Florida’s unacceptable risk
Published: Sunday, March 7, 2010 at 1:00 a.m.
Last Modified: Friday, March 5, 2010 at 5:52 p.m.
Florida homeowners have learned to live with the risk of hurricanes. They shouldn’t have to live with the risk that their property insurer won’t cover their losses if disaster strikes.
Yet, as detailed last Sunday in a Herald-Tribune investigative report by Paige St. John, numerous small, undercapitalized insurers operating in Florida are in perilous financial condition.
St. John’s report also depicted a state insurance regulatory apparatus that not only has permitted the heightened state of risk but encouraged suspect insurers to take on more homeowners policies than they could safely cover. The state even concealed some companies’ shaky status through the end of last year’s hurricane season.
The report makes clear that the Florida Legislature needs to step in to make sure that property insurers licensed to operate in this state have adequate means to cover the policies they are allowed to write.
Based on insurance industry standards used by regulators, industry insiders, academics and consumer watchdogs, St. John found that one in three privately insured Florida homeowners “relies on insurers that exhibit one or more signs of financial risk.”
Six property insurers in Florida have failed in the past year — more than in any other state. And state regulators openly admit that more will fail — leaving Florida taxpayers and consumers to pay the tab through assessments on homeowner, auto, boat and other insurance policies.
Hurricanes and fallout
This precarious position is largely a result of Florida’s recent history of hurricanes — and of the state government’s well-intentioned but ultimately flawed efforts to deal with the insurance industry fallout.
After 1992, when Hurricane Andrew devastated much of South Florida, and continuing through the multiple hurricane strikes in 2004 and 2005, major national insurers have dropped thousands of homeowners policies and largely withdrawn from the state.
The state government responded by creating its own insurer, Citizens Property Insurance, to cover homes considered too risky by private companies. The state also established the Florida Hurricane Catastrophe Fund to provide reinsurance — or backup funding — for insurers in the event a hurricane strikes.
But both government entities have become seriously underfunded, leading state officials to actively seek private insurers to assume more of the financial risk.
National property insurers, thwarted by state regulators in their pursuit of huge rate increases, have continued to pull out of the state. Into the breach have stepped small insurers that operate only in Florida.
“In 1992, these concentrated risk-takers insured just 6 percent of Florida,” St. John noted. “Today, including the Florida-only subsidiaries of national insurers, they cover 71 percent.”
How well they cover their many policy-holders is the question — and the Legislature needs to find the answer.
Last year, the Legislature tried to reverse the exodus of national insurers by passing a bill, co-sponsored by state Sen. Mike Bennett of Bradenton, that would have let them charge homeowners rates free from state regulation. The rates of small insurers would continue to be regulated.
Gov. Charlie Crist vetoed the legislation, contending that the smaller companies would be placed at a competitive disadvantage and that nothing would prevent the major providers from raising their rates and later leaving the state.
This year, Bennett has proposed a bill that would let all property insurers in the state charge whatever the market will allow.
Weaknesses need correction
In light of the risks posed by the current crop of small, undercapitalized insurers, Bennett’s bill deserves a fair hearing and, if approved by the Legislature, serious consideration by the governor.
But the Legislature should not stop there. Weaknesses in the state’s insurance regulatory system, exposed in the Herald-Tribune report, should be examined and corrected.
Among the issues worthy of scrutiny:
State law requires insurers to have a minimum of $4 million in reserve to pay future claims. Many industry insiders say the amount is insufficient, and some say Florida insurers should have $25 million or more. The state Office of Insurance Regulation uses $10 million as an unofficial benchmark, St. John reported. The Legislature should officially raise the minimum to $10 million or higher.
The state uses national standards to determine when insurers carry too much risk for their assets; companies falling below a “score” of 200 must file a remediation plan. The National Association of Insurance Commissioners is considering requiring insurers in high-risk areas — and Florida should qualify — to carry enough additional capital to achieve a score of 230. The Legislature should make 230 the minimum score.
Officials with the Office of Insurance Regulation, St. John noted, acknowledge that some Florida insurers “are on the verge of collapse,” but the OIR “will not name the companies or say how many are in trouble.” The OIR has placed weak companies under its supervision but, citing state insurance laws, concealed details from policyholders. The Legislature should re-examine the laws to see if the public would benefit from more transparency in the regulatory process.
One inevitable consequence of creating a more stable, reliable insurance market in Florida — whether by Bennett’s legislation or by setting high standards for all insurers — will be rate increases for policyholders.
But the rates — and the risk they cover — are part of the price of living in a state that is prone to hurricanes. It’s a price from which the state government — through its public insurance entities, its rate regulation and its encouragement of small, Florida-only insurers — has tried to shield residents.
We suspect that most Floridians would willingly pay a higher premium to have the security of knowing that, if disaster strikes, their home and possessions will be covered. After all, that’s why we have insurance.