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Hurricane Andrew survivors still await insurance compensation.

The devastation from last August's Hurricane Andrew continues to linger as many property/casualty policyholders await payments from insurers. To date, insured losses have reached $13 billion.

But to the dismay of many, the nightmare has worsened as some insurers have been unable to meet claims due to insolvency. Nine insurance companies have been declared insolvent, partly due to Andrew, leaving 15,000 policy holders with $500 million of unpaid claims.

The city of Homestead has stepped in with a unique financing technique that will allow the Florida Insurance Guarantee Association (FIGA) to cover these claims.

FIGA, like its counterparts in other states, levies annual assessments to cover claims of insolvent insurers, which are usually sufficient to cover insolvencies. All insurance companies licensed by the Florida Department of Insurance are required to be FIGA members and pay assessments.

The city issued a $472.4 million, 10-year tax-exempt debt issue in February so payments to policyholders could be accelerated by the immediate infusion of bond funds. The bond issue is rated 'AAA' by Standard and Poor's and is the first time S&P has rated a long-term tax-exempt issue secured by insurance surcharges for this purpose.

The state granted special authority to Homestead to issue the bonds and lent its tax-exempt status to the issue. FIGA, as program administrator, will direct the bond trustee to disburse bond proceeds for payment of unpaid hurricane claims due to insurer insolvency.

Until the bonds are retired, a special two percent assessment will be levied against insurance companies' net direct written premiums based on property/casualty business. Assessments are levied equally against all insurers in proportion to each company's net direct written premiums in the state.

Prior to Andrew, up to two percent could be assessed to cover unpaid claims due to ordinary insurance company insolvency. Before 1992, the greatest number of insurer insolvencies for Florida's property/casualty business lines was five in 1985, accounting for almost $15 million of net direct written premiums, compared with $46 million as a result of Andrew.

Due to the severe devastation caused by Andrew, this special two percent assessment is being levied in addition to the original assessment levy.

Without this financing, which will amortize the claims over an estimated 10-year period, a one-time FIGA assessment would have been 10 to 15 percent. Even though the assessment is levied against insurance companies, the ultimate burden of payment rests with policyholders, who will bear the assessment by way of increased premium rates.

The state believed extending repayment over 10 years would be a more manageable approach, especially since the burden of premium increases rests with the policyholders.

Pursuant to state law, the special two percent assessment is pledged exclusively to the bonds. Based on 1991 net direct written premiums of almost $3.5 billion, the special assessment generates $70.1 million, covering maximum future debt service of 1.15 times.

Historical premium growth has been strong; however, even if statewide net direct written premiums decline, the assessment is guaranteed to generate no less than $70.1 million, based on 1991 premiums. Also, if there is a bond fund deficiency, the committed original assessment is legally available to replenish the bond fund.

The bond issue also has a special, seldom-used feature. Any excess funds remaining after paying annual debt service will be captured in the surplus fund and allowed to build up and be used to redeem bonds prior to their stated maturity. This feature will also become more significant if the premium base rises, since excess revenues will be captured at a quicker rate.

While the current portfolio of insurers participating in property/casualty underwriting is diversified, this could change as insurance companies re-examine their decisions to do business in the state. Of the 500 or more insurers involved in the property/casualty sector in Florida, the top 25 companies, based on premium concentration, have historically represented 65 to 70 percent of premiums written since 1987.

There are risks to this financing, according to Standard and Poor's Creditweek Municipal, from which this article is adapted. If another catastrophe strikes while the assessment is in effect, another major participant could become insolvent.

Also, an insurer could stop doing business in the state and its assessments would be lost. However, according to S&P , it is most likely that the abandoned policyholders would seek insurance from an existing company and the firm's premium base would be recaptured.

Already it has become more difficult to obtain insurance since Andrew due to the unwillingness of insurers to increase their exposure in the state. Local newspapers have reported a backlog of real estate deals that cannot be closed because buyers are unable to procure property insurance. Many Floridians now fear they will not be able to buy insurance should their company be declared insolvent.

In an effort to alleviate this problem, the state has established the Joint Underwriting Association (JUA) to provide coverage for homeowners unable to purchase insurance through the voluntary market. However, in addition to the insurance assessment, these policyholders will be paying 25 percent higher premiums, compared with the voluntary market.

Even though the JUA was not in business when Andrew struck, these policyholders' premiums are still subject to the special assessment.
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Publication:Nation's Cities Weekly
Date:Jun 7, 1993
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