the Florida market, George Carse, head of Tampa Office at Guy Carpenter, says the combination of excess capacity and no hurricanes hitting the state for seven consecutive years has influenced pricing. He says the market indicated at the beginning of 2013 that clients renewing business this year should wait for a later renewal period. That wait produced “flexibility in pricing and structure options from both traditional and alternative reinsurance providers, coupled with a divergence of pricing between Florida-specific catastrophe bond transactions and the traditional reinsurance market, resulted in more substantial price decreases on average than originally anticipated.”

He also notes that competition kept several Florida-only bonds off the market as traditional insurers stepped in to fill the need.

The direction of pricing in the future will all depend upon losses for the 2013 hurricane season, says Guy Carpenter. With elevated hurricane activity predicted once again, carries will be monitoring events closely. NOAA is calling for as many as 20 named storms this season with the potential of up to 11 hurricanes and between three to six becoming major hurricanes.

Bob Smolowitz, of Davie, best summed up the sentiments I’ve heard from readers when he emailed: “Who are these guys? And will they have the funds to settle a claim?”

These homeowners have a few more weeks to decide whether to go with the untested upstarts or stick with state-run Citizens by “opting out.” (Under the skewed system designed to shrink Citizens, the default is “opting in,” meaning those who disregard the letters and don’t respond automatically get switched.)

Smolowitz has gotten an offer from Heritage, which is set to take over some 60,000 Citizens policies by month’s end (roughly 24,000 in Broward, Palm Beach and Miami-Dade counties). Weston has taken over roughly 26,000 Citizens wind-only policies, including nearly 11,000 in South Florida.

Carlos Diaz, of Boca Raton, got a takeout notice from Heritage last week, including a bold-faced paragraph warning of potential 45 percent storm surcharges if he stays with Citizens.

Said Diaz: “Frankly, I think these letters are highly deceptive. … All they do is scare you about Citizens and surcharges, but why doesn’t the company tell you it’s only been around nine months?”

Diaz called the state Office of Insurance Regulation and asked that question.

The frustrating response he got: “Because they don’t have to.”

Heritage launched in August and began taking over Citizens policies in December. Weston Insurance was licensed by the state on Dec. 21 for wind-only policies (residential and commercial), a market previously handled only by Citizens. Under terms of the takeout, when policies renew, the firms have to adhere to the same 10-percent rate-hike cap as Citizens for three years.

“Frankly, we’re a test case for other people watching on the sidelines,” Weston’s president, Michael Lyons, told me. He insisted the company’s strategy is workable, and said the firm had enough resources to weather two Andrew-sized storms in a season.

Weston has $24 billion of total exposure on its books, with $50 million in reserves and over $1 billion in claims-paying resources as of June 1, Lyons said. State documents show the company received $63 million in inducements from Citizens, with $15 million going to the firm and the rest to a reinsurer (which provides storm insurance for insurers).

Heritage has $26 million in reserves. I couldn’t get figures for its overall exposure or claims-paying resources through reinsurance. Heritage got $52 million in inducements from Citizens, and has triggered controversy because of political contributions made to Gov. Rick Scott and the Republican Party.

Lyons, an insurance industry veteran, said Weston and its executives haven’t made any political contributions in the past three years. After the firm formed in March 2011, he said, the company had to win over skeptical regulators and went through rigorous financial “stress testing” of various scenarios, including major storms and an increase in reinsurance rates.

I’ve heard complaints from consumers and agents about disorganization and inadequate notification by Weston. Lyons said, “With anything new, there are always some…speedbumps.”

But perhaps the most disconcerting thing to me – and Florida Insurance Consumer Advocate Robin Westcott – was the high interest Weston is supposed to pay on a $15 million, 10-year surplus note (basically a loan) that it used to boost reserves. The terms call for escalating interest in the 15-20 percent range, which Westcott called “pricey” and “dangerous.”

