Legislature struggles to solve Florida's property insurance woes

Feb 17, 2012

Going into this year’s Florida Legislative Session, it appeared property insurance might finally drop off of lawmakers’ radar screens.  But Tom Flanigan reports, with three weeks to go in the session, the issue is once again a matter of some debate.

Florida’s so-called “property insurance crisis” dates to the big back-to-back hurricane years of 2004/2005.  Insurers coughed up billions of dollars to satisfy claims.  State officials turned aside the companies’ rate hike requests to offset those payouts and most big insurers fled Florida.  State-backed Citizens Property Insurance then became the biggest policy provider in the state.  It all seemed like a very Florida-specific scenario.  But John Forney says that’s really not the case.

“Property insurance prices are going up.  Private insurance companies are increasingly leery of accepting the risk that goes along with natural catastrophes.  And so you have some version of an affordability and availability dilemma – if not a crisis -  in many different states and you see that whether you have Democratic administrations or Republican administrations.”  

Forney should know.  He’s the financial advisor for Citizens Insurance, the Florida Catastrophe or “CAT” fund, along with the state’s Insurance Guarantee Association.  He provides similar expertise in California, the Carolinas and many other places.  Although Forney notes there is one very big difference:

“The state government of Florida participates in the property insurance market in a way that really is, in terms of scale, unprecedented.”

The simple reason for that, Forney says, is because so many private insurers, especially the big companies with the means to pay big claims, are either gone or going.

“If you look at other states around the country, Florida stands out like a sore thumb in terms of what I call the ‘Allstate/State Farm factor’.  They don’t want to write business in the state of Florida and they’re increasingly pulling back from some other states, but Florida stands out and so our market is dominated by these smaller companies that have less capitalization, obviously, than Allstate and State Farm and it creates a lot of concern on peoples’ part about the fragility of that market.”

To help make that market less fragile, Florida’s Hurricane Catastrophe Fund came to be in 1993 in the wake of Hurricane Andrew.  It’s designed to act as a financial safety value in the event disaster claims exceed the insurers’ ability to pay.  In 2007, the man who was then-Florida House Speaker, now U-S Senator Marco Rubio, worried there wasn’t enough of a cushion.  So Forney says Rubio included this thought among his “One-hundred Innovative Ideas for Florida’s Future”…

“It was to greatly expand the size of the Florida Hurricane Catastrophe Fund because he viewed that as a way to relieve some of the pressure that was being put on private insurance rates.”

But today critics say the fund, which now totals around four billion dollars, would still come up pitifully short.  Another Andrew-type storm event could easily rack up damages topping thirty billion.  Taxpayers would be on the hook for the difference.  To reduce that liability, lawmakers have been looking at a number of fixes.  One is simply to shrink the whole idea of the state essentially competing with the private re-insurance market.  A bill greatly reducing the size and scope of the CAT fund passed the House’s powerful Banking and Insurance Committee, much to the delight of Governor Rick Scott.

“To believe that you can go borrow money after a significant disaster is not realistic…or a significant amount of money.  We have to downsize the CAT fund.  The people are buying something that they’re not going to end up getting because the CAT fund won’t be able to borrow the money to pay for the product they’re selling, so it doesn’t make any sense.”

Something else the governor supports is a smaller Citizens Property Insurance company.  To reduce the number of Citizens policyholders, the house passed a bill to allow out-of-state companies called “surplus-lines insurers” to assume at least some of Citizens’ business.  The problem with that, says former Florida Insurance Commissioner Bill Gunter, is that the state has absolutely no control over what those companies may charge or even how much ability they may have to pay claims.

“Right now they are not.  Florida of course could adopt some new laws that would bring them under the umbrella of regulation, but at the present time, they are not, in Florida or anywhere else.”

But supporters say simply allowing those companies to do business in Florida sends a powerful signal to the entire industry.  That message is that Florida wants private insurers, especially the big national firms, to come back.  And this time, companies won’t have to worry so much about competition or interference from the state.