Where the Money Goes: Off-shore Reinsurance, Part 3

We’re not quite done with our discussion of the reinsurance market in Florida. A recent news report brought to light the facts and the issues associated with reinsurance arrangements Florida insurance companies have taken on since the 2005 hurricane season. Homeowner insurance premiums have increased, but the money insurance companies rake in isn’t staying in the state. It’s going to off-shore investors, who run shell companies here while they track hurricanes from afar.

Property insurance companies are paying outrageous amounts for reinsurance, but they keep buying it — to the tune of $4 billion a year in 2009, up from $1.4 billion in 2004. That means that 64 percent of a homeowner’s premium is spent on reinsurance, compared with the national average of 19 percent.

Inevitably, the increased costs are passed on to consumers. Increases run from 72 percent for the average Florida homeowner to nearly double, and sometimes more, for homeowners in coastal counties. And regulators keep approving the rate hikes. In Palm Beach, it can cost $7,890 to insure a $100,000 house — $13,000 for the same house in the Keys.

The insurance companies put themselves at risk by agreeing to these reinsurance schemes. Shelling out more than half of every premium dollar to reinsurance, as 28 Florida insurers did in 2009, is not a sustainable business plan.

While insurance companies profit if there are no claims, this new breed of reinsurance investor profits when there are claims. The news story tells of a reinsurance industry meeting in September 2008. Profits at the time were flat, and even in Florida reinsurance rates were down. The situation would turn around, though, if there were a $35 billion disaster.

They watched with excitement as Hurricane Ike approached Miami.

More to come.

Resource: Sarasota Herald-Tribune “Property Insurers Sending Billions Overseas” 10/25/10

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