News & Updates


Head or heart? The Florida Legislature tackles the property insurance reform package

Posted: April 11, 2010 – 10:10am

In the next few weeks, members of the Florida Legislature will have to choose between their heads and their hearts.

If they listen to their heads, they will pass Rep. Bill Proctor’s property insurance reform package.

If they listen to their hearts, or their political instincts, they will reject it.
The St. Augustine Republican’s bill would allow property insurance companies to increase their premiums, incrementally, by about a third over three years – then further adjust them until they’re “actuarially sound.”

People wouldn’t be required to buy premiums at market rate; they simply would have the option. In most cases, that means they could deal with a company known to be reliable.

Critics say Proctor’s bill couldn’t have come at a worse time – asking families to pay more during a steep recession, with 12 percent of Florida’s workforce unemployed.

Few alternatives

Insurance companies are not allowed, under current state regulations, to charge enough to cover the full cost of their risk.

That is why many insurers have stopped selling policies in the state. Of those remaining, several are small companies that lack the money to pay all of their claims if a hurricane hits.

In fact, the Sarasota Herald-Tribune says, one-third of all policies are with financially troubled insurers.

Several years ago, the state created its own Citizens Property Insurance Corp. to cover homes so risky that private companies won’t insure them.

Also, the state has assumed a large portion of the risk on all policies by creating a catastrophic fund (called the CAT fund).

That, it was reasoned, would make it profitable for private companies to sell policies here, despite the artificially low rates.

It didn’t work very well:

  • Citizens, rather than a secondary insurer, is now the largest insurer in the state. And it’s in trouble.

The Tallahassee Democrat says it would have a $21 billion obligation if a 1-in-100-year storm hit – but it has only $13 billion in cash and available reinsurance.

  • The CAT fund already has a $7.2 billion deficit and would have to borrow billions more if a major storm were to hit.

The money to repay that debt would have to be raised by higher taxes or surcharges on policies.

No free market

Proctor argues, logically, that the state should stop distorting the market – let the rates rise to cover the risk.

That way, private companies could afford to sell policies, and state government no longer would risk financial ruin if a major hurricane hits.

Some might argue that it makes more sense to keep the current system because there is only a 1 percent chance that a 100-year storm will hit next year.

But, as Proctor points out, two 50-year storms, or several smaller hurricanes, would do about the same amount of damage.

“Sooner or later,” he says, “we’ll be hit badly.

“And the worst insurance is cheap insurance that cannot pay the claims.”

Under Proctor’s bill, homeowners could keep state-regulated policies. But they also would be able, if they wished, to pay more for policies from large companies widely considered financially viable. That is vitally important.

Reuters, citing Colorado State University hurricane forecasting team predictions, says eight hurricanes likely will threaten the Atlantic Coast this year – four of them with winds of at least 111 miles an hour.

This would be a bad time to be underinsured. Let’s hope the governor and Legislature have enough long-term vision to encourage more reliable coverage.