We can’t afford another Charley, thanks to Charlie
August 13, 2009
Hurricane Charley hit in 2004.
Governor Charlie hit in 2007.
Between them, Charley and Charlie have redefined the property-insurance market in Florida.
Hurricane Charley showed us that no place in Florida was safe from mega-storms.
And then Charley was followed by Frances, which was followed by Ivan, which was followed by Jeanne.
And the great 2004 storm season was followed by an even more active and destructive 2005 storm season.
All this was an eye-opener, even to insurance companies experienced in dealing with hurricanes. Traditionally they calculated potential losses by projecting damage from a single, major storm. But Charley and Co. introduced the concept of multiple hits in one season.
On top of that, the onslaught of storms confirmed the belief of hurricane experts that we are in the midst of an active storm cycle that could last two more decades. And so, as insurers paid out billions, the risk modelers who calculate future losses were inputting all this new information in their computer programs.
The result was a demand for catastrophic increases in premiums.
Calculating hurricane risk is a very inexact science compared with calculating other forms of insurance. Auto insurers can predict payouts using statistics from millions of cars and billions of miles.
But hurricanes are anything but predictable. If you charge enough to cover massive losses, and a storm doesn’t show up for a few years, you are accused of price gouging.
If you don’t charge enough and one does show up, you can’t pay your claims, and the taxpayers end up doing it for you. That is what happened after Hurricane Andrew in 1992. It turned Florida into an insurance graveyard and began the exodus of big insurers.
The market quieted until five years ago today.
The losses rippled around the globe. Insurance companies don’t keep enough money on hand to pay off their hurricane policies. What they do is buy backup coverage from what are known as reinsurance companies. These unregulated companies, many located offshore, are the unseen shadow world of the insurance industry.
Because the reinsurers take on this great risk, they charge substantial rates. After the beating they took in 2004 and ’05, their rates skyrocketed.
Florida insurers had to pay and pass on the cost to customers. This drove premiums up.
Gov. Jeb Bush accepted the necessity of higher premiums from private insurers and the state-owned Citizens Property Insurance, which went bust after the onslaught of storms and required a taxpayer bailout.
Then came Gov. Charlie Crist, who had other ideas.
He vilified the insurance industry, accusing it of price gouging. He reversed rate increases that Bush had set in motion for Citizens Property.
Crist wanted to use Citizens Property like President Barack Obama plans to use a government-run health program: as a direct competitor with private insurers to keep their rates down.
He pledged to halt increases in private-insurer rates. But he could not control the reinsurance companies, which were driving many of these rate increases.
So this is what he did: Florida sells reinsurance through what is known as the Catastrophe Fund, or CAT Fund. The Legislature started this fund after Hurricane Andrew to settle the market. It sells reinsurance to insurance companies at rates below what private insurers charge.
Crist got the Legislature to increase its financial obligation from $16 billion to
$28 billion so it could sell even more reinsurance. Private insurers were required to buy the coverage and pass on the savings to customers.
The problem is the CAT Fund only has about $4 billion in assets. It couldn’t even borrow enough money to meet its obligations.
This made some insurers nervous, chief among them State Farm.
When the company asked for a large rate increase, the state said no, State Farm said goodbye and Crist said good riddance.
Crist and his regulators point to the army of small insurers that have set up shop in Florida as proof State Farm is not needed. They supposedly represent a new insurance model: replacing a few big national companies with dozens of smaller ones.
It makes sense as far as spreading out risk.
But these small companies will rely heavily on the CAT Fund if a major hurricane hits. They are fronts for a government-run insurance program that has little more than taxpayer IOUs backing it up.
It all works as long as we don’t get a major storm. When we do, Florida faces billions in tax increases during the next 30 years.
Charlie Crist, who is positioning himself as a conservative in his run for the U.S. Senate, has overseen one of the greatest expansions of government into the private market in any state’s history.
That is the legacy of Charley and Charlie.
Mike Thomas can be reached at 407-420-5525 or firstname.lastname@example.org.
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