Florida's Property Insurance Risks

Florida's population has increased from ~7 million (1970) to ~19 million (2009). Our coastal areas have over $2 trillion in insured property, resulting in more property at risk than all other 'hurricane alley' states combined (LA, VA, TX, NC, SC, GA, AL, and MS). Political decisions made over a couple decades have artificially lowered property insurance rates for homeowners in high-risk areas while exposing the state's taxpayers to massive liabilities if a major hurricane were to hit one of the state's heavily populated areas.

Florida's state government intervenes in the property insurance marketplace more than any other state, through three major government entities: the Florida Office of Insurance Regulation (OIR), the Florida Hurricane Catastrophe Fund (CAT), and the Florida Citizens Property Insurance Corp (CPIC).

Office of Insurance Regulation (OIR)

The OIR oversees the insurance industry in Florida. It licenses agents/brokers, runs programs intended to protect consumers, and oversees the rates, forms, market conduct, and market entry of companies wanting to do business in Florida. OIR has great powers due to discretionary authority in interpreting the laws that govern it. It decides how insurers price products, determine whether or not they can even sell these products, and impose fines if they determine violations. Additionally, it essentially operates autonomously from elected officials, though it does report to the Financial Services Commission (composed of the Governor, Chief Financial Officer, and Attorney General).

Citizens Property Insurance Corp

Citizens is a government agency that sells more Florida property insurance than any private company. In many ways it operates as a non-profit business, but it is exempt from most state purchasing and hiring rules. Citizens has the authority to impose taxes (or surcharges) on every insurance policy issued anywhere in Florida. When it has a deficit of more than 10%, it has the unilateral power to impose taxes to recoup that deficit. Originally, Citizens was created (2002) to insure only to those that were legitimately unable to obtain insurance in the private market.

Hurricane Catastrophe Fund (CAT)

CAT is a state-run reinsurance (insurance for insurers) corporation. Created in 1993 to provide reinsurance 'at the margins', it has grown to the point where it may be impossible for the state and taxpayers to pay its liabilities if a major hurricane struck a populated area. The CAT Fund is different from private reinsurance in several ways: participation is mandatory, all insurers are sold identical coverage, it covers property risk only in Florida, and it has the power to tax. Because of its power to tax the CAT Fund does not legally need sufficient capital to pay claims. Yet, Florida does require this from all other insurance companies. Thus, the CAT Fund operates in a way that a private company in Florida could not without being considered a Ponzi scheme.

Problems and Liabilities

Florida's insurance system is inherently unstable, and discourages free choice and enterprise. It has failed to attract a sufficient number of financially sound property insurance companies. The Florida insurance market is in serious trouble, while capital has not flowed into the state to write new policies.

A 100-yr probable maximum loss would leave Citizens with a $10.6 billion deficit and the CAT Fund with a $24.9 billion deficit for a total of $35.5 billion. Spread over 30 yrs at a 4% rate (bonds) would require $117.9 billion with annual payments of $3.9 billion. This massive liability would be placed on the Florida taxpayers at a rate equal to $689 for each of Florida's 5.7 million policyholders (per year).

Recently, more insurers have cut back or left Florida than have entered, and those that have entered cannot write much private coverage due to financial constraints. Most major national insurers (State Farm, Allstate, Nationwide, USAA, and Hartford) have essentially stopped writing coverage in coastal Florida.

Office of Insurance Regulation (OIR) financial reports show that 52 Florida domestic property insurers and the Florida subsidiaries of three national carriers had underwriting losses of about $750 million in 2009, a year without hurricanes. The 52 Florida companies had net losses of $275.4 million, following an underwriting gain of only $34 million in 2008, also without hurricanes. This is a recipe for disaster as these companies will not be able to pay out claims for a large event.

Citizens Property Insurance Corp is too large. While Citizens has shrunk in the last couple years, it is still bigger than any other entity of its type in any other state. Citizens still writes about 1 million policies (State Farm is second at about 775K). It offers coverage to anyone who gets a quote over 15% above its rates, effectively capping rates creating a price control mechanism. This results in many of the people that are removed from its rolls re-purchasing policies. Citizens records show that despite eliminating 1.1 million policies since 2003, it still had 17.5 percent of the market in 2009 (which is identical to its share in 2003).

