In the wake of a storm such as Charley, reacting to human needs is the first priority of the industry. Through the Partners in Recovery program, the industry is working closely with state officials to monitor and respond to the storm. In the immediate aftermath of a storm, speed is of the essence as insurers scramble to activate mobile command centers and put claim adjusters into place. For example, Allstate Floridian activated seven rapid response centers and 650 claim adjusters. State Farm set up two mobile catastrophe facilities, activated five catastrophe response vehicles, and sent 825 claim adjusters into the field. Other companies, likewise, moved to respond quickly. If Andrew taught the industry anything, it was that the insurers could ill afford to be seen as reacting slowly. In a situation such as Charley, the difference between gaining the public's trust or ire is measured in days, if not hours.

Absorbing the Losses

While the aftermath of Charley plays out in the affected areas, insurance executives are assessing their own companies' losses. The Insurance Information Institute estimates that insurers likely will pay out $7.4 billion in insured losses, making Charley the second costliest storm in history. A decade ago, the $7.4 billion figure would have thrown the market into disarray and plunged some companies into bankruptcy. This time, however, the market was backed by years of legislative and market reforms, which included the creation of the Florida Hurricane Catastrophe Fund, a financially solid residual market, and a general level of rate adequacy. Added to the fact that the storm did miss Tampa Bay, the market finds itself well positioned to bear the financial impact of the storm.

Florida insurance executives agree that the industry probably could have handled the losses from a direct hit on Tampa Bay. However, they pointed out that several factors helped spare the industry from the worst, even though the storm left a swath of damage from Punta Gorda to Daytona Beach. One such factor is that Charley was a tightly wound storm, whose most devastating force was confined to a six- to seven-mile eye wall, concentrating its most severe damage in a narrow corridor.

“We didn't completely dodge a bullet, but it did miss our vital organs,” said Rade Musulin, vice president and chief actuary for the Florida Farm Bureau Insurance Co.

The industry's ability to absorb the losses from Charley will be credited in great part to the Florida Hurricane Catastrophe Fund, which has long been referred to as the crown jewel of the post-Andrew reforms. All carriers providing residential homeowners coverage are mandated to participate in the fund, which currently encompasses 229 insurers that pay approximately $490 million in annual premiums.

Until Charley, the fund's largest payout equaled roughly $13 million for losses associated with Hurricane Opal in 1995. Although Hurricane Charley represents the first time that the fund would be activated for billion-dollar storm losses, it likely would not required the fund to issue bonds, according to Jack Nicholson, FHCF senior officer. Currently, the fund has $6 billion in cash, which, when added to the industry's $5-billion total co-pay, should more than cover the industry's financial needs.

“The magic number is $11 billion in losses to trigger the bonding,” said Nicholson. “Even when company's start filing claims, we are optimistic we won't have to bond.”

Although it will go unnoticed by consumers, the Cat Fund's financial structure provides consumers with some important financial security. First, the fund's ability to pay Charley's claims without issuing bonds removes the prospect of state policyholders' having to pay significant assessments. Additionally, a law passed this year limits the fund's total payout for one storm to $15 billion, which will ensure the fund's resources will not be totally exhausted.

“The Cat Fund will have the capacity to recharge and provide $15 billion in resources next year,” said Nicholson.

Citizens Weathers the Storm

Hurricane Charley represents the first test of Citizens Property Insurance Corp., created by lawmakers in 2002. Although the majority of Citizens' exposure is along the southeastern Florida coast, Charley did have a sizable impact on the insurer of last resort. Like other insurers, however, Citizens' losses were mitigated when Charley missed the Tampa Bay area. Out of the total 815,000 policyholders in the residual market, the storm's path only passed over some 110,000 risks. The majority of those risks were in Sarasota Co. (37,500), Lee Co. (24,000), Collier Co. (19,500), and Volusia Co. (16,635).

