News & Updates


Reducing Florida’s risks – Property insurance legislation is painful but necessary

Published: Wednesday, April 8, 2009 at 1:00 a.m.
Last Modified: Tuesday, April 7, 2009 at 7:10 p.m. 

The Legislature is demonstrating that – despite its fear of touching the state’s broken tax system — it really is capable of making tough, potentially unpopular decisions for the right reasons.

Recently, major committees in the Florida House and Senate approved bills designed to pull the state back from the brink of potential financial calamity.

The bills would let state-run Citizens Property Insurance gradually increase its rates in order to improve its solvency. The bills will also begin to reduce the state’s Hurricane Catastrophe Fund — which provides reinsurance for Citizens and private insurers against hurricane-related losses — by several billion dollars.

If, as expected, property insurance legislation is soon approved by both chambers and the governor, rates will rise for many — if not all — Florida property owners. For one thing, Citizens is the largest property insurer in the state, with 1.1 million policies. And the reduction of the so-called Cat Fund will force many insurers to buy reinsurance in the private market — at substantially higher costs — which will lead to higher rates for their policyholders.

Dangerous shortfalls

Despite the economic pain in store for Floridians, the legislation is necessary. Neither Citizens nor the Cat Fund has enough money to pay the claims that are anticipated if a major hurricane — or a series of damaging storms — strikes Florida. The shortfall in the Cat Fund alone is estimated to be as much as $19 billion — a liability that all Florida ratepayers and taxpayers would bear.

The problem is largely the result of actions taken by the Legislature and Gov. Charlie Crist two years ago. At Crist’s urging, lawmakers froze Citizens’ insurance rates and nearly doubled the size of the Cat Fund in the hopes of driving down Floridians’ property insurance costs by 35 percent or more — hopes that never materialized.

At the time, we agreed that the state needed to try to stabilize rapidly rising rates that were pricing many homeowners and businesses out of the state. We also hoped that the state — with federal support in the form of a national catastrophe fund — would be able to adequately capitalize Florida’s Cat Fund. But the recession and credit crisis made those goals nearly impossible.

Instead, Florida faces the potential, if a catastrophic storm strikes, of a bankrupt state insurance system unable to raise needed funds in the paralyzed financial markets, and unable to pay homeowners’ claims.

Increases would be gradual

The legislation would not restore solvency to the system immediately. The Senate bill would let Citizens’ rates rise by as much as 10 percent a year until the insurer is actuarially sound; the House bill would allow increases of up to 20 percent a year. If the bills pass in both chambers, those differences would have to be resolved.

The bills would also reduce the size of the Cat Fund by $2 billion a year for six years, while gradually increasing the premiums paid into the fund by Citizens and private insurers.

If there is good news in all of this for ratepayers, it’s that the pain might be temporary. Industry experts predict that, as the rates charged by Citizens and the other insurers rise, more private insurance companies will be motivated to get into the Florida market. And as competition for policyholders increases, say the experts, property insurance rates will eventually come down.

Floridians have heard that argument before and have reason to be skeptical. Yet the status quo approach clearly is not working.

In any case, Citizens and the Cat Fund were always intended to be insurers of last resort — not to dominate the market. If the legislation being considered becomes law, the state’s financial risk will be reduced to a level that Florida can safely live with.