Lyons said Weston is in the process of replacing that note with a new one “at more attractive rates,” and said he “anticipates finalizing this within the next five weeks.”

To view financial data these companies submitted to the state, go to http://www.floir.com/Sections/PandC/TakeoutCompanies.aspx.

The big question for consumers, especially those eager to flee Citizens: Can these new companies be trusted?

Actually, we should call it the $400 million question, in the wake of an alarming Miami Herald report (confirmed by Westcott) that six of 18 companies previously allowed to take over Citizens policies (often with inducements) have gone bust in the past five years. Five of the six were formed after 2005, the last time a hurricane hit Florida.

All told, those failures cost taxpayers $400 million.

Yet all our politicians like to talk about are potential surcharges because of giant Citizens, with its 1.2 million policies.

All those failed upstarts were vetted and approved by the Office of Insurance Regulation. Just as the latest newcomers have been vetted and approved by OIR.

That ought to fill us with confidence.

June 6, 2013

Although hurricanes are usually associated with southern coastal states, Hurricane Irene and even more recently, Hurricane Sandy serve as reminders that these are not the only states at risk.

In 2011, Hurricane Irene caused more than $15 billion in damages in the Northeast, reaching as far north as Vermont and New Hampshire. In October 2012, Hurricane Sandy became the second-costliest hurricane in U.S. history.

Affecting 24 states, including the entire eastern seaboard, Sandy caused more than $50 billion in property damage and destroyed 650,000 homes.

No geographic region along the Gulf of Mexico or Atlantic Ocean is safe from hurricane damage, and in turn, storm surges. More than 4 million properties valued at $1.1 trillion are exposed to storm surge damage, triggered by high winds and low pressure associated with hurricanes.

For insurers, being aware of the areas at risk can aid in the understanding of potential water damage exposure from storm surges, particularly for those who may not be aware of their risk or who do not fall within Federal Emergency Management Agency’s flood zones.

A state’s total risk of exposure depends on a variety of factors, including trends in population and residential development, geographic risk factors and length of the coastline. In its 2013 Storm Surge Report, CoreLogic took these elements into account to compile a list of states with the most properties susceptible to storm surge damage.

10. Massachusetts

Total potential properties at risk: 107,657

Total potential exposure to storm surge damage: $50,284,887,752 (Ranks 9^th)

States in the northeast can feel the impact of hurricanes, including those as far north as Massachusetts.

9. Georgia

Total potential properties at risk: 118,004

Total potential exposure to storm surge damage: $20,520,284,057 (Ranks 12^th)

8.  South Carolina

Total potential properties at risk: 196,784

Total potential exposure to storm surge damage: $65,582,551,882 (Ranks 6^th)

Charleston rounds out the top 10 U.S. metropolitan areas at risk for storm surge.

7. North Carolina

Total potential properties at risk: 232,212

Total potential exposure to storm surge damage: $65,186,373,970 (Ranks 7^th)

6. New York

Total potential properties at risk: 270,458

Total potential exposure to storm surge damage: $134,977,084,630 (Ranks 2^nd)

Population density and property value, especially in the New York metropolitan area, are responsible for New York’s high ranking in both potential property damage and potential exposure for surges. No homes in New York City are considered in the “low risk” category for surges, and Hurricane Sandy proved how just a category 1 could impact the area. Nearly 116,000 homes in the New York metropolitan area alone were damaged by Hurricane Sandy, which was only a category 1 hurricane when it first made landfall in the New York metro area.

5. Virginia

Total potential properties at risk: 329,234

Total potential exposure to storm surge damage: $78,044,300,879 (Ranks 4^th)

4.  New Jersey

Total potential properties at risk: 350,577

Total potential exposure to storm surge damage: $118,796,101,231 (Ranks 3^rd)

New Jersey’s low elevation increases the state’s risk for storm surges. In the last 100 years, the sea level along the New Jersey coast has risen over a foot, contributing to the increased risk in surges, and they are expected to continue rising. Professor of geology Daniel P. Schrang of Harvard University, was quoted in the Harvard Gazette, saying the 13-foot surge in New Jersey caused by Hurricane Sandy “will be the new norm on the Eastern seaboard.”