Citizens is expecting roughly 37,000 claims, with the majority of coming in from Lee and Collier Counties, said Susanne Murphy, a spokeswoman for the company. Early estimates place the insurer's losses at roughly $1.2 billion, although officials note that number could change as adjusters begin to investigate claims. Much of Citizens' exposure is on Sanibel and Captiva islands, which have some of the highest property values in the state. Charley made the bridges to the islands impassible, and adjusters only recently have had access to the islands.

Given the size of the insurer's losses, it should be able to pay its claims with relative ease, Murphy said. Citizens' high-risk account has $100 million dollars in surplus, a figure that is being increased by $40 million a month. The account also has more than $2 billion in proceeds from bonds issued in prior years, and monies from the Cat Fund also can be accessed. “We think we'll have sufficient resources to pay the claims of our policyholders,” she said.

As with the Cat Fund, Citizens' financial resources are good news for the state's policyholders, who could be facing assessments to fund the residual market's losses. Much of the credit for the insurer's catastrophic financing goes to a 2002 Internal Revenue Service ruling that granted Citizens tax-exempt status, according to Murphy. The IRS ruling has saved millions of dollars that now are available to pay claims.

Murphy cited higher Citizen's rates as another reason that the insurer is able to pay claims. “There has been a lot of consternation over the rates that Citizens charges,” she said. Combined with the tax-exempt status, she said that the demands of Charley are “a good test of our new financial structure.”

While Citizens appears to have weathered Charley with minimal financial hardship, long-term concerns remain about the residual market. Florida Insurance Council Vice President Sam Miller commended the insurer for preparing for a significant storm. Still, he said, Citizens' concentrated exposure in Miami-Dade, Brevard, and Palm Beach Counties still are of concern to the industry.

“The state created Citizens to make sure that, if people were not able to get insurance in the regular market, they'd have a place to go,” Miller said. “They have plenty of cash and an incredible financing plan so they can pay [Charley] claims. I'm not sure that would have been possible if the storm had affected Southeastern Florida.”

It remains to be seen how the storm will affect Citizens, especially when it came to its population, cautioned Jim Koburger, a state board member of the Florida Association of Insurance and Financial Advisors. “It was a horrific storm and I'm not sure we can say whether it was good or bad for Citizens,” he said. “The question is what is the situation for takeout companies and will they have to dump business back into Citizens.”

Reforms Paid Off

The human costs cannot be forgotten, and it will take time to fully assess the impact of Charley on the state and the market. Still, there is a measure of pride among those who fought for the post-Andrew reforms that those reforms have made a meaningful difference in how Charley is being handled. Not only did Charley bear out the need for the Cat Fund, it showed the wisdom of creating the Florida Hurricane Loss Methodology Commission, said Musulin. Made up of technical specialists and representatives of the industry, the commission led the way for the use of computer modeling in setting rates. In spite of the political controversies, he said, the commission played a key role in allowing insurers to reach a level of relative rate adequacy.

Adequate rates are another reason that the Cat Fund and Citizens will be able to pay claims without placing assessments on policyholders, according to Jim Brainerd, general counsel for the Florida Association of Insurance Agents. “Quite frankly, all the work we've done in the past few years is stating to pay off,” he said. “Those in Punta Gorda and various barrier islands will now recognize the importance of adequate insurance and recognize that you have to pay for it.”

Several other reforms are also being viewed as important in terms of the state's ability to cope with Charley. One is the statewide building code that calls for new building techniques designed to improve the ability of structures to withstand storms with minimal damage. Another major change is a 1996 state law that allows insurers to charge policyholders a two percent deductible on homes valued at more than $100,000. In the end, it is those changes, along with the other reforms, that differentiate the memories of Charley from those of Andrew, said Miller.

“We'll be able to pay all claims and pay them quickly, and it will not cause dramatic rate increases such as we saw after Andrew,” said Miller of the industry. “Nor are we going to see insurers leave the state because of this storm. This was a very serious storm, but it's not the nightmare storm that causes chaos.”