After the storms: homeowners deductibles and reinsurance raise questions in Florida.

Key Points

* Insurers have attempted to determine what damage was caused by each hurricane and how to apply deductibles.

* For some reinsurers, having a large amount of claims assigned to one hurricane could work out well.

* The four hurricanes raised issues concerning reinsurance reinstatements.

After four hurricanes swept through the U.S. Southeast in quick succession in 2004's third quarter, insurers have had to scramble to assess damages and sort out what damage was caused by which storm. The task is enormous, especially in Florida, where all four storms hit--three of them in roughly the same areas.

As claims and damage estimates slowly come into focus, problems tied to Florida's unique property insurance market have become evident. One of the thorniest may be the question of how to handle deductibles, which for Florida homeowners may be up to 2% of the insured value of their property per occurrence.

How insurers apply those deductibles to multiple claims from several storms is uncertain, so much so that state officials are already calling for legislative action to change the rules.

"It's a real mess," said Tim Gardner, managing director with reinsurance broker Guy Carpenter & Co., referring to unique claims problems caused by hurricanes Charley, Frances, Ivan and Jeanne. "There are a whole host of issues involved here, some of which are political."

Gardner cited state Chief Financial Officer Tom Gallagher's much-quoted comment that per-occurrence deductibles on homeowners policies are "unfair," as claims problems became more obvious. "It's an interesting position to take, when you consider that is the basis on which insurers were rating the business," said Gardner.

"It's a difficult position for insurers to be in," said Gardner. 'They want to be fair to their policyholders, but on the other hand, they have contracts to uphold."

In some instances, insurers were not able to reach properties damaged by one hurricane to adjust claims before the next storm came through. "How do you differentiate which storm caused what damage? It's very difficult," said Gardner. "Then you have problems such as determining whether damage was caused by flooding, which is not covered, or wind-driven rain."

Robert Hartwig, chief economist with the Insurance Information Institute, said there has not been a "uniformity of opinion" within the industry as to how to handle deductibles on homeowners policies following such a rapid succession of storms and individual insurers are opting for difference approaches.

For claims where it is unclear which storm was the cause, some of those insurers who are applying only one deductible tend to assign them to the first event--Hurricane Charley, Hartwig said. "Among many of the market leaders, where you can clearly establish damage from one storm vs. another, the deductible for the second event will apply," he said.

But some insurers have announced they would waive the deductible requirement for damage from a subsequent event. Fireman's Fund Insurance Co., for instance, said after the fourth storm--Hurricane Jeanne--that it would waive the application of deductibles to the claims of its 2,500 affected homeowners policyholders. "The six-week wave of back-to-back hurricanes was a unique and unprecedented phenomenon that warranted exceptional action on behalf of customers who had little or no time between storms to participate in the traditional process of claims adjustment, property repair, protection against the elements and rebuilding," President and Chief Executive Officer Chuck Kavitsky said in a statement.

Gardner agreed, saying in many cases the only practical route for adjusters to take is to assign damage to the earliest event. "I don't think that's intentional, but it's just the reality of what seems to be happening," he said. For that reason, revised loss figures for Hurricane Charley are rising faster than the subsequent three storms, he said.

Hartwig believes the amount of claims that are questionable in terms of which storm caused the damage is "a very small percentage" of the total. The complaint ratio--number of complaints compared with total claims--so far has been less than 1% in Florida, he said.

Of the 2.2 million claims associated with the four hurricanes, about 1.7 million are in Florida, said Hartwig. About 78% of the claims and 85% of the losses are in that state.

Reinsurers Watching

Where insurers decide to waive deductibles for 2004's unique events, reinsurers are "not likely to subsidize" the decision, said Hartwig. "The premium a reinsurer receives is a function of the expectations that deductibles are enforced," he said. "A reinsurer covers the insurer above a certain attachment point, so if the primary insurer decides to waive that underlying deductible, the reinsurer can't be held financially accountable for that."

Gardner said reinsurers are "watching the situation carefully," but how the unique claims problems of these storms will affect them is still unclear. For some reinsurers, having a large amount of claims assigned to one event could work out well, if loss amounts breach their attachment points, then go beyond their coverage layers.

"I think reinsurers understand that it's a claims-adjusting mess all over the state," said Gardner. "They know there are extenuating circumstances here, and they appreciate all of the issues involved. But they would like to ensure that it's not just throwing all of the losses to one event because it's easy."

Another issue 2004's storm season raised for the insurer-reinsurer relationship is that of reinstatements--which allow the primary insurer to get reinsurance coverage for a second event once its reinsurance limit was reached in a first event. Reinsurance contracts normally provide for one reinstatement per year.