3. Texas

Total potential properties at risk: 369,577

Total potential exposure to storm surge damage: $50,947,847,377 (Ranks 8^th)

Along its coastlines, Texas has long, gently sloping shelves, and the water is relatively shallow.  This geographic feature produces relatively small waves, but increases storm surges. The shelf permits the surge to accumulate ahead of the storm, then pushed ashore with the movement of the hurricane.  Cities along the Gulf of Mexico, particularly Houston and Corpus Christi are largely affected by hurricanes and surges.

2. Louisiana

Total potential properties at risk: 411,052

Total potential exposure to storm surge damage: $71,937,718,435 (Ranks 5^th)

Though Louisiana does not have an expansive coastline, low elevation is responsible for putting it at risk. Hurricane Katrina proved just how damaging storm surges can be in Louisiana, particularly in New Orleans. Although improved levees and pumping systems were constructed in the aftermath of Katrina, Hurricane Isaac in 2012 resulted in an 11-foot surge, causing significant flood damage. CoreLogic predicts that just a one foot rise in ocean levels would succeed in putting another 2,000 homes at risk for storm surges in New Orleans, worth approximately $300 million.

1. Florida

Total potential properties at risk: 1,478,858

Total potential exposure to storm surge damage: $386,479,005,701 (Ranks 1^st)

With 1,197 miles of coastline, it is no surprise that Florida comes in at number one for the most potential properties at risk, as well as having the most potential exposure to storm surge damage.  Five of the top ten metro areas in the United States at risk for storm surge are located in Florida, including Miami, Tampa, Cape Coral, Naples and Bradenton. In Tampa alone, nearly 301,045 properties are at risk, more than Massachusetts and Georgia combined.

Last Modified: Wednesday, June 5, 2013 at 5:25 p.m.

Officially, hurricane season begins June 1 each year. But in the past, the really scary stuff often didn’t develop before August, allowing months of procrastination and complacency.

Hurricane information

• If you need a copy of the Herald-Tribune’s Hurricane Guide, you
can pick one up at the downtown Sarasota office (1741 Main St.).
• The Hurricane Guide is also available online:
http://sarasotaheraldtribune.fl.newsmemory.com/special.php?date=20130601
• To track the latest in weather systems with the Herald-Tribune’s tropical
weather center and get the latest headlines on storms, check out the
Tropical Weather site at: heraldtribune.com/section/topic0330
• For up-to-the-minute information, follow J. David McSwane’s Hurricane
Report blog: hurricanereport.blogs.heraldtribune.com/
• For preparation information in Spanish, check local libraries or the
Sarasota County administration center. Some is available online at
https://
www.scgov.net/StormCenter/Pages/Espanol.aspx

Those days appear to be gone with the wind, so to speak.

Just six days into the 2013 hurricane season, the makings of a cyclone are moving up the Gulf of Mexico. And last year, three weeks into June, Tropical Storm Debby gave us what one official called a “gentle wake-up call” — including a foot or more of rain in downtown Sarasota and the loss of up to 20 feet of beach.

So much for the leisurely approach to storm preparation. It was never a good idea, anyway, as hurricanes Audrey and Agnes — June 1957 and 1972, respectively — attested.

With a significant chance of damaging weather hitting Florida this week, readers would be well advised to check out the Hurricane Guide (included in last Saturday’s Herald-Tribune and available online at heraldtribune.com) — if they haven’t already done so.

If you don’t have answers to the following questions, try to get them:

• How do you plan to get storm information? In what flood zone is your home located? What level of winds can your roof withstand? Where’s your main power switch if you need to turn it off?

• Do you have enough supplies to “shelter in place,” as is often recommended? If you need to evacuate, where’s the nearest open shelter and are pets allowed there? If you have special health needs, have you registered in advance with your county?

