When former Gov. Jeb Bush recently said his successor's insurance reforms were “as bad as the natural disasters themselves,” he understated his case. As a result of Gov. Charlie Crist's January insurance reforms, in fact, the Tampa Bay area will take on a massive liability to bail out South Florida.
Consider the facts. In the wake of Crist's reforms, the quasi-governmental Citizens Property Insurance Corp. – now the state's largest insurer – covers more than 75,000 properties facing “high risk” from hurricane winds in Broward County. In Pinellas County, Citizens has written only about 16,000 such policies. Citizens also writes more than 90,000 such policies in Miami-Dade and almost 65,000 in Palm Beach County.
To make things worse, the state Hurricane Catastrophe Fund, which backs Citizens and all major private insurers with reinsurance – essentially, insurance for insurance companies – already has the authority to cover $28-billion in damages in the wake of a big storm. Even this might not be enough: the Cat Fund's own figures show that just one big storm season could render it in need of a state bailout. Plans to keep the Cat Fund and Citizens solvent involve imposing new taxes called “assessments” on every homeowners' and automobile insurance policy in the state. Florida's average auto insurance premium, now about $1,100, could easily top $2,200 as a result.
One could justify all this had it made Florida better off but, despite Crist's popularity, the system just hasn't worked. While Citizens may provide lower rates in the short term, even one major storm would likely require assessments and general tax increases that would eat up the savings. And, of course, private insurance companies haven't come through with the 24 percent rate cut that Crist and state actuaries promised when they rolled out the expanded Cat Fund in March. Although they face a mandate to buy into the Cat Fund, insurers simply don't believe it will work and have brought additional private reinsurance anyway. To cover their costs, they've asked for rate increases and seen insurance commissioner Kevin McCarty deny them one after another.
As a result, they're ceding more and more market share to Citizens. Already, the Hartford – denied a rate increase just last week – Liberty Mutual, USAA, and Nationwide have announced significant pullbacks from Florida. State Farm, indeed, has paperwork that hints at a full-scale pullout. In private, executives from other companies tell me they've considered doing the same. Insurers know that their current high premiums and record investment profits won't last and they feel they can't risk everything on South Florida remaining hurricane-free.
Unless Tampa Bay area residents like the idea of paying vastly higher assessments and taxes to subsidize discount insurance in Miami-Dade, Broward, Palm Beach and the Keys, the state needs options that involve something other than crushing new debt. Two ideas have some promise. One proposal from the Travelers Co. would create a federally regulated insurance zone through the hurricane region to help private companies spread risks over more policyholders without subsidy. Another proposal before Congress would let insurers do what banks have long done and organize themselves under federal rather than state law. This proposal, called optional federal chartering, would help insurers pool together risks from many states. Although rates would likely go up in the short term under such a proposal, federally regulated insurance companies, freed from onerous state-level regulations, would have the flexibility to write insurance to almost anybody who wanted it.
Fixing Florida's insurance mess will take hard work and may mean higher insurance rates for Floridians who live very close to the coast. Failing to act, however, could leave everyone in Florida saddled with an enormous debt.