"In this year's case, you may have needed three additional reinstatements to retain that reinsurance coverage," said Hartwig. "What is happening now is that many primary insurers are negotiating for more reinstatements for their 2005 contracts."

"What we had in Florida this year was some insurers who had blown through three limits and might have had trouble finding capacity to sell them reinsurance for a fourth or fifth limit," said Gardner.

The Florida Legislature planned to hold a special session in December to consider whether insurers should be required to give homeowners the option of a deductible on a per-event basis, or one deductible for an entire season. The special session was requested by Gallagher, the state's chief financial officer and financial services regulator.

"It is likely that legislation will be put forth giving people that option," said Hartwig. "And that will be reflected in the rates--premiums will be higher?

While new legislation might give buyers more choices concerning whether to select deductibles per occurrence or by season, or how high the deductible will be, consumers will have to understand that fewer deductibles or lower deductible levels will mean higher prices, said Hartwig.

Tapping the Fund

While consumers will have to think harder about what kind of deductibles they want with their coverage, insurers and state officials will have to reconsider the way the Florida Hurricane Catastrophe Fund is set up, said Hartwig. "The fund was set up to handle a single catastrophic event, along the lines of Hurricane Andrew, but here we've had four smaller events that together add up to something like Andrew in today's dollars," he said.

Even though the four hurricanes together were about as bad as Andrew in terms of losses, only two will likely reach a level that allows insurers to tap the fired, said Hartwig.

The Florida fund kicks in and begins to cover the industry as a reinsurer when industry losses reach $4.5 billion. Like individual policy deductibles, the fund's activation point applies to each event. Total loss estimates for each event in all areas, as estimated by the Insurance Services Office Inc., are as follows: Charley, $6.75 billion; Frances, $4.4 billion; Ivan, $6 billion; and Jeanne, $3.25 billion.

Three of the four storms did most of their damage in Florida. Ivan is the exception--about $5 billion of losses related to Ivan are outside Florida. The way the numbers have added up so far, the Florida fund may be on the hook for about $3 billion in reinsurance payouts. It all of the state's damage from the four storms could be attributed to one--say, Charley--that would have exposed the fund to a $10 billion payout.

"We're likely to sec some legislative effort to bring the deductible down on the cat fund," said Hartwig.

Gardner said there will be some second-guessing about the regulatory rifles in place, particularly the requirement that insurers offer deductibles only on a per-event basis. In the private sector, catastrophe models will get a hard second look too. "We as an industry have probably put more emphasis on per-event exposure, at the expense of aggregate exposure," he said.

"Everything from modeling, to how reinsurers were protecting companies to how the regulators were ensuring capital adequacy was based on whether you can withstand a storm of size X," he said. "I think we can say we all learned a lesson from this."

In the aftermath of 2004's storms, many primary insurers are thinking in terms of aggregate exposures much more than they had done before, probably a "healthy development" for the market, said Gardner. "Insurers had been thinking about their risk management in terms of a large loss; now they're thinking about sideways exposure, or accumulations of net losses," he said.

It is not likely that the property reinsurance market will be greatly changed by 2004's storm loss experience, said Gardner. "I don't think we're going to see reinsurers sharply cut capacity or raise rates because of this," he said. "Reinsurers are still anticipating a profit for the year, and some are even reporting third-quarter profits, despite their losses."

Reinsurers will likely scrutinize the adequacy of current modeling for storm losses, and work more closely with modeling companies to "recalibrate" their loss expectations, Gardner said.

Snapshot of 2004 Hurricanes

[ILLUSTRATION OMITTED]

Fla. Top 5 Homeowners
Multiperil Writers--2003

Group market share rankings are
based on direct premiums written.

State Farm Group           23.7%
Allstate Insurance Group   11.5%
USAA Group                  5.3%
Nationwide Group            5.1%
HDI U.S. Group              4.3%

Note: Table made from bar graph.

Estimated Loss
By Storm

The Insurance Services
Office says total loss could
Reach $20.4 billion

Charley   $6.75 Billion
Ivan       $6.0 Billion
Frances    $4.4 Billion
Jeanne    $3.25 Billion

Note: Table made from bar graph.

Florida Statewide Hurricane Deductible Provisions

According to the Florida Senate Insurance
Committee, the provisions "result
in most homeowners being given two
options for a hurricane deductible--either
2% or 5% of policy limits."

                       Minimum      Maximum        Mandatory
Dwelling            Deductible   Deductible       Deductible
Limits                 Allowed      Allowed            Offer

up to $25,000             $250           2%      $500 and 2%
$25,000-$100,000          $250           2%      $500 and 2%
$100,000-$250,000         $250           5%   $500, 2%; $500
$250,000-$500,000         $250           5%               2%
Above $500,000            $250    Unlimited               2%

Sources: Insurance Services Office, A.M. Best data and news
reports