State Farm’s exit leaves Florida on the brink of a crisis

State Farm’s decision to quit providing homeowners insurance in
Florida shows that the state’s insurance market simply can’t survive in
its current form. Moreover, the company’s exit won’t merely leave
thousands of Florida homeowners scrambling for a reliable insurer, but
it also will add to the financial risk that Florida would face if
costly storm damage were to occur.

Indeed, unless Gov. Crist and the Legislature swiftly make several
painful but necessary changes to Florida’s current insurance system,
State Farm’s retreat places the entire state in grave fiscal peril.

That’s
because inaction means that Florida’s taxpayers will become practically
the only major underwriter for coastal property owners, whose homes are
among the priciest and most exposed to storms. That could literally
mean bankruptcy for a state that’s already dealing with a budget crisis.

Whatever
State Farm’s faults as a company, it at least could back its promises
with actual assets — about $60 billion worth. Moreover, it charged less
than many of its competitors while providing insurance for about
one-fifth of all Florida homes.

Only the state itself, through
Florida Citizens Property Insurance Corporation, sells more homeowners
insurance in Florida. Partly because State Farm is a mutual company
operating on a not-for-profit basis, it also wrote lots of coastal
coverage that shareholder-owned companies tended to avoid.

Without
State Farm, Florida easily could face a fiscal train wreck. No
similarly-strong private company exists to take up the slack. In the
wake of the ill-conceived property insurance "reforms" of January 2007,
every sizeable out-of-state provider of homeowners insurance has either
entirely withdrawn from the state or severely curtailed its business.
The only companies writing significant numbers of new policies are
Florida-only companies with fewer real assets.

Unlike State Farm,
which purchased plenty of reinsurance (insurance for insurance
companies), many of these in-state companies and Citizens rely almost
entirely on the state government’s own reinsurance entity, the Florida
Hurricane Catastrophe Fund.

But the Cat Fund doesn’t have
sufficient real assets to back up its promises. Rather than making
investments, as private reinsurance companies do, the Cat Fund plans to
finance its payouts by selling enormous amounts of bonds after a major
storm hit, with the debt to be repaid via surcharges on insurance
premiums for homes and vehicles.

Under the current law, the state
could assume liabilities totaling $32 billion. However, because no
state has ever sold more than $11 billion worth of bonds all at one
time, the Cat Fund simply cannot keep its promises —especially in
today’s troubled credit market.

As a result, a costly storm or
series of storms almost certainly would cause the collapse of Citizens,
the Cat Fund, and many nominally "private" companies. Yet because the
State of Florida guarantees the solvency of all these entities,
Floridians would end up footing the bill.

Moreover, because
Florida has no personal income tax and has a statewide cap on property
tax rates, the government has no practical way to collect the tax
revenue needed to clean up the mess. If Congress doesn’t have the
appetite to bail out Florida —and there’s a good chance that it won’t
—the state might well have to take a trip to bankruptcy court.

When
the Legislature convenes in March, lawmakers need to consider some
tough measures to pull Florida back from the brink. They should let the
rates rise significantly for both Citizens and other insurers operating
in the state — a step that will require real political courage. They
should also act to reduce the size of the Cat Fund and encourage
Floridians to do more to reinforce their homes against hurricanes.

Indeed,
with whatever resources it can muster in tight times, the Legislature
should strive to increase funding for the "My Safe Florida Home"
program, which helps Floridians make their residences less vulnerable
to costly storm damage.

Meanwhile, State Farm’s exit from the
Florida market makes it clear that Floridians — especially those who
live near the coasts— will have to pay higher insurance rates. The
alternative, however, is much, much worse.