Guest column: Government needs new role in hurricane insurance crisis
Story updated at 5:08 AM on Tuesday, Jun. 16, 2009
Insurance companies have historically dealt with their customers in a free market.
Meanwhile, government agencies have historically limited their involvement with the industry to assuring that the financial worth of insurers in the state was sufficient to fund losses incurred.
Near the end of the last century, when Floridians became concerned about the cost and/or the availability of hurricane insurance, our government felt a need to change their role in this relationship.
The state has:
– Created its own insurance company.
– Passed laws limiting the amount insurance companies can charge for coverage.
– Assessed all insurance customers to cover the costs of failed insurance companies after the devastating hurricanes of 2004 and 2005.
With the 2009 hurricane season officially under way, it is reasonable to ask how this activity has impacted the cost and availability of hurricane insurance for Floridians.
The overwhelming consensus is that Floridians will incur losses of at least $11.5 billion (the amount of the unfunded Catastrophic Fund and Citizens Property Insurance Co. programs) the Legislature obligated Floridians to pay through assessments because the state has not bought reinsurance to cover its obligations when a Category 4 or greater hurricane slams Florida.
Further, the state does not have adequate reserves for these losses. The current plans to remedy the situation involves increasing premiums and by raising the rates at Citizens.
While this will be helpful, it will not correct all of the current difficulties quickly. We think there is a better solution – one that will stabilize rates, provide adequate reserves and do so at a decreased cost. Better yet, more of Floridians’ money stays in Florida.
State elected leaders know we have a plan that will reshape the way hurricane insurance is managed in Florida. Our finance solution – financing hurricane insured losses over a longer period of time – would replace the state CAT fund while providing adequate reserves.
The finance solution is this: Determine the likely loss exposure for multiple years. Charge premiums based on that actuarially sound model, eliminating the wild rate gyrations we currently experience.
Collect those funds and hold them for future claims. All hurricane premiums will be collected by the insurance companies (or agents) and sent to the state fund.
The insurance companies continue to be paid for their work including settling hurricane claims.
The big difference between the state’s program and the finance solution is that Floridian’s hurricane insurance premiums stay in Florida and accumulate a surplus vs. hurricane premiums leaving the state with layers of reinsurance commissions, taxes, profits and high salaries, all factored in to their high cost of doing business.
The state fund could be established in 2010 with a starting balance of $12.5 billion ($6.4 billion currently available from Citizens and $6.2 billion from the Florida Hurricane Catastrophe Fund). An additional $2.2 billion would come from hurricane premiums the following year after expenses.
Had this finance solution been created in 2006, the state funds would presently have a surplus of $20 billion.
That would already be enough money to handle a 100-year hurricane.
A finance solution means that claims can be paid immediately. Calculations by a national actuary indicate the funds necessary to pay claims can be financed over a longer period of time and include reimbursement to the federal government if the state funds needs to borrow from the feds.
This works well with a national catastrophe fund. Insurance companies must factor in the cost of huge losses that must be paid and premiums collected in a very short time.
They are betting that the correct premiums have been collected. They are not in the finance business.
The bottom line: After the inevitable storms there will be the usual posturing, remorse, dismay and fingerpointing.
Listening to our plan is a no-risk political choice with lots of upside and no downside.
Ignoring us is foolhardy, not only economically but politically.
Donald Crane Jr. is president of the Hurricane Insurance Coalition Inc.