• Are your insurance policies up to date and will you be able to access the information in the aftermath of a storm? How will your family stay in touch?

Those questions just skim the surface of storm prep, which is a daunting endeavor. The long-range tasks — such as installing roof and garage reinforcement, buying custom shutters, backing up computers, photographing possessions, and evaluating insurance needs — can make a real difference, but they take time. Indeed, some of the steps are probably best begun many months before hurricane season.

Other vital decisions — such as whether to “stay or go” — can’t really be made ahead, adding to the stress of uncertainty as a storm approaches.

Many residents of Southwest Florida experienced this effect in the 2004-2005 seasons, during which major hurricanes threatened the region repeatedly in August and September.

Most did not actually hit us, but Charley slammed Charlotte County, Arcadia and parts of eastern Sarasota County in August 2004. This was life- and attitude-changing because, for decades, our region had been spared from hurricanes.

Charley, which created as much havoc inland as it did on the coast, upended conventional wisdom that safety lies to the east when evacuating a Gulf storm. It was a lesson few residents of the area will forget.

Charley showed that even the best-prepared homeowners can be humbled by hurricane season. The lesson contained in its Category 4 winds was that nature is often at least one step ahead of us, and less predictable than we can imagine.

Forecast accuracy continues to improve. Our attention to timely hurricane-season preparation should, too.

The industry is facing a near-perfect storm of financial good fortune entering the six-month 2013 hurricane season that began Saturday:

-Rate increases have boosted revenues.

-Expenses are down, the result of an unprecedented seven years without a hurricane striking Florida.

-Corporate costs for hedging against hurricane risk are declining.

Ratings firm Demotech recently reported that 70 percent of the Florida-based insurers it monitors posted an underwriting profit last year — and underwriting is just one profit source for the companies.

Yet such favorable financial conditions have yet to benefit consumers in the form of lower rates or significantly larger reserve accounts, which serve as a counterweight against future rate increases.

Robin Westcott, the state’s insurance consumer advocate, said Florida’s home insurance market is at an important crossroads. With profits up, the industry has an opportunity to improve solvency and limit future rate shock.

“I still think our market needs a considerable amount of work to be a really healthy marketplace,” she said.

The top 20 Florida-based private insurers — they collectively account for half of the policies sold in the state — bolstered reserves by 25 percent last year, compared with just 5 percent in 2011, according to a Herald-Tribune analysis.

The surplus growth and other factors should leave insurers better prepared to pay claims if a major storm makes landfall in Florida for the first time since 2005.

Still, the surplus growth isn’t even spread among all of Florida’s insurers; just two companies accounted for more than half of the 2012 increase in surplus.

In fact, the firm with the biggest cushion is state-run Citizens Property Insurance, which has three times more money in reserve — $6.3 billion — than Florida’s top 20 private insurers even though it only covers half as much property value as those firms.

Westcott said she wants to see the companies sock more money away in reserves.

“We should see surplus growth in a way that is commensurate with the profits we’ve seen in underwriting in the last year or two,” she said.

Florida’s property insurance market has been in turmoil in recent years, with some large national carriers fleeing the state after eight hurricanes made landfall in 2004 and 2005.

The smaller, Florida-based companies that now dominate the landscape have not followed the traditional model of building large reserve funds in good years to pay claims in bad ones.

Instead, Florida-based insurers act as intermediaries when it comes to hurricane risk. They pay huge sums to offshore reinsurance companies that agree to cover claims if a storm hits Florida.

Reinsurance costs can be extraordinary — roughly 40 to 50 percent of a homeowner’s premium.

Building up surplus would allow firms to buy less reinsurance, relieving pressure to raise rates when the reinsurance costs spike.

“It gives you the ability to absorb years when reinsurance is more expensive, when the market shifts,” said Demotech client services manager Robert Warren. “That surplus gives you the ability to be more flexible in your decision-making process.”

