Guest commentary: Returning insurance pricing to the marketplace is best for Florida
GARRETT RICHTER / member of the Florida Senate, GOP for district 27
5:00 p.m., Wednesday, April 15, 2009
Chairman, Senate Committee on Banking and Insurance:
The Senate Committee on Banking and Insurance has passed Senate Bill (SB) 1950 which allows for Citizens Property Insurance to increase its individual property rates up to 10 percent based upon the level of risk assessed for a homeowner’s area.
This legislation is receiving mixed reviews and, as chairman of this committee and the bill’s sponsor, I feel it is necessary to address some of the issues we need to resolve.
Two years ago the Florida Legislature took action to freeze rates for Citizens Property Insurance policyholders in order to help homeowners who were struggling to pay their monthly premiums. At that time, it was understood that once the two years had passed the rate would be adjusted to an actuarially sound rate; the required increase in rates to achieve actuarial soundness averages anywhere from 40 percent to more than 55 percent.
Additionally, over the past two years during this rate freeze, the Florida Hurricane Catastrophe Fund has suffered greatly. Our current balance in the “cat” fund is $4 billion; if Florida were to experience another Hurricane Andrew in the upcoming year, estimators believe $28 billion would be required to cover all the damages following such a major storm.
This difference, coupled with the inability of Florida to purchase bonds due to the economic instability of Wall Street, has left our state $24 billion short in the cat fund. It is imperative that this risk be addressed. SB 1950 provides for a reduction in our state’s cat fund exposure by shifting this re-insurance to the private market. The bill also provides for a rapid cash build-up of reserves.
The departure of State Farm from Florida has left Citizens overburdened and a depleting cat fund has resulted in the fiscally unsound situation that Florida faces today.
The legislation I am sponsoring calls for a responsible increase, frequently referred to as a “glide path” approach to premiums, capping increases to 10 percent per year until actuarially sound rates are achieved, rather than extending the freeze. The goal of this increase is to reduce Citizens to an insurer of last resort and provide for more competition in the private market. The art of insurance is to price risk, and the marketplace is best suited to do this pricing.
I am mindful of the hardship Floridians are enduring during this difficult time. But the financial realities Florida faces if a major storm were to hit our state could be more devastating than the storm itself. With the insolvency of the cat fund and the government-controlled premiums, we have dug ourselves a hole.
The first positive step to take when you are in a hole is to stop digging — and the proposed property insurance bill stops the digging. Florida needs to increase the competition for property insurance, reduce our exposure in the re-insurance business and return Citizens to the insurer of last resort. This legislation points us in that direction.