Will your insurance company be strong enough for Irma?

Twenty-five years since Hurricane Andrew shattered Florida’s homeowner insurance business, is the rebuilt industry ready to stand up to the even more powerful Irma? Insurance companies say yes. Other experts say probably — but it’s a worrisome challenge to a largely untested industry.

“We’re going to learn a lot about the Florida insurance business in the next week,” said Christopher Grimes, who follows the insurance industry for Fitch Ratings, an international credit rating and research company.

Hurricane Andrew’s $27 billion in damages – at the time, a record – sent many of the big-name national insurance companies, like Prudential and State Farm, fleeing out of Florida’s property-insurance business. State-back Citizens stepped in. But over the past five years, it has shed policies to limit its risk, encouraging the creation of new insurers such as Universal Property and Heritage Property.

“Generally speaking, Florida’s homeowner insurance business is dominated by smaller, newer companies,” said Grime. “We think, in general, they’re well-positioned. But they’ve never been tested, and Hurricane Irma, unfortunately, presents a situation where they will be tested, hard.”

In a report issued earlier this year, the reinsurance firm Swiss Re estimated that if a storm the size of Andrew hit South Florida in the same place, the damage could be as much as $100 billion. The increase comes largely from the huge coastal building boom over the past two decades.


Many insurance executives say the figure is credible – among them Joe Petrelli, president of Demotech, a financial analysis company that works with homeowner’s insurance companies.

Nonetheless, Petrelli said the 50 Florida companies that work with Demotech – which control about 60 percent of the market – have about $40 billion in funds available to pay claims. The rest of the 120 or so companies writing homeowners’ policies in Florida probably have another $20 billion, he estimated.

“In the aggregate, they’re pretty well positioned,” Petrelli said of the insurance companies. “That’s $60 billion to cover claims, and remember, homeowners’ insurance will only be one segment of that projected $100 billion in damages.

“A lot of it will be to commercial buildings, or big expensive condo buildings along the coast, who don’t insure through the homeowners’ market.”


Some experts, however, are less optimistic. They say that if Hurricane Irma lives up to its catastrophic billing and directly hits Florida as a Category 5, countless property owners across the state would likely have a difficult time collecting on their insurance claims because such a powerful storm would shake up the market. Current projections suggest it will hit at a slightly lower force, as a Category 4 storm.

An expert at Florida International University who has researched hurricane losses says Florida’s building standards and insurance markets have improved since the devastation of Hurricane Andrew 25 years ago. But Professor Shahid Hamid says “all bets are off” if Hurricane Irma shreds the entire state, from Miami to Orlando to Jacksonville. By comparison, he said, Andrew’s damage was limited to South Florida, particularly the Miami area.

Hamid said that some of the smaller insurance companies that have entered the market to relieve the burden on the state-owned Citizens Property Insurance would certainly be incapable of paying damage claims.


Hamid performs “stress tests” on Florida insurance companies for the state – that is, he runs hypothetical disaster scenarios to see if the companies would have enough money to cover the damages. He’s guided by the fundamental question: “What if Hurricane Andrew happened today?”

Hamid said almost all of the property insurance firms reviewed by his research institute pass that test. But he warned that Hurricane Irma is predicted to be much bigger and stronger than Andrew.

“There will be some insolvencies with the smaller companies,” he said.

Hamid said the state’s catastrophic fund and the private reinsurance market are financially healthier today than they were 10 to 20 years ago, partly because the state has not experienced a major storm since Hurricane Wilma in 2005.

“Whether it’s enough is questionable,” Hamid said. “It depends on how big the storm is. If it’s a $100 billion or more [in property damage], all bets are off.”

Homeowners’ insurance companies use variety of resources to pay for claims. They keep some of the money they’re paid for policies in reserve (while investing the rest). They buy reinsurance, to cover claims too big to be paid out of policy receipts.

And if claims are too big to be covered by all that, they have access to the Florida Hurricane Catastrophe Fund (universally known simply as the Cat Fund), a rainy-day cache of money from taxes on property insurance companies.

The insurance companies themselves are confident they’ve got plenty of safeguards against a killer ’cane.

Citizens Property Insurance “is right now probably in the best financial shape we’ve ever been since we were created in 1992” in the wake of Hurricane Andrew, said company spokesman Michael Peltier.

Originally created as a state-backed insurer of last resort, Citizens grew into Florida’s largest home-owner insurance company. But an aggressive push to shed clients over the past years has reduced it to the No. 2 company, with about 450,000 policies.

The company estimates its share of the liability for a once-in-a-hundred-years disaster would be about $6.2 billion. But between $7.5 billion in reserves, $3.5 billion in reinsurance and access to $2.3 billion from the Cat Fund, Citizens has almost double the money necessary to pay claims for its worst-case scenario.

Heritage Property & Casualty, the state’s sixth-biggest homeowners’ insurance company, mostly relies on $1.75 billion in reinsurance to pay claims. By its estimates, a Hurricane Andew-sized hurricane would exhaust only about 30 percent of Heritage’s reinsurance.

And Heritage officials strongly object to the idea that they’ve gone “untested” since they set up shop in Florida in 2012.

“Last year we handled the loss from Hurricane Matthew quite expeditiously,” said Joseph Peiso, Heritages’s investor Relations Director, “certainly to our regulators’ satisfaction, and to customers as well.”

Universal Property & Casualty – with nearly 600,000 policies, Florida’s biggest writer of homeowners’ insurance – also relies heavily on reinsurance.

“Each year, we purchase a strong reinsurance program to provide the financial resources to pay claims,” said a company spokesman. “Our reinsurance program is designed to handle large single events, as well as multiple events.” Available from reinsurance this year: $2.65 billion.