Florida’s private insurers have long complained they have not been able to charge adequate rates despite escalating premiums over the last several years. They also have repeatedly pushed for changes to Citizens, the state’s largest insurer, arguing that it represents unfair competition and artificially constrains rates.

But the insurers are themselves under fire for not reinvesting enough of the money they collect into reserves. They often divert profits into affiliates, reaping substantial gains while reporting paper loses and letting reserve funds languish.

The rate boosts have been painful for homeowners still recovering from the Great Recession. The increases have continued despite the lull in claims from hurricane strikes, and pose a threat to Florida’s still-recovering building and real estate industries. Insurers could face a backlash if their extra profits are diverted in ways that do not benefit consumers.

Those profits are expected to be enhanced over the next year because of lower reinsurance costs. Investment money has been flooding into the offshore reinsurance industry, leading to an expected decline in prices this year.

Reinsurance contracts have yet to be finalized for the coming hurricane season, but Demotech chief ratings officer Barry Koestler said “we have seen some softening in the reinsurance pricing.”

Locke Burt, a former state senator who runs one of Florida’s largest insurers, said early signs point to a price cut of roughly 15 percent. “It’s significant,” said Burt, founder of Security First Insurance Company.

Security First could save roughly $15 million from the cheaper reinsurance prices, Burt said, further boosting profits that already were on the rise. Insurers statewide should benefit.

Burt expects surplus to continue growing at his company and others. But buying extra reinsurance is more of a priority, he said.

“We’re going to be adding money to surplus, but what’s important to me as a privately held company is the risk of ruin,” Burt said. “By spending that additional money on additional reinsurance we can knock that risk of ruin down. My objective is to build a company that is going to be in Florida for a long time, that I can pass on to my kids and grandkids.”

Some Florida property insurers have operated with dangerously little surplus and reinsurance, leaving them vulnerable to failure after a big storm.

At least eight private insurers — 11 when considering multiple insurers operating under one holding company — have failed since 2004.

Other weak companies were purchased or merged before going broke.

“It would be a wonderful time for companies that don’t buy as much reinsurance as we do to purchase more,” said Burt.

But there is a question of how much reinsurance is too much for Florida ratepayers to handle.

The state Office of Insurance Regulation and ratings firms such as Demotech have generally encouraged insurers to buy coverage for a massive 100-year storm that has a 1 percent chance of occurring in any year.

In the past, many companies have failed to hit that target. Now most should be able to exceed the standards without resorting to higher rates.

But how far they should go is open to debate. Reinsurance typically covers one storm season. Saving the money as surplus can protect companies long into the future.

Some companies may even consider passing on their reinsurance savings to customers in the form of rate cuts, a major change from recent years.

Burt is watching the market closely.

“If a number of our competitors take their reinsurance savings and cut their rates, then we might have to reconsider what we’re doing, but none of that will happen quickly,” he said.

The trend lines for Citizens are running in the right direction. The insurer still is the largest in Florida with more than 1.2 million policies, nearly a quarter of them in the Tampa Bay area. But that total is down more than 200,000 from a year ago as more private companies are willing to take on more risk. Citizens also has a record surplus of more than $6.4 billion and more competent leadership than it had a year ago. The insurer has enough capital to pay off claims from a 1-in-58-year hurricane without assessments after the storm.

That hasn’t stopped the fear-mongering or the efforts to raise premiums and reduce coverage. Legislators and private insurers warn of a “hurricane tax” — large assessments after a 1-in-100-year storm. The Florida Senate was determined to remove the 10 percent cap on premium increases at Citizens at least for new policyholders. Fortunately, the House resisted and the compromise Gov. Rick Scott signed into law Wednesday retains the premium caps and offers some reasonable changes. It also creates a clearinghouse that would make it easier for homeowners to find better coverage from private insurers at more competitive prices before signing up with Citizens. That could result in shifting another 200,000 policyholders from Citizens into the private market

Yet Citizens is its own worst enemy. First it reduced coverages. Then it further angered policyholders with a poorly run reinspection program that significantly cut premium discounts for hurricane hardening efforts that had previously been approved. Last week, the Citizens board foolishly agreed to pay a St. Petersburg start-up, Heritage Property and Casualty, up to $52 million to take up to 60,000 policies. That is a misuse of money and violates the intent of the Legislature, which rejected Citizens’ plan last year to loan private insurers hundreds of millions of dollars to take out policies. House Speaker Will Weatherford is understandably critical and has ordered a legislative review.

