The Property Insurance Crisis:
Have we made progress...or are we worse off than before?
For Florida's middle-class families, receiving a letter from their insurance company is good reason to fear. The envelope often contains just one of two notices: either their premiums are skyrocketing, or the company has dropped them. As millions of Floridians have learned, both are devastating options.
The Governor convened the state legislature in a special session in January to address the crisis. They passed legislation and everyone -- Republicans and Democrats alike -- has been talking about what great progress they made toward solving the problem.
But what did they really do? And what are the long-term effects?
Will the new insurance law reduce rates?
In the short term, rates are predicted to drop by roughly 10-25 percent for Florida homeowners.
Floridians who are insured through Citizens should see the largest relief because Citizens was required to repeal a recent rate increase and no longer has to charge the highest rates in Florida. Citizens policy holders who have already paid the increased premiums will receive refunds.
Property owners insured by private insurance companies will also see their premiums decrease soon, although it's unclear yet by how much. All private insurance companies are required to file rate reductions within the next several months.
But what are they NOT telling you?
While your elected officials are patting each other on the back for reducing your rates so quickly after the November elections, what they aren't telling you is that the method they chose is a huge gamble.
The premium reductions are going to result from a dramatic increase in the size of the state's commitment to providing a financial backstop to private insurance companies. The new law obligates the state to provide additional backing to insurance companies through the state's catastrophic fund ("CAT Fund") to the tune of some $32 billion.
In turn, insurance companies are now required to either 1) purchase the cheaper reinsurance offered by the CAT Fund and reduce their premiums accordingly, or 2) purchase more expensive reinsurance on the private market but still reduce their premiums as if they purchased it more cheaply from the CAT Fund.
But there is a very big catch. Right now, the Cat Fund has less than $2 billion in reserves. (To learn more about the Cat Fund, visit this site or click here to see it's current financial status.) If we face an economically devastating hurricane in the coming years -- or even a series of smaller hurricanes -- every Florida property owner will be forced to pay a special assessment to make up the $30 billion difference.
Essentially, the legislature has gambled that Florida won't be hit by too many hurricanes before they can build up the CAT Fund. Who pays off that $30 billion bet if they're wrong? Florida property owners.
And here's the part no one is talking about yet. Not only are taxpayers likely to end up paying for a big bailout of the CAT Fund, the legislation could very well destabilize the private market too. Here's how.
Insurance companies receive a rating from a company called A.M. Best. Best Ratings are very much like credit scores for insurance companies. And just like an individual has a difficult time getting loans or renting an apartment with a low credit score, an insurance company with a reduced Best Rating has a hard time getting additional capital or buying reinsurance. That means that with a low Best Rating an insurance company might have a very difficult time paying claims if we get hit with multiple hurricanes, or even one catastrophic one.
And what is the legislature's action going to do to insurance companies' Best Ratings? Well, if they buy their reinsurance from the severely under-funded Florida CAT Fund, as the legislature hopes they will, A.M. Best is going to lower their rating because of the instability of the CAT Fund. (Click here to read A.M. Best's statement.)
And if they don't buy their reinsurance from the CAT Fund and have to pay more for it elsewhere, the legislature is requiring them to reduce their premiums to take into account cheaper reinsurance even if they are actually paying more for it. That means the premiums they're charging won't be sufficient to cover the cost of the reinsurance, and A.M. Best will reduce their rating for that reason.
Now, most Floridians don't feel too sorry for big insurance companies, but there are two big reasons we should be very worried about this.
By forcing insurance companies into a situation that will result in lowered Best Ratings no matter how they decide to proceed, the legislature has made it very likely that two things will happen. First, some companies will pull out of Florida, leaving homeowners with even fewer choices. And second, a bad hurricane season is likely to destabilize the private market, leaving some companies unable to pay claims.
In sum, if we have a bad hurricane season in the next few years, not only will we be bailing out the state, but private insurance companies could fail to pay claims too. Florida's families are at risk on multiple fronts.
So, where do we go from here?
Many of our leaders are ready to move on to other issues -- right now, they're putting property tax reduction center stage. It is imperative that we hold their feet to the fire on property insurance. We have to tell them that we're not satisfied by the band-aid legislation passed in January, and we expect real solutions.
We have to demand that the legislature again address property insurance during their annual session in March and April. The central theme of the debate must be how the state can do a better job of reducing the risk of an economic calamity following a hurricane. Gambling with our families' future is not an acceptable solution.
In addition to demanding they revisit the problematic legislation they passed in January, we need to urge other actions that can be part of a comprehensive solution:
National and Regional CAT Funds
The best solution is not one that Florida can do on its own. Congress should create a National Catastrophic Trust Fund, which could provide some type of national disaster insurance, similar to the federal flood insurance program. By spreading out the risk over many states that face threats from other disasters, such as floods and earthquakes, Floridians should see relief.
In the meantime, our state leaders, especially Governor Charlie Crist and Chief Financial Officer Alex Sink, should work to bring together other hurricane-prone states in the Southeast and structure a regional catastrophic fund. Sink has already started a dialogue with insurance commissioners from other Gulf states.
If Florida's presidential primary is moved up to early February, giving us a real say in the selection of the nominees, Floridians must make support of a national CAT fund our litmus test. We need to demand a straight answer on this issue, and refuse to support a candidate that won't support us.
Fair and Open Rate-Making Process
Florida must also hold insurance companies accountable. It is fundamentally wrong that a company can increase the rates of Floridians, claiming they are losing money in the state, when in fact nationally, the company enjoys huge profits. State regulators should be required to consider the company's national profits, not just their balance sheet in Florida.
The state also should make the rate-making process open and transparent, so all Floridians can see exactly why their insurance company wants to raise rates.
Hurricane-Ready Homes
We need to continue to strengthen building codes around the state, especially for new coastal construction. The "My Safe Florida Home" program, which provides free home inspections and matching grants for hurricane mitigation improvements, should receive increased funding and a streamlined application process.
Take Action
Contact your legislator about the property insurance crisis.
Write a letter to the editor about the property insurance crisis.