As Floridians continue cleaning up after Tropical Storm Debby, residents all over the state are filing insurance claims to cover the losses of their homes, boats and cars. The storm also left hundreds of property owners contending with destructive and expensive sinkholes. Debby’s direct hit, months before the peak of hurricane season, adds fuel to a debate over Florida’s property insurance market. Policymakers are warning the state-run Citizens Property Insurance needs to raise rates and drop customers to avoid an even bigger financial catastrophe for Florida residents.
In August, it will be the 20-year anniversary of Hurricane Andrew. It was one of only three Category 5 storms to strike the U.S. It left 15 people dead and more than 150,000 homeless in the Miami area. The mega storm also had a drastic effect on the state of property insurance in Florida. Several private insurance companies were put out of business or pulled out of the state to avoid the risk of future catastrophes. Residents with no other options turned to the Florida Legislature, which created a state-run insurance company called Citizens. Florida State University business professor Patrick Maroney explains, Citizens was conceived as a so-called “residual market” option for homeowners in the most risk-prone areas. Another example of residual market insurance is the more expensive auto-insurance policies for drivers with a few tickets.
Maroney says, “It wasn’t the same policy as you would get in the general market, and the premiums were higher. So residual markets are generally markets of last resort. And that’s really what Citizens was designed originally to do.”
He runs the Florida Catastrophic Storm Risk Management Center at FSU's College of Business. The center studies the science of risk and makes recommendations to the legislature about insurance policy. He says, as Florida rebuilt after Andrew, Citizens and private insurers co-existed without much political wrangling for years. The non-profit state insurer became flush with cash.
And, he says, “Folks started looking at their reserves, saying, ‘Gee that’s an awful lot of money sitting there. Maybe we can use that for something else.’ Fortunately, that didn’t happen.”
That was lucky, he says, because in 2004 and 2005, one hurricane after another hit Florida. The series of storms transformed Florida’s insurance landscape once again. Several private insurers left the state. And it drove up the cost of reinsurance, or the backup insurance that insurance companies have in case their reserves are depleted. Citizens raised its rates, and homeowners protested. Responding to the popular outcry, the legislature placed a cap on Citizens rate increases in 2007. Since then, the so-called "insurer of last resort" has offered such competitive rates that its rolls have ballooned to cover about 1.5 million policies. And now, some state lawmakers are warning, Citizens, and the state-run reinsurer, called the Catastrophe Fund, won’t be able to pay up if a big storm or series of storms hits.
One of those sounding the alarm is Bill Hager, who represents Boca Raton in the Florida House.
He says, “We need to be brutally intellectually honest with ourselves. Florida is the number one catastrophic land mass on the face of the earth.”
Trying to reduce the state’s exposure to potential risk, Hager co-sponsored a bill this year. It would have tried to shrink the number of insurers getting reinsurance from the state’s Catastrophe Fund, which acts as a backup not only for Citizens but also for some private insurers.
Hager says, “So we have the state of Florida owning and operating a reinsurance company when concurrently the state of Florida knows that when the big storm comes, we cannot pay the claims that we promised we would pay."
The bill failed to pass, but many lawmakers and Fla. Gov. Rick Scott continue to encourage shrinking the scope of Citizens and the backup fund. Although Citizens has a cash surplus, when forecasters look at the worst-case storm scenario, the maximum claims are several times more than the insurer’s ability to pay. And the sudden and dramatic costs would be passed along to Citizens policy holders. Professor Maroney says, that’s because, unlike private insurers, after it runs out of money, Citizens is legally authorized to charge post-loss assessments, or extra charges after property is damaged.
“I don’t know if most Citizens policy holders understand that Citizens has three separate accounts, and when there are shortfalls, the first charge back is against policy holders, up to 15 percent per account. So you could get an assessment of 45 percent right off the bat,” he says.
After that, additional assessments would be made against all Florida home and auto policies, even private ones. Floridians are still paying off those assessments from the 2004-5 storm season, for example.
The Citizens Board of Directors, trying to avoid a post-catastrophe financial disaster, says it needs a 15.2 percent increase for existing and new homeowner policies. But, because of the rate cap put in place by the legislature, they’ve proposed asking for just a 7.5 percent increase. Maroney says, a rate increase for at least some Citizens policy holders looks inevitable.
“Quite frankly, I think the question is, whose lap is the ball going to be thrown into. Is it going to be Citizens that does it, or are they going to throw it back into the lap of the legislature and have the legislature be the entity that has to raise or remove the cap?" he says.
Another proposal, which is gaining traction in Tropical Storm Debby’s wake, involves raising the rates for sinkhole coverage. And while many homeowners have vocally opposed Citizens raising rates of any kind, insurance consultant Barbara Zee says, she sees a smart way to do it. Zee is the insurance liaison for Community Advocacy Network, which lobbies on behalf of residential property owners. She says, she has no problem with Citizens' trying to shed policies, as long as it still offers some coverage for people in Florida’s insurance deserts, like Key West.
She says the situation can be improved “if they can charge rates that are actuarially sound and let the other properties go to the private insurance. Those who can get private insurance should be getting the private insurer to insure them.”
Citizens' governing board will vote next week on what rate increase, if any, it will request from the Florida Office of Insurance Regulation.