Article published Aug 22, 2007

By Paige St. John
TALLAHASSEE DEMOCRAT
FLORIDA CAPITAL BUREAU

An outside auditor has told state-run Citizens Property Insurance it needs to add almost $300 million to reserves, thanks to hundreds of hurricane claims reopening two years after the fact.

That could reduce Citizens' surplus to pay any storm losses this year without assessments. The company's last reported surplus is $1.8 billion.

''It's mostly Wilma, really,'' said Bruce Douglas, chairman of the state-run insurer's board of governors.

Citizens' governors were given the bad news Friday in a round of calls placed by the company's chief financial officer. Douglas blamed the surprise on outsiders encouraging homeowners to seek further payment for the October 2005 hurricane.

Florida's Hurricane Catastrophe Fund will pick up $195 million of the new bill, leaving Citizens to pull $102.5 million from its own surplus, Douglas said.

A Citizens corporate statement later said $20 million of that would be covered by other private reinsurance. The statement also characterized the review of its reserves as ''common practice'' ''to assure that claims reserves to pay developing claims from past events are adequate.''

It noted those reserves are an estimate of claims not yet reported, and it ''does not affect Citizens' current cash position.''

However, the added liability nudges both consumer-backed funds closer to requiring another bailout if hurricane claims this year exceed cash on hand to pay them.

As of May 31, the state's largest property insurer touted just under $2 billion in surplus - enough, Douglas said, to cover a moderate hurricane without triggering an assessment.

The Cat Fund can withstand a $9.7 billion hurricane striking the state before wiping out its cash reserves and pre-event financing, state regulators told Gov. Charlie Crist's office earlier this year.

Citizens officials maintain the company's 2005 bill keeps growing through no fault of its own. Douglas pointed the finger at those who stand to profit from convincing South Floridians to reopen old claims.

''They're not frivolous (claims), but I think they may be encouraged by certain public adjusters and attorneys,'' he said Tuesday.

Rep. Julio Robaina, a Miami Republican who chaired a legislative task force that looked at Citizens' still-open claims, shares the same opinion.

''We've got cases where public adjusters are willing to give people commissions, and plasma TVs, to those who hire them, and who know nothing about adjusting,'' Robaina said. ''It's ridiculous, it's abusive.''

Robaina said he will introduce legislation next year to stiffen state regulation of public adjusters, and to reduce the amount of time consumers have to file insurance claims.

A major lawyer who handles those cases said Citizens is wrong to place blame elsewhere.

''That's almost like a crook blaming the police on being arrested and that's the reason for the bad crime statistics,'' said Chip Merlin, a Tampa attorney who specializes in insurance litigation.

Merlin said 2005 claims are just now being pressed by lawyers and independent adjusters because that's how long it took homeowners to give up hope of resolving disputes on their own.

He cited the case of a Panhandle condominium association he represented last month. After years of disputing the claim, Citizens agreed to pay $300,000 within 10 days of Merlin's firm being hired.

''Citizens wants to say shame on their own customer,'' Merlin said. ''Citizens created their own problem by underpaying people's claims.''

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A story released Tuesday by the Florida Capital Bureau of the Gannett News Service contained factual errors and misleading information about Citizens Property Insurance Corporation.  The erroneous information is as follows: 

• That an “outside auditor finds the state-run Citizens Property Insurance is short almost $300 million in reserves”

At no time was Citizens short almost $300 million.  What has actually occurred, as was discussed at the August 2, 2007 Board of Governors’ meeting, is that Citizens retained the services of an outside consulting actuary to perform a reserve analysis.  It is common practice for property and casualty insurers to periodically review reserve levels to assure that claims reserves to pay developing claims from past events are adequate.    

• That “Florida’s Hurricane Catastrophe Fund will pick up $195 million of the new bills”

If these losses develop as projected, the Florida Hurricane Catastrophe Fund may have to reimburse Citizens for as much as $175 million, with the remaining $20 million payment coming from private reinsurance. 

A detailed discussion of this reserve adjustment appears below. 

Due to the nature of loss reserves, in which the ultimate cost of loss events cannot be known until the claim is ultimately paid, insurers estimate loss reserves.  Admitted insurers are required to obtain an actuarial opinion of the adequacy of loss reserves annually.  As those actuarial reviews are completed, insurers adjust their reserves accordingly.  While Citizens is not an admitted insurer, the corporation performs periodic and annual reviews of loss reserves using an independent actuary.  As discussed at the August 2, 2007 Board of Governors meeting, an independent actuary was engaged to review Citizens’ loss reserves as of June 30, 2007.  The results of the actuarial review indicated an upward adjustment to reserves was appropriate.     

The gross increase to loss and loss adjustment expense reserves recorded in the month of June amounted to approximately $298 million.  The gross amount was offset by the amount estimated to be recoverable from reinsurers (for Wilma claims) in the amount of approximately $195 million.  Of the $195 million recoverable from reinsurers, approximately $175 million is recoverable from the Florida Hurricane Catastrophe Fund.  The net adjustment to the June reserves for Citizens Property Insurance Corporation amounted to approximately $103 million.  This adjustment is to record an actuarially determined amount for Incurred But Not Reported (IBNR) claims; claims which may exist but have not yet been reported to Citizens.  This adjustment to accrue for incurred but not reported claims does not affect Citizens’ current cash position.  IBNR represents an estimate of potential future claims and as such, may or may not ultimately result in actual claims filed with Citizens. 

The increase to loss reserves relates primarily to adverse development on Hurricane Wilma claims, particularly new and re-opened claims from the 2005 hurricane.  Information related to new and re-opened Hurricane Wilma claims has been a subject of discussion at recent meetings of the Task Force on Citizens Property Insurance Claims Handling and Resolution.