Risk of Losses for Property In Florida

In my last blog I outlined the 10 states with the greatest losses since 2006.  Florida was not among them, yet given our legislature’s on-going discussion and hand-wringing with the state run Citizen’s insurance, you would  think we have a major ongoing crisis with insurance here.  Maybe we do, but I will provide some facts.  Citizens,averaged between 1 and 1.5 million policies over the last 8 years.  according the the South Florida SunSentinel, the average person pays $2500 per year for windstorm coverage.  Somehow I think I want that bill because my insurance is about $6000 through my private insurer and when I had Citizens it was $5700/yr.  But I digress.

Let’s assume there is 1.2 million policies over that time paying the #2500/yr. That totals.$3 billion a year in premiums.  That means Citizens should have reserves of $24 billion because they have not paid-out since 2006.  They have $11 billion according to the SunSentinel sources.  So wher eis the rest of the money?  We can assume there are operating expenses.  They pay their executives very well for a government organization.  I am sure they pay the agents as well.  I asked a couple friends in the industry and they indicate that for private companies, about half your premium goes the the agent who writes the policy.  That’s only Citizens.

Let’s assume there are conservatively another 8 million policies in Florida and since many of those are inland, let’s day they average $1500/yr.  If you have it for less, check out your policy!.  That means there is another $12 billion collected each year for a total of $15 billion per year.

Now let’s look at storms.  According to Malmstadt, et al 2010, the ten largest storms 1900–2007, corrected for 2005 dollars are as follows:.

Rank   Storm                         Year        Loss($bn)

1 Great Miami                        1926       129.0

2 Andrew                               1992        52.3

3 Storm                                  1944       35.6

4 Lake Okeechobee               1928       31.8

5 Donna                                1960       28.9

6 Wilma                                  2005       20.6

7 Charlie                                2004        16.3

8 Ivan                                     2004        15.5

9 Storm # 2                            1949        13.5

10 Storm # 4                          1947       11.6

So for all bu the top 9 storms in a 107 year history,the annual receipts exceed the losses for a storm.   The total over the period is $450 billion (adjusted to 2005 dollars)  That means an average of $4 billion per year.  So what is the issue?  Sure a big storm could wipe out the trust fund, but that is what Lloyd;’son London, re-insurers and the ability to borrow funds is all about.

I suggest that the fuzz is really about is this.  Most people do not understand the concept of an insurance pool.  That includes many public officials.  The idea of insurance is to pool resources is to collect huge sums of money so that if something bad occurs, there is the ability to compensate people for their losses.  Insurance is a good thing but individually we hope it is never us that needs to be compensated because that means something bad happened.  But we expect our premiums to pay into that pool, build large pools of money, and have money when you need it. The more people that pay in, the more the  risk is split and lower the likelihood that any individual suffers a loss.  Hence the lower risk should lower premiums.  And people who live in high risk area should pay more than those who don’t.  Flood plains, dry forests, coastal areas, high wind areas, tornado alley, etc are all high risk.  Florida is one, but clearly there are many others,

So Citizens has a pile of money. Most private insurance companies should also, although their money is invested and they expect most of that will not be paid out.  I suspect the concern is a fear that the pile of cash will create a public furor, but that shows a lack of communication and education.  Cash is good.  Lots of it is better.  It’s like running surpluses in government or in your personal savings account. The idea is to have money when you need it.  Running at a point where you never have surpluses guarantees you will have deficits that require cuts in services,and possibly losses of jobs when the economy tanks again.   For insurance, those losses occur when big event hit.  Fortunately those are infrequent, but they have and will happen.  We need the cash pools on hand to protect our citizens just in case.    In the meantime we need some leadership and education of the public.