Florida is trying to cure its insurance "disease."
State lawmakers are abandoning long-held promises to lower rates for hurricane policies -- even amid the prospect of stronger storms -- in favor of rapid hikes to rescue public insurance programs that could sink, financially speaking, during the looming cyclone season.
The sudden turnaround amounts to a sobriety test, some contend, as the nation's top and most damage-prone target of hurricanes tries to reduce its vast exposure to loss as scientists predict greenhouse gas emissions will fuel stronger winds and more powerful storm surges.
"I think that everyone's waking up," said Ron Reagan, the state's House speaker pro tempore, a Republican and an insurance agent.
The alarm can be heard, too, in the governor's office, as Charlie Crist (R) moves away from a position that helped get him elected -- lowering rates -- to acknowledging that coastal residents are bound to pay more for their risky real estate positioning.
At the outset of 2007, Crist and lawmakers imposed a rate freeze on the state-operated insurance company, Citizens Property Insurance Corp., the state's largest insurer. The move followed a political campaign season filled with pledges to hold the line on premiums, after a crushing series of storms 16 months earlier swamped private insurers and prompted many of them to retreat from the seashore.
Now, in the third year of frozen rates, lawmakers are scrambling to shore up Citizens and the state-run reinsurance program, the Florida Hurricane Catastrophe Fund. Both are short of surplus to pay claims if a massive hurricane barges ashore. That means nearly every policyholder in the state -- even inland motorists with private car insurance -- could have to fill the gap through additional fees.
Citizens' life expectancy in a storm: 'a few short hours'
"If we have a major hurricane that hits a major metropolitan area, neither one of [the programs] would be able to pay their claims," said state Rep. Bill Proctor, a Republican who introduced a bill that would allow private insurers to charge whatever they want. "Frankly, we've just dug the hole deeper since 2005."
Residents would likely pay more for those policies. But it would be voluntary, and they would never be burdened with post-storm fees, also called assessments, which can hit unsuspecting residents and businesses in the pocketbook.
Proctor's bill is one of many moving through the Legislature. It probably won't pass, observers say, but others that raise rates almost surely will.
Here's why: Citizens is almost broke. The public corporation has more than 1 million policies and about $450 billion in exposure to loss. And although there have been no major hurricanes in Florida since 2005, the program has only accumulated about $3 billion in surplus.
"Any kind of significant storm event would, or could, wipe that out in a few short hours," James Malone, chairman of Citizens, said in February.
The House Insurance Committee approved a bill last week that would raise Citizens' rates 20 percent a year until they match the real risk of living in the path of big storms. A Senate committee this week adopted 10 percent hikes annually.
"Florida is clearly beginning to recognