State-dominated insurance system poses threat to Florida’s economy
By STATE REP. BILL PROCTOR, COMMUNITY VOICES
A serious threat to Florida’s economic recovery is the possibility that a major hurricane will strike a large metropolitan area this summer or next. 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 and the Florida Hurricane Catastrophe Fund (known as the “Cat Fund”) do not have the financial resources necessary to pay losses of such magnitude.
Citizens, the primary insurer of Florida homeowners, will have about $4.2 billion in cash and $8.7 billion in expected reinsurance coverage this year to meet its potential $21 billion obligation from a catastrophic hurricane. Thus, Citizens could be underfunded by more than $8 billion.
Equally concerning, insurance companies would rely on about $23 billion in state Cat Fund coverage. Yet it is projected that the Cat Fund will only have about $6 billion in cash this year, and may be forced to incur debt through bond issues of more than $17 billion to pay its claims.
This leads to a frightening reality: Whatever debt Citizens and the Cat Fund incur must be paid back by Floridians through hidden hurricane taxes — of an unknown amount and duration — that are levied on their auto, boat, homeowners and business policies. In the event of an $80 billion storm, these taxes could cost individual families and businesses thousands of dollars. Most Floridians don’t realize it, but they’re already paying hurricane taxes on their insurance policies to bail out the state’s flawed property insurance system. In fact, we’re all still paying taxes for the 2004 and 2005 hurricanes, because the state ran out of money to pay its claims.
The threat to Florida’s economic recovery arises from three possibilities: additional hurricane taxes 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; and the state would have few resources left to pay claims from a second major storm. These possibilities could occur soon, unless we abandon the policy of suppressing insurance rates below actual risks.
The private insurance market is eroding. National companies are reducing their exposure or leaving the state; small “start-up” companies do not have the resources to fill the void and many are facing financial difficulties. Florida insurance regulators recently reported that 100 out of 206 private insurers sustained underwriting losses in 2009; 60 companies saw surpluses decline. 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 that truly reflect risk. Additionally, private market rates must be based on price competition, regulated by consumers in a competitive environment – not by government.
This spring, I am again sponsoring the Consumer Choice property insurance bill (HB 447/SB 876). This bill would allow consumers to decide for themselves what they want to pay to have their home protected by a private insurer that they know and trust.
Under HB 447, insurers could offer Consumer Choice policies at rates established through price competition. To protect consumers from dramatic price swings, the bill presently provides that any future rate increases would be capped at five percent in year one, 10 percent in year two, and 15 percent in year three and beyond.
Buying a Consumer Choice policy would be entirely voluntary — Floridians could still buy a policy from a private insurer at a fully regulated rate, or from state-run but underfunded Citizens. The intent of my bill is to give Floridians more choices and options for buying homeowners insurance, to attract more private claims-paying capital to our state, and to reduce the state’s unfunded risk in Citizens and the Cat Fund.
Some critics oppose allowing Citizens and private insurers to charge rates that reflect actual risks. It is then the obligation of these critics to propose a solution that does not entail hidden hurricane taxes.
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.
Proctor, R-St. Augustine, represents state House District 20, which includes part of Flagler County.