Citizens is not actuarially sound. It is $9 billion undercapitalized and charges rates that prevent it from paying out claims in a timely manner. This shifts liability to the taxpayer. Citizens exposes Florida taxpayers to massive liabilities. It does not buy private reinsurance, thus it accounts for about 25% of the CAT Fund’s liability and is the largest purchaser of optional (TICL) coverage. It cannot spread risk to other areas, as it is a Florida only property insurance entity.

The CAT Fund also imposes excessive liabilities. It violates basic principles of risk, and has limited ability to pay its potential liabilities. It focuses all its risk in Florida, preventing it from spreading out liability. It cannot invest its moneys (as most other re-insurers do) because of the need for immediate access to its funds should a hurricane strike. The CAT Fund imposes a theoretically liability of $36 billion on taxpayers (about $17 billion 'mandatory'), yet it only has $4.5 billion in hard assets, plus the ability to sell about $12 billion in bonds (though no state has ever engaged in a bond sale this large, and Florida failed to even sell $6 billion in bonds intended to provide pre-event financing). Above the bond layer is a Temporary Increase in Coverage (TICL) layer that is liable for the remaining amount (and which kicks in after mandatory coverage gets exhausted).

Solutions

Allow Floridians to buy any insurance product they want. Current law makes it nearly impossible for many to buy what they want. In 2009 HB1171 (Consumer Choice Bill – allowing consumers to stick with a more expensive insurer for fear that the current rate regulated companies would have difficulty paying a claim) was passed by the FL House and Senate only to be vetoed by Governor Crist. In 2010 HB447 would have addressed the concern that Governor Crist had (limited choice to only those insurers with at least $500 million in capital), but it died in the house never making it to a vote.

Over time the CAT Fund should be completely eliminated. The state should accelerate reductions in the CAT Fund’s size than what is currently in process and transfer as much of the risk to the private sector. According to international re-insurer Aon Benfield, over $10billion in capital looking for deployment is currently being used to repurchase shares instead of issuing reinsurance. Florida should work to attract this capital to cut back the size of the CAT Fund’s mandatory layer. This would transfer hurricane risk to the private sector where it should be.

Florida must attract private insurers and shrink Citizens. Currently, essentially all property insurance pricing is set by regulatory approval. Insurers will not write policies in Florida until it is fiscally viable to do so, which will require some pricing freedom. Because Citizens current rates are unsound and below market, they fiscally endanger the state. Repeated requests by management to increase rates have been denied by regulators. Though recently allowed to rise by 10% (HB1495 in 2009 allows 10% increases until an actuarial level is reached enabling Citizens to pay claims in a timely manner) the legislature froze rates from 2007 to 2009. If Citizens would be allowed to increase rates appropriately, private insurers would re-enter the marketplace, beneficially taking share from them.

Citizens should be restricted to insure primary dwellings. It should be restricted to covering homes below a certain value (multi-million dollar home owners can get coverage elsewhere. Citizens should also be required to limit new coverage to those that truly cannot get private insurance, which will become easier to implement as more private insurers enter the market.

Addendum

Recently, Governor Crist vetoed SB2044, which was an insurance bill with a wide-range of implications. He vetoed the bill because he believes it would have made it easier for insurance carriers to get rate hikes to cover reinsurance costs up to 10 percent a year. The insurance commissioner still would have had to approve these hikes, but the process would have been streamlined under the bill. He also opposed the bill's provision reining in premium discounts for homeowners who strengthen their homes against hurricanes. A state audit had found this mitigation program riddled with fraud and overly-generous discounts.

SB2044 attempted to address this and other problems:

1.  Streamlines the existing process for insurers to pass through reinsurance costs. These costs cannot result in an overall premium increase of more than 10 percent a year.
2.  Gives insurers some leeway in payment of replacement costs claims to make sure repairs are actually being made.
3.  Prohibits state regulators from regulating commissions paid to independent agents in its regulation of insurer rates.
4.  Requires that all hurricane-related claims be filed within three years (currently five).
5.  Imposes a higher capital requirement of $15 million for a homeowner insurer. Currently, it is only $5 million until 2015 and $15 million after that date.
6.  Allows an insurer (with OIR permission) to cancel policies with 45 days notice if OIR determines this is in best interest of the public due to the insurer's financial condition.
7.  OIR to develop a plan for a new web site to aid in shopping for residential property insurance.