Hurricane insurance produces little harmony: Homeowners feel it's overpriced. Insurers face rising risk. Regulators are caught in the crossfire.
But there is one sliver of agreement. It appears that everyone supports reinforcing homes, one of the few immediate fixes that can protect people, houses and revenue from more powerful storms that strike seashores blooming with new housing and buildings.
A central way to promote hardened homes, however, is now being questioned. Insurance discounts in Florida are under scrutiny for being too political, for inviting fraud and for having "failed to operate as intended," according to a report by an independent Florida commission.
The state Legislature requires that insurers offer the discounts. They're meant to offset the cost of things like hurricane shutters for homeowners and businesses. Those remedies could save lives. They're also designed to reduce damage, giving insurers a stronger foothold in a state that has seen hurricane claims skyrocket in the last 20 years.
That hasn't happened. Indeed, insurers have blamed the mandatory discounts for exacerbating Florida's insurance problem: artificially low premiums combined with rising hurricane risks.
Florida's Commission on Hurricane Loss Projection Methodology, an independent body of experts established by the Legislature, seems to agree. It found that "the current system for assessing, determining, and applying windstorm mitigation discounts has failed to operate as intended and has contributed to problems in the residential property insurance marketplace."
In other words, there are more discounts being given out than there are homes being protected.
"In effect, everyone's getting a discount," said Gary Landry, vice president of the Florida Insurance Council, an industry group.
Discounts and fraud are up; insurers and protection are down
One reason is "widespread fraudulent and unethical behavior" in the discount system, according to the report. Many inspectors tasked with making sure that homes had been fortified never did. Drive-by and phone inspections occurred instead. The commission recommended that the penalty for fraud be raised from a misdemeanor crime to a felony.
The discounts were also faulted for lowering the overall premium revenue that insurers collect in the state, contributing to the departure of companies that refuse to underwrite Florida properties because, insurers say, they can't charge enough to cover their risks associated with huge storms and massive losses.
The state's public insurance program took up the slack, making it one of the largest underwriters in Florida. It's called Citizens Property Insurance Corp., and it, too, saw the value of discounts rise dramatically. They rose even though Citizens' rates had been kept artificially low by lawmakers and the company was considered to lack the financial backing needed to cover the risks of a major storm.
Discounts under Citizens jumped 85 percent in one year, from $421 million in 2008 to $782 million in 2009. That means that more than one-third of Citizens' premiums now disappear in the form of discounts, also known as credits. For homeowners, the discounts have doubled in two years. Residents with a high-risk windstorm policy can now deduct on average $1,533.
"As the windstorm mitigation credits increase, the premiums charged by Citizens do not increase at the same rate causing even more inadequate [insurance] rates," the commission found in its report.
'Incentives are backwards'
That's an issue related to climate change, environmentalists say, because artificially low insurance rates can prompt increased development along the coast as scientists warn of hazards from stronger winds, heavier downpours and bigger waves surging farther onto shore.
"All the incentives are backwards," said John Kostyack, who runs the National Wildlife Federation's global warming project. "If you want to build on the coast, you don't need to take into account that storms are becoming more intense. You don't need to factor in that sea levels are rising. You don't need to prepare your home for any of these storms, because the taxpayers are coming to the rescue."
The findings come as damage mitigation, or hardening, is becoming a central effort in adapting to hurricanes and climate change.
A coalition of environmental and insurance groups developed a blueprint for the Obama administration last year that calls for higher insurance prices, strict building codes and land-planning principles that look decades into the future. Members of Congress, moreover, have proposed funding programs that would provide grants and loans to homeowners for hardened retrofits.
Insurance discounts have been one way to promote strengthened homes. But now it's unclear how effective that incentive can be. No state is hit more by hurricanes than Florida, and it has set the tone on damage mitigation.
Job opportunities in 'pre-disaster zones'
"It forces people to ask the question, 'What is the appropriate way to deal with [damage] mitigation?'" Howard Kunreuther, a risk management expert with the Wharton School at the University of Pennsylvania, said of the report. "It sends a message that we better understand the way that we should price mitigation measures, or reward mitigation measures, and they obviously haven't been rewarded in the right way."
The findings also come as state programs designed to fund home hardening through grants are drying up because of budget deficits. Florida had what many people considered the gold standard in its My Safe Florida Home program, which provided mitigation funding. It ran out of cash last June.
Climate advocates now believe there's an opportunity for funding in Congress' upcoming jobs bill. Hurricane retrofits in homes could keep a lot of people working, said Sharlene Leurig, manager of the insurance program at Ceres, a group of institutional investors and environmentalists.
"That seems to be the best chance we have in getting mitigation programs up and running in areas that should be treated as pre-disaster zones," Leurig said of federal legislation.
It's clear that Florida can't meet a heightened level of hardened homes through just insurance discounts, said Randy Dumm, who chairs the commission that developed the report. He said that is "not sustainable," adding that a mix of public funding and tougher building codes might be needed.
"Until we find ways in our system to better incentivize consumers to do those sorts of things, it continues to be a challenge," Dumm said.