Rep. Bill Proctor: One big storm could wreck Florida’s economic recovery
January 26, 2010
Bill Proctor
My View
A serious threat to Florida’s economic recovery is the possibility that a major hurricane will strike a large metropolitan area. It is estimated that the resulting damage to residential and commercial properties could exceed $80 billion.
Many of the claims would be the responsibility of the state. Unfortunately, the state’s two major property insurance entities — Citizens Property Insurance Corporation (Citizens) and the Florida Hurricane Catastrophe Fund (CAT Fund) — do not have the financial resources necessary to pay for losses of such magnitude.
Citizens, the primary insurer of Florida homeowners, will have about $4.2 billion cash on hand and $8.7 billion in expected reinsurance coverage, for a total of $12.9 billion, to meet its $21 billion obligation in the event of a 1-in-100-year storm during 2010. Thus, Citizens could be underfunded by more than $8 billion.
Of equal concern is the fact that insurance companies would rely on approximately $23 billion in recoveries from the CAT Fund. The Cat Fund projects just about $6 billion in cash for 2010 and may incur debt through bond issuances up to $17 billion to pay its claims.
Whatever debt Citizens and the CAT fund must acquire would be paid by assessments of unknown amount and duration on all homeowners policies. Assessments might also be levied on boat, auto, and business policies. These assessments could, in the event of an $80 million storm, total thousands of dollars in “hidden hurricane taxes” on Florida’s families and businesses.
The threat to the state’s economic recovery arises from three possibilities: the necessary assessments may intensify the current recession; the state may not be able to issue enough bonds to pay all of Citizens’ and the Cat Fund’s claims; the state would have few resources with which to pay claims from a second major storm.
These possibilities could occur in the hurricane season of 2010 or beyond unless we abandon the policy of suppressing insurance rates below actual risks.
Clearly, the private insurance market is eroding. National companies are reducing their exposure or leaving the state; small domestic companies do not have the resources to fill the void. Florida insurance regulators recently reported that 102 out of 210 private insurers reported losses during the second quarter of 2009, a period in which the state experienced no storms. Moreover, three domestic property insurers have become insolvent, another has been placed on administrative supervision, and others have been acquired to save the companies from insolvency.
We must attract and retain private, claims-paying capital; otherwise, the burden shifts to the state.
There is no immediate solution, but two actions are imperative. Citizens must be required to charge rates commensurate with risks; otherwise, major assessments remain a threat to economic recovery. Additionally, private market rates must be “market based,” regulated by consumers in a competitive environment, not by government.
Some critics oppose allowing Citizens and private insurers to charge rates that reflect actual risks. It is then the obligation of the critics to propose a solution that does not entail assessments of an unpredictable amount or duration.
Florida cannot afford to wait for a solution from Congress — we must take action now to ensure the rates of Citizens and private insurers are actuarially sound, and to minimize the state’s role in the homeowners insurance business. Otherwise, we face the threat of bankrupting the state after a major hurricane.
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