Climateer Investing: "How Bermuda rigs insurance rates in Florida"

Thursday, October 28, 2010

"How Bermuda rigs insurance rates in Florida"

Told ya.
From "No Surprise: Chile Leads to Reinsurance Rate Increase Debate" BRK-A; BRK-B

No kidding.
A brisk breeze gets the boys in Omaha, Zurich, Munich and London (Lloyds) talking about premium increases.
Not to mention the herverzekering crowd in Amsterdam, they're tough bastards....

It's a dog-eat-Hoppin' John world.
From the Tampa Herald-Tribune:

:HAMILTON, BERMUDA - In early 2006, Florida was on the verge of a financial disaster.

After two deadly hurricane seasons, major insurance carriers were leaving, smaller companies struggled to raise capital and Florida families scrambled to find coverage and pay escalating premiums.
As they strove to recover from the eight hurricanes of 2004 and 2005, Floridians took another hit — from Bermuda reinsurance companies that seized on the crisis to double or triple their rates.
These reinsurance companies, which insure the insurance companies, are the lifeblood for scores of under-capitalized, highly leveraged start-up insurers. Most carriers could not remain in business without costly reinsurance policies geared to cover their losses.

But in 2006, many reinsurers reduced the storm coverage they were willing to give Florida. Some purposefully refused to write policies for months, convinced they could extract an even higher price from insurers that neared collapse.

First-hand accounts, brokerage reports and copies of reinsurance contracts written that year show Florida insurers were still cobbling together hurricane protection in August and September, during the peak of danger, and paying three times the January rate.

The cost was paid by Florida property owners, some of whom suddenly faced premiums as high as their house payments. Real estate agents complained they were losing home sales as buyers no longer qualified for mortgages, and Florida bank leaders trouped to Tallahassee begging relief.
The squeeze was legal, and opportunistic.
“That's what we saw after hurricane Andrew and that's what will happen again, in my opinion, the next time we have a major hurricane,” said Steve Alexander, actuary for the office of the Florida Insurance Consumer Advocate.

REINSURANCE OPERATES ON a global scale, regulated to some extent in Europe and hardly at all elsewhere, especially in Bermuda, a tax haven.

The tiny volcanic rock 600 miles east of North Carolina is home to nearly half the reinsurance sold to Florida, a $470 billion powerhouse crammed in a few blocks between the rum bars and T-shirt shops.
There are more than 1,200 foreign insurers incorporated in this oceanic frontier town, including 59 reinsurers that provide billions of dollars of hurricane protection for nearly every home in Florida, from swamp trailer to coastal high-rise.
They crowd and color every aspect of Bermuda. With no place to build, newcomers worth hundreds of millions settle for whatever they can lease. Two cram offices next to a hair salon, heralded by wooden signs of equal size.

With no place to park, wealthy executives buzz around on motor scooters, ties flapping and knees peeking beneath colorful Bermuda shorts, one of the persisting oddities cultivated by the island's financial expats.
An industry broker once dubbed them the “almost-pirates of the almost-Caribbean.”
Bermuda's regulations are famously light, exposing consumers to business practices designed to reduce competition and encourage price-fixing.

Solvency requirements exist, but they are dramatically light compared with what private financial rating firms consider reasonable. Only the island's 37 largest reinsurers must file audited annual reports. Only 29 of those agree to make the document public.

The only other records Bermuda allows the public to view are kept in a drab office building two blocks from the harbor. Hidden on the third floor, behind a wobbling counter propped against the wall, a government clerk will fetch all that Bermuda cares to make public about the financial giants who shoulder Florida's tremendous hurricane risk.

The manila files are virtually empty.

What they do contain is unhelpful — mostly lists of island lawyers who serve on boards of convenience that hide the real owners and decisionmakers....MUCH MORE

This article is the last in a series. We posted the first part via the Sarasota version of the Herald-Tribune family last weekend in "Florida's Hurricane Insurance Premiums Largely Determined Overseas".