A financial disaster waiting to happen

Florida’s state government easily could end up bankrupt this year
unless the Legislature and Gov. Charlie Crist change the state’s
homeowners’ insurance laws.

The situation is pretty simple: If a
storm – even a minor one – were to hit the wrong area of Florida,
Citizens Property Insurance Corp. and the Florida Hurricane Catastrophe
Fund could quickly run up bills topping $30 billion.

To pay them,
the state would plan to sell bonds – as much as $30 billion worth – all
at once. Yet no state has ever sold more than $11 billion in bonds at
one time, so it’s highly unlikely that today’s skittish bond markets
would buy that much debt from a storm-battered state with a sluggish
economy and shrunken tax base.

And, whatever happens, any serious
storm will result in higher taxes, called "special assessments," for
almost everyone in the state.

As a result, Florida would be faced
with some unenviable choices: massive tax increases, deep service cuts,
or most likely, some sort of federally supervised bankruptcy.

Congress might not offer very good terms for bankruptcy: Last week, the
U.S. Senate rejected both a national catastrophe fund and federal
windstorm insurance, which would replace much of Citizens. Either
program might have bailed out Florida, but the resounding "nay" votes
against federal wind insurance – more than 70 against – made it clear
that Congress is in no mood to bail out Florida.

Really, Congress shouldn’t fund a bailout.

Crist and the Legislature created the current fiscal mess with a
horribly misguided 2007 insurance reform bill that massively expanded
both the Cat Fund and Citizens.

Given the opportunity to fix both
during the session that just ended, furthermore, the Legislature
instead passed a minor package of reforms that changes things only
around the margins. The situation won’t get any better until Florida’s
private insurance market is restored so property owners can be
compensated using private capital gleaned from a broad base around the
nation, rather than from public funds collected in Florida.

has a majority of the state’s coastal risk and many of the small
"private" companies now taking policies off of Citizens’ books simply
rely on the same unstable Cat Fund that props up Citizens. No plan that
would solve these problems and bring back private insurance even made
it out of legislative committee and none has the support to do so.

Still, as members return to their districts, they should consider three ideas for fixing the state’s insurance situation.

Chief Financial Officer Alex Sink’s proposal to reduce the size of the
Cat Fund deserves serious consideration. It almost passed this past
legislative session and should top the agenda when the Legislature next
meets. Although the size of the proposed reduction in the Cat Fund
isn’t enough to pull the state back from the brink by itself, it would
still point the state in the right direction.

Second, the
Legislature should give Citizens the authority to raise its own rates.
Because Citizens sells insurance policies to anybody who gets a single
quote more than 15 percent above its rates, the current regulatory
scheme amounts to little more than a price control for all insurers
operating in the state: no matter the risk, no insurer can charge more
than 15 percent above Citizens’ artificially low rates.

the ability to charge proper rates for risky beachfront property, no
private insurer will do business in the state. Higher rates for
Citizens policyholders, furthermore, would also reduce risks for the
more than 85 percent of Florida taxpayers who don’t hold Citizens

Finally, the Legislature should consider giving
consumers the ability to opt out of the Citizens-Cat Fund system. Since
the current system’s artificially low rates come with a massive risk of
higher taxes (if the state manages to sustain a storm without going
bankrupt), it’s only fair that people who benefit from the low rates
pay these costs themselves.

People who don’t opt out might pay higher short-term rates but would largely eliminate the risk of higher taxes.

right steps can indeed bring Florida back from the fiscal brink.
Without changes, however, the threat of bankruptcy will continue to