In the long run, Florida needs a better solution to its property insurance issues. Name-brand national insurers still refuse to write new policies, and the state’s record of propping up in-state start-ups is spotty at best. But there is no traction in Washington for a national catastrophe fund or in Tallahassee for creating a state fund that would collect windstorm premiums in return for private insurers covering everything else and assuming all Citizens policyholders. Private market forces are not working, and jacking up Citizens’ rates as the economy is recovering is not the answer.

Floridians can’t let the philosophical debate over insurance or the state’s good weather fortunes distract them from practical preparations. Today is the day to remember to gather hurricane supplies such as batteries and portable lights, find the weather radio and review evacuation plans. The state has been on a winning streak, and it won’t last forever.

Scott signed SB 1770 late May 29, a piece of legislation he says “will bring much needed reforms to better protect the taxpayers who support Citizens Property Insurance.”

The law establishes a clearinghouse aimed at reducing the number of policies at Citizens, which for a variety of reasons—mainly rate suppression—has ballooned to become Florida’s top write of property insurance. The clearinghouse allows new and renewed policies to be shopped to private insurers before landing at Citizens. A comparative rate analysis would be generated.

SB 1770 prevents Citizens from insuring homes valued at more than $1 million—a cap that gets lowered gradually until it reached $700,000 in 2017. New construction in high-risk, coastal areas after July 1, 2014 can also not be insured by Citizens.

“This commonsense step eliminates public insurance subsidies for new coastal constructions with a high risk of storm losses,” Scott says.

 The legislation also requires the state-run insurer to have an inspector general. Scott says a nationwide search for this position is immediately starting.

“Citizens needs serious reform in order to instill the public confidence that should belong to the state’s largest insurance company, which is supported by Florida taxpayers,” says Scott, in a statement.

Citizens has recently been embarrassed by in-house fraud, waste and abuse—misappropriations of funds and controversial pay raises to executive, which Scott has demanded it return. He says Citizens has yet to do so.

However, the bill contains no language related to Citizens’ rates. The original Senate bill outlined a plan to require Citizens to be actuarially sound for new business starting Jan. 1, 2014.

The Florida House basically replaced the original SB 1770 with its own version, HB 909. Nevertheless, SB 1770 retained its number. Another provision omitted from the original Senate bill had to do with opening Citizens up to bad-faith litigation.

The new law also expands Citizens’ board from eight to nine members—the addition being an advocate for consumers appointed by the governor. It also renamed the Florida Hurricane Catastrophe Fund the “State Board of Administration Finance Corp.”

WHAT THEY’RE SAYING ABOUT SB 1770:

Barry Gilway, CEO of Citizens Property Insurance Corp.:

“We’re pleased that the Governor has signed this important piece of legislation and have already done preparatory work to meet the timelines outlined in the bill.

Kevin McCarty, Florida Insurance Commissioner:

“SB 1770 is an important piece of legislation that will address several property insurance issues in our state along with establishing a Clearinghouse for Citizens.  The Clearinghouse concept will help to give consumers more choices in their search for private homeowners insurance, while providing the benefit of reducing Citizens overall exposure and the risk of assessments for all Floridians.”

Gov. Rick Scott:

“While this law will not be a cure-all for Citizens’ many problems, it makes important reforms to improve this taxpayer-backed organization.”

