No sunny outlook for Florida’s insurance market
By Benjamin Zycher
April 25, 2010
The sun doesn’t always shine in the Sunshine State. But for many career public officials, maybe the sun will come out tomorrow, and every day until the next election; and after that, the weather will be someone else’s problem. That mindset explains the willingness of Gov. Charlie Crist to veto legislation to undo the wreckage wrought by years of price controls on property insurance and by his 2007 “reforms.”
Insurance markets have powerful incentives to allocate premiums in accordance with the risks imposed by given policyholders upon the entire pool. Democratic governance, on the other hand, is the art of wealth redistribution, in this context political pandering to subclasses of consumers seeking regulated premiums lower than actuarially fair. The problem is that potential hurricane losses are so large that the market distortions and wealth transfers engendered by politicized ratemaking are enormous.
That is why several major carriers have left the state or cut back sharply on coverage, only to be replaced by frequently undercapitalized insurers that, in the event of a big storm, pose a real danger of leaving their policyholders high and soaking wet. Because someone has to pick up the tab, other policyholders must pay higher premiums as well as assessments for the excess losses caused by past events.
Ultimately, it is the taxpayers who must bear the risks and pay the costs. And so we have Citizens Property Insurance transformed into the largest property insurer in the state, without the resources to pay the claims that will result from a big storm. The Catastrophe Fund, supposedly a bulwark for the insurers, has an expected deficit in excess of $7 billion. The taxpayers thus face the prospect of massive borrowing to cover losses in the event of a large storm, which will not be the last one. Perhaps the Beltway will help out. But Congress is not in the habit of handing out favors for free.
Moreover, insurance in the most basic sense is the accumulation of capital made available to pay claims. If regulated rates are insufficient to attract that capital from investors, then by definition the availability of insurance coverage will contract. The attendant effects — on economic growth, investment, employment, tax revenues, Florida’s competitiveness with other states — cannot be salutary.
The current state of Florida’s insurance market makes obvious the absolute need for reform, however distasteful the medicine in the immediate term. A public official actually able to oppose so critical a reform in Florida can be predicted with confidence to prove incapable of standing for other critical reforms. Such as in a hypothetical transition — to pick one example entirely at random — from the Florida governor’s mansion to the U.S. Senate. Let the voter beware.
Benjamin Zycher is a senior fellow at the Pacific Research Institute, a San Francisco-based public policy think tank.