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| By Gavin Magor |
I’m the Ratings Director here at Weiss Ratings, but I won’t blame you if you find the subject of insurance about as exciting as watching paint dry or a scoreless football game. Right now, however, the industry is going through some extremely noteworthy changes.
For a while now, I’ve been warning you about the recent bank failures and advising everyone to find out if their bank made the red-flag list of seven banks that Weiss Ratings was very concerned about.
High atop that list was First Republic Bank, which the U.S. government sold in a fire sale to JPMorgan (JPM) just last week.
Yet, what’s happening to banks is nothing compared to what’s happening with something else we all depend on: insurance.
While it’s not something you want to spend money on, insurance is a must whether it’s for medical care or as a condition of your mortgage agreement.
People who don’t carry insurance and suffer losses often take on huge financial burdens that sometimes last for years.
Unfortunately, just because you pay your insurance premiums every month, that doesn’t mean your insurer of choice is using that cash to shore up their assets in preparation of paying big claims. Which means that, despite having property and casualty insurance, you might find yourself …
Unprepared to Face the Storm
You might remember the recent article I wrote about the insurance crisis in Florida.
The bottom line was that residents of the state face skyrocketing property insurance rates due to a shortage of insurance companies doing reliable business there.
One of the big reasons for the gap is that insurers received “paid for” high ratings from agencies prior to disasters.
Then, once those disasters actually hit, their customers had to face the unfortunate reality of them being unable to fulfill their promise to pay out all the claims.
Florida is in the eye of the annual hurricane season that begins June 1. But anyone in any state is bound to feel the ripple effects of failed companies that, while meeting the state’s minimum financial requirements, are ultimately shown to be undercapitalized.
This means they are at risk of not being able to fulfill their obligations in the event of a severe weather event.
So, they — and you — are left exposed and unprepared when it actually happens.
In this situation, the insured face enormous problems with their claims in the form of delays and difficulties in receiving their settlement.
This additional stress, caused by an organization that should be offering aid and reassurance during a time when their customers’ lives have been turned upside down, is completely unnecessary and unacceptable.
Many Floridians who lose their insurance have no alternative other than the Citizens Property Insurance Company, a state-controlled, not-for-profit that has been labeled a “carrier of last resort.”
Today, this state-owned insurance carrier — which was first created in 2002 — has gone from being Florida’s last-resort option to, in many cases, the only option.
Why Ratings Matter
The Tallahassee-based company has hung in there so far, but it was downgraded by Weiss from an “A+” in Q4 of 2021 to a “C+” in Q3 of 2022.
Florida Governor Ron DeSantis warned on March 20 that Citizens was “insolvent” and wouldn’t be able to pay claims when the next hurricane strikes.
Only time will tell whether Citizens can absorb all the claims racing its way faster than the 2023 hurricane season.
But if it faces losses that exceed its ability to pay all of its policyholders who file a claim, then everyone else in the state with a policy will face surcharges to make up for the difference.
Welcome to Florida!
Remember how I said this problem extends beyond the Sunshine State? We may soon learn that …
Everything Really IS Bigger in Texas
The insurance crisis isn’t just confined to the 27th state. This contagion is sweeping across the Gulf Coast and into Texas.
I know everything is supposed to be bigger in the Lone Star State, but that’s not the case when it comes to the coffers of its state-chartered insurance program — the Texas Windstorm Insurance Association.
Unfortunately, as the only coverage option for high-risk homes in the state, it doesn’t operate with a whole lot of money in the bank.
In fact, TWIA currently only holds around $250 million in its checking account for paying claims.
That’s less than a quarter of the amount it had in 2017, before Hurricane Harvey devastated the state. And it’s a fraction of the money it would need to pay claims if another major storm hits.
Once claims exceed that $250 million — as they’re likely to do — the strategy to raise additional money might include taxing every insurer in the state.
Written into state law and part of the state charter, it allows TWIA to, for example, go after other insurers to pay for a potential $750 million gap that will exist should claims total $1 billion.
The percentage of premiums required by insurers, especially smaller ones that don’t have a lot of reserves, could put them in jeopardy even though much of the tax would be passed onto policyholders.
However, $1 billion may turn out to be quite conservative.
One consultant reported that a worst-case-scenario storm this year would generate $5.2 billion in claims.
While Citizens in Florida may not be in such dire straits as Texas’ TWIA, both insurers are exposed in the event of a disaster.
That means policyholders in each state could be asked to either pay for claims or make good on the losses themselves.
Wherever you reside, but especially if you live in a state that’s susceptible to severe weather, I strongly suggest that you go over to our Weiss Safety Ratings and check on the health of your property and casualty insurance company right now.
Currently, of the 2,302 property and casualty companies in our database, 401 of them are rated a “D” or an “E.”
Either of those ratings should raise concerns that include weak stability, poor long-term capitalization, negative cash flow, insufficient reserves and other serious issues.
Don’t wait until disaster strikes to gauge the health of your insurance company — check out the health of your insurer today.
It’s bad enough paying for skyrocketing premiums. But getting stuck footing the bill for additional damages only adds insult to injury. Protect yourself before it’s too late.
Stay safe out there,
Gavin Magor
P.S. I’ll be joining Dr. Martin Weiss, Chris Graebe, Sean Brodrick and a host of other Weiss Ratings personalities Sept. 10-12 at the Weiss Investment Summit in Boca Raton, Fla. We’ll present our best ideas and our biggest warnings throughout this exclusive event. Reserve your spot before May 15 to take advantage of our $200 early bird discount. Details here.
