FOR IMMEDIATE RELEASE

UM Economist Dr. David Letson Testifies on Windstorm Risk Profile Before Florida House of Representatives

Virginia Key, FL (May 15, 2008) — What would be the economic effects on Florida’s economy if the hurricanes of the 2004 season were to strike again in 2008? How would Citizens Property Insurance Corporation (Citizens) and the Florida Hurricane Catastrophe Fund (FHCF) meet their claims obligations? What effect might these actions have on incomes, jobs and tax revenues throughout the Sunshine State?  University of Miami Marine Affairs and Policy Professor and Florida TaxWatch Council of Economic Advisors member, David Letson testified in response to these questions before the Florida House of Representatives, Jobs & Entrepreneurship Council, Committee on Insurance, at the invitation of Committee Chairman Donald Brown.

“As our economy grows and the value of built-infrastructure continues to increase, the economic and societal impacts of hurricanes also can be expected to escalate,” said Letson. "When the next big hurricane strikes Florida, somebody is going to have to pay."

When Citizens or FHCF incur a deficit as a result of damage claims, they raise the necessary funds through “assessments” on premiums written statewide, which are then passed on as surcharges to policyholders. To measure the economic impact of the assessments, economists estimate how much worse off the state residents are with the damage claims than they would be without them. For example, the 2004 season was considered a once every 33-year season (a standard measure of hurricane intensity or damage). According to Florida Office of Insurance Regulation Assessment Estimates, a storm season of that magnitude might produce an assessable shortfall of $15.1B, which would include a FHCF assessable shortfall of $14.1B and a Citizens assessable shortfall of $1.0B. If amortized over a 30-year period, assuming 4 percent interest, the annual debt service would be $1.63B (= FHCF $1.52 B + Citizens $0.11B). In turn, those assessments might create economic impacts of $2.9B per year, 29,400 lost jobs, and $294M in losses of annual state tax revenue.

The FHCF provides catastrophe reinsurance to primary insurers underwriting property coverage in the state. It was created in response to a major crisis in the supply of insurance that occurred after Hurricane Andrew in 1992. “The point of reinsurance is to take on the risk that insurers cannot dilute through diversification,” said Letson.

Letson cited a recent Wharton Risk Center study, which estimated that a hurricane with a return period of 100 years in 2008 would result in damage claims that would create deficits to the FHCF and Citizens of $21.2 billion and $5.7 billion, respectively. In the event of a 100-year storm, both the FHCF and Citizens would assess private insurers operating in Florida to recoup the necessary funds for the claims they could notmeet from their reserves. Should this occur, all residential and commercial policyholders in the state would pay a significant portion of these losses through ex post recoupment. An open question is whether these policyholders realize the extent of this ex post payment. On the other hand, potential mitigations to prevent storm damages could reduce the potential losses from a 100-year storm by 61 percent in Florida, or about $51 billion in savings.

“Given the significant increase in damage from hurricanes and other natural disasters during the past fifteen years, and the growing population and assets in high risk areas, we need a new approach for insuring these risks and encouraging individuals who reside in these hazard-prone areas to undertake effective mitigation measures,” said Letson.

About the Rosenstiel School

Founded in the 1940’s, the University of Miami's Rosenstiel School of Marine & Atmospheric Science has grown into one of the world's premier marine and atmospheric research institutions. Offering dynamic interdisciplinary academics, the Rosenstiel School is dedicated to helping communities to better understand the planet, participating in the establishment of environmental policies, and aiding in the improvement of society and quality of life.  For more information, please visit www.rsmas.miami.edu

Media Contact:
Barbra Gonzalez, Communications Director
Rosenstiel School of Marine and Atmospheric Science
305.421.4704
bgonzalez@rsmas.miami.edu