Donovan Brown, state government relations counsel for PCI:

“As Florida stands at the doorstep of the beginning of hurricane season, the enactment of Senate Bill 1770 lays the foundation for future reforms that could address the exposure and rate inadequacy of Citizens, which subjects all Floridians to a hurricane tax liability.

PCI and its members look forward to working with all stakeholders in order to implement aspects of the Citizens clearinghouse embodied within this legislative measure, and to collectively achieve additional solutions to return Citizens to its original concept as Florida’s insurer of last resort.”

Christian R. Cámara, Florida director of independent think-tank R Street:

SB 1770 “combines fiscal responsibility and market-based environmental stewardship. Although more needs to be done to restore Florida’s property insurance market, Senate Bill 1770 is a small, balanced step toward reaching that goal.”

Dan Krassner, executive director of independent government watchdog group Integrity Florida:

“All Florida taxpayers, whether they are Citizens customers or not, run the risk of having to bailout Citizens, through more hidden hurricane taxes, if the organization does not perform efficiently and effectively. We are confident that the new inspector general will be a watchdog for both Citizens policyholders and all Florida taxpayers.”

AIR catastrophe models are not meant to forecast the frequency or severity of hurricanes in any particular season. Rather, they are intended to help insurance companies understand and manage their potential losses over a range of potential future seasons. That said, AIR does monitor seasonal predictions made by others and the broad consensus is for an above average number of named storms and an elevated number of those storms becoming hurricanes. These forecasts, in general, are in line with the forecast recently published by NOAA, which predicts 12 to 18 named storms (with maximum winds of at least 39 mph), of which 6 to 10 are predicted to become hurricanes (with winds of at least 74 mph). 

It is important to note, however, that a high level of hurricane activity does not necessarily correlate to an elevated potential for landfall or insured loss. High levels of loss are typically the result of strong hurricanes making landfall, which itself is dependent on a host of correlated factors including sea surface temperatures, wind shear conditions, and atmospheric steering currents.  

Are the paths of storms expected to be different this year, following events such as Irene and Sandy? Will the storms be more violent? 

No, there is no clear evidence that the paths of Atlantic storms will be statistically different than the long term average. Sandy and Irene were both products of a unique set of circumstances, and ultimately the track of each tropical cyclone is unique and challenging to forecast even days in advance. No technology exists today which can forecast individual storm tracks a season in advance. There is some evidence that warmer than average Atlantic Ocean temperatures can lead to more storms developing far from the U.S. and curving out to sea sooner, but this is an active area of research and no definitive conclusions have been reached.  

While there are studies that suggest that elevated ocean temperatures (owing to climate change) may lead to less frequent but more intense hurricanes in the Atlantic, there is little evidence that storms occurring in any one season will be more or less violent than average due explicitly to the effects of climate change. Sea surface temperatures in the Atlantic and Pacific oceans are important to defining hurricane risk in North America. Atlantic Ocean temperatures are expected to remain warmer than average, as they have been since 1995, which would suggest an impetus for elevated activity. Pacific Ocean temperatures are expected to be close to average this year, suggesting that the ENSO cycle (El Nino / La Nina) will not play a very large role in the Atlantic. 

Is hurricane forecasting cyclical? Are there ‘seasons’ that play out across many years? 

Each hurricane season is unique and the hurricane forecasts published each season by various agencies are dependent upon a host of factors including predicted Atlantic sea surface temperatures and El Nino conditions. However, some aspects of the climate that influence the forecast move in cyclical patterns. The El Nino Southern Oscillation (ENSO, i.e., El Nino / La Nina) in the Pacific recurs over a period of 3 to 8 years and can significantly modulate Atlantic Ocean activity owing to its effects on vertical wind shear in the atmosphere. Other climate factors vary on different time scales, such as the Quasi-Biennial Oscillation, which has a two year repeat cycle. So, in some sense, the climatological factors that influence Atlantic hurricane activity do evolve over the course of several years, but since each factor has its evolution, it would be difficult to relate activity levels to any one “cycle”.