State-backed Citizens Property Insurance will spend more than half a billion dollars this year on public and private reinsurance, or catastrophe insurance for insurers.

That's more than 11 percent of the roughly $5 billion it has in claims-paying reserves. A small portion of that would be recouped from policyholders' rates in 2012 because premium increases are capped at 10 percent a year, according to Citizens Spokeswoman Christine Ashburn.

Citizens is required to buy coverage from the state's Florida Hurricane Catastrophe Fund, and this year, it will plans to spend $460 million for $6.5 billion worth of coverage.

It could spend three to six times more per dollar of coverage for private reinsurance this year. Citizens board on Wednesday approved spending up to $125 million to buy $300 million to $580 million worth of coverage. Part of that coverage would only kick in if after a major hurricane, if Citizens' losses exceeded $6.3 billion.

There's a debate about whether state-run insurers should buy private reinsurance. Private reinsurance rates are not regulated by the state and if there isn't a major hurricane, the insurer does not gets payouts from the hundreds of millions of dollars spent.

If a major hurricane strikes, however, private reinsurance can help pay claims – reducing fees that would be charged to all automobile and property insurance policyholders in the state to help offset Citizens' deficits. Sharon Binnun, chief financial officer of Citizens, noted shifting risk to private reinsurers would help address goals expressed by Gov. Rick Scott and others to reduce the financial risk posed by Citizens.

“Buy reinsurance and the wind doesn’t blow, then we blew it; Don't buy reinsurance and the wind blows, then we blew it," former Citizens board member Jay Odom said before voting to spent $106 million for $446 million in private reinsurance coverage in 2008.

The wind did not blow that year.

That means the risk paid off for reinsurance companies and their investors that year but not for Citizens.

Citizens' reinsurance purchases paid off big-time in 2005 when three hurricanes made landfall in Florida. We'll get details on how much was spent and how much reinsurance companies reimbursed Citizens to help pay claims.

An insurance expert and consumer advocate said Wednesday they support Citizens' decision.

“Citizens seems to be making a wise decision here," said John Rollins, an insurance consultant who is a former vice president of AIR Worldwide, which provides risk modeling services to hundreds of insurance and reinsurance companies. Rollins, who is a former Citizens actuary, added in a statement that the private reinsurance portion would only increase rates next year by "at most a couple of percentage points" for policyholders with windstorm coverage.

Bill Newton, executive director of the Florida Consumer Action Network, said private reinsurance would allow Citizens to "spread the risk" to investors around the world. "Reinsurance also puts Citizens in a position to assess its exposure based on the cold, calculating opinion of the marketplace. This is far more realistic than heated rhetoric about financial disasters, and will allow decision makers to make data driven choices," he wrote.

By Julie Patel
Sun Sentinel, 200 E. Las Olas Blvd., Fort Lauderdale, FL 33301