Donald Crane: Florida plays ostrich in insurance crisis
As the 2009 Legislative session nears the finish line, our leaders’ strategic plan for dealing with hurricane insurance seems to be prayer — prayer that Floridians will again be spared a major hurricane this season. The facts are irrefutable. If a Category 3 or greater hurricane slams our state, current insurance will be inadequate.
The governor will wring his hands in dismay, and Cabinet members will announce that they have no choice but to place 20-percent to 30-percent assessments on all forms of insurance to make up for the sudden shortfall. Floridians will be shocked by the huge assessments on all of their policies (except worker’s compensation and medical malpractice). The governor knows this. The Legislature knows this. Our Cabinet officers know this. But no one has done anything to protect Floridians from this foreseeable course of events.
It is the old "Pay me now or pay me later" story, and our politicians are afraid to prepare for inevitable storms that will one day hit our peninsula.
Florida’s hurricane risk is too great to be handled efficiently by the private insurance market. These companies are dependent upon a layer of "at-cost reinsurance" from the Florida Hurricane Catastrophe Fund (Cat Fund) plus very expensive reinsurance from unregulated reinsurers, most of which are offshore companies.
Floridians do not realize that the Cat Fund has only a tiny net worth (less than 10 percent of actual exposure) and that, when the next big hurricane hits, the fund will have to borrow (through issuance of bonds) the billions of dollars it promises to pay. Rating agencies are informing insurance companies that the Cat Fund is not sufficiently capitalized and may be unable to fund losses from a major storm.
In 2006, private market reinsurance rates spiked, causing property insurers to seek large rate hikes. The Legislature responded by increasing the Cat Fund reinsurance for residential hurricane risk from $15 billion to $27 billion, believing that $15 billion in post-event bonds could be sold.
The reality is that Floridians are financially responsible for a state property insurance system that is knowingly underfunded and cannot fully pay Floridians’ claims. Currently, we Floridians are paying off previous hurricane losses by assessments to our insurance policies. My 2008 assessments totaled $167. Do you know yours?
Research by the Florida Hurricane Coalition contends that a State Hurricane Fund that collects all residential hurricane premiums is stronger, more economical and safer than the state’s current program. Our primary goal is to have the state verify our proposed financial solution to make sure it is actuarially and economically sound.
For three years, we have requested the following from the state insurance commissioner so we would have accurate information on which to base our solution:
* Require the Office of Insurance Regulation (OIR) to report all hurricane premiums for residential and commercial residential properties for the past four years and projections for 2010, 2011 and 2012 (without a rate increase and with a 10-percent rate increase each year, as proposed by some legislators). Until policymakers know the amount of money available, no one can assess the validity of any plan.
* Require OIR to report the average annual losses on residential property for the past 30 years, in 2009 dollars. (Again, unless the Legislature has access to these numbers it cannot evaluate the potential effectiveness of any plan.)
* Require the OIR to begin this year obtaining and reporting to the Legislature all hurricane premiums on all insured buildings in Florida. There must be true transparency so that Floridians will know how much they are paying the insurance industry for hurricane insurance (including reinsurance and excess and surplus lines) every year.
One has to wonder why this information has not been provided to the Legislature in clear and accurate form.
Most legislators are being lobbied by the well-heeled insurance industry, which opposes our plan. It doesn’t like a plan that benefits Floridians by financing hurricane damages instead of the state’s present system of costly reinsurance. Reinsurers must capture a large amount of hurricane premiums over a short period of time to cover even a 1-in-25-year major hurricane. If annual premiums for residential properties are $7 billion and if average annual hurricane losses are $4 billion, as our research indicates, a State Hurricane Fund can finance hurricane losses. Twenty years at $7 billion is $140 billion, less expenses, to pay hurricane losses of $80 billion. That is a good bet. "Ifs" don’t count. That is why the commissioner must put all the cards on the table.
At the moment, Florida’s leaders have adopted a heads-they-win, tails-we-lose strategy. If we continue with the present system and there are significant storms, the insurance industry will have to be supplemented by Floridians using assessments. If we get lucky and have a period of fewer than average storms, the difference between 20 years and $7 billion in fees — and losses of $60 billion to $80 billion — will leave our state and go into the pockets of the reinsurance industry and others.
The question all legislators need to address is this: Is the state better off sending $7 billion of hurricane premiums out of Florida every year or capturing the premium in a State Hurricane Fund to finance hurricane losses over a long period of time?
As it stands now, no one really knows where to begin building a case for a financially sound hurricane insurance solution. We need those numbers from the OIR. And Floridians need to know the potential assessments (taxes) that can be attached to their insurance policies.
But our "leaders" refuse to face what they know is an inevitable financial crisis. They continue to leave it for someone else to tackle after the next big storm. We have done what the media asked; we got involved. Frankly we are frustrated, and you should be also.
ABOUT THE AUTHOR
* Donald R. Crane Jr., who was in the Florida House of Representatives from 1970-74, is president of Florida Hurricane Coalition Inc. Contact him at email@example.com or at www.floridahurricanecoalition.org.
Imported: Apr 8 2009 5:48AM Indexed: Apr 8 2009 6:04AM