Florida residents know all too well that homeowners insurance premiums have gone up over the past few years. According to quarterly premium reports, the average Florida homeowner's rate has jumped 72 percent since 2003. Regulators have approved rates approaching $8,000 on a $100,000 Palm Beach home. In the Florida Keys, the same home would cost $13,000 a year to insure.
A Sarasota newspaper reported last week that its investigation into the Florida insurance market revealed a stunning -- and costly -- reliance on off-shore reinsurance companies. The role of reinsurance has changed, the paper said, and more money is going to those company's investors than ever before. Coupled with the profit motive is a ghoulish approach to the fate of Florida homeowners during hurricane season.
Reinsurance is insurance for insurance companies. Just as an insurance company takes on a homeowner's risk, a reinsurance company takes on an insurance company's risk. There are many different reinsurance arrangements, but the most common is referred to as "excess" reinsurance. Excess reinsurance covers losses above a certain dollar amount. Reinsurance companies collect premiums from their customers, taking profits when they pay fewer dollars out in claims than they earned in premiums.
The newspaper's report asserts that the reinsurance market has changed dramatically, moving farther away from its traditional role. Reinsurance is rapidly eclipsing traditional property insurance, especially flood insurance, in Florida and all along the eastern seaboard.
And it all started with Hurricane Katrina.
In our next post, we'll talk more about how insurers inadvertently paved the way for reinsurers to take over the market.
Resource: Sarasota Herald-Tribune "Property Insurers Sending Billions Overseas" 10/25/10