Fitch: Hurricane Wilma Further Strains a Delicate Florida Insurance Market

Fitch Ratings today said Hurricane Wilma represents a major blow to an already weak Florida property insurance market. If actual insured losses come in at the high end of the estimated range ($4 billion to $10 billion), Wilma will represent the third largest U.S. insured hurricane loss behind Hurricane Katrina and 1992’s Hurricane Andrew.

The financial strength of the Florida insurance market has weakened substantially in recent years due to the withdrawal of highly rated national insurers that have been replaced by state-sponsored entities and thinly-capitalized Florida-only insurers, Fitch said. The deterioration of the insurance market has occurred against a backdrop of rapidly appreciating property values, particularly along the desirable but higher-risk coastal areas, which increases the severity of losses when they occur, and increased frequency of losses from back-to-back seasons with multiple hurricanes.

Although much smaller than Katrina’s losses, Fitch noted that Wilma is still a major insured loss. Depending on the ultimate amount, Wilma could be the fifth largest U.S. catastrophe loss behind Hurricane Katrina, the 9/11 terrorist attack, Hurricane Andrew, and the Northridge, California earthquake.

Due to the combined losses from Hurricanes Dennis, Katrina, Ophelia, Rita, and now, Wilma, Fitch expects 2005 to be the highest U.S. insured catastrophe loss year ever.

Fitch said the insurance industry has earned an adequate return on insurance capital invested in Florida since Hurricane Andrew in 1992, and pricing remains deficient, nor has it fully recovered from the 2004 hurricane season. As a result, there is little incentive for a well capitalized insurer to remain in the market or for a start-up insurer to capitalize well. All else equal, thinly-capitalized insurers will report greater profitability (if measured by return on equity) but will be less able to survive extreme events such as very large storms or multiple storm seasons. As a result, the risk of insolvency among the small Florida-only hurricane insurers is high.

Fitch said that there are disincentives for smaller companies in Florida to grow due to the structure of the market that allows companies of up to a certain size to qualify for limited apportionment status. Limited apportionment companies may obtain prompt cash recoverable payments from the Florida Hurricane Catastrophe Fund (FHCF; rated ‘AA’ by Fitch), the state-sponsored reinsurer, in the event sustained hurricane losses pierce the attachment point. In addition, these companies are also capped on potential assessments emanating from Citizens Property Insurance Company (Citizens; rated ‘A-‘ by Fitch), the state-sponsored insurer of last resort.

Additionally, regulatory risk to insurers in Florida is very high, Fitch noted. While it is expected that property insurance rates in Florida will continue to rise as a result of recent losses, the level of price increases that would be needed to attract insurance capital back to the state is politically unappealing. Adding to a potential market capacity crisis will be the higher cost of reinsurance, as reinsurers are able to raise pricing at a faster pace and to a greater degree, than primary companies that are subject to rate regulation in personal lines.

Fitch noted any significant amount of insured damage from Wilma is likely to result in Citizens making a second assessment to insurers, following a $515 million assessment earlier this year. These assessments are ultimately passed on to policyholders. Within Florida, there is increasing resentment towards the Citizens’ assessment that many people (accurately) view as a transfer of losses from the higher-risk coastal areas to the lower-risk interior areas. Furthermore, if Wilma does result in the insolvency of any insurers, the remaining carriers would likely be expected to pay guarantee fund assessments to cover the insolvent insurer’s claims.

Fitch recently downgraded the long-term rating of Citizens from ‘A’ to ‘A-‘ with a Negative Outlook due to the significant losses suffered over the past two hurricane seasons and concerns about the ability of Citizens and the Florida primary insurance market to achieve price adequacy. There is also significant uncertainty as to the viability of Citizens in its current form, as the state government is actively considering a potential overall of Citizens. This action was brought on in response to the company’s poor claims handling during the 2004 hurricane season that exposed operational risks and more recently from the resignation of several executives due to allegations of bribery and conflict of interest that have highlighted corporate governance issues. Any structural or operational changes to Citizens, as the second largest homeowners insurer in the state, could have major implications to the Florida insurance market.

Wilma made landfall at 6:30 a.m. EST Monday near Cape Romano, Florida as a strong Category 3 hurricane with sustained winds of 125 m.p.h. Wilma was the third hurricane, following Dennis and Katrina, to make a Florida landfall in 2005. Wilma moved rapidly across Florida, which was a positive because rainfall was lessened and buildings were exposed to high winds for a shorter length of time. Additionally, Florida has some of the highest building code standards in the nation, which lessens the likelihood and severity of damage. Nonetheless, the storm crossed eastward through some of the most highly populated areas of Florida, exposing a greater number of properties to damage.

The various natural catastrophe modelers have begun to release preliminary loss estimates ranging from $6 billion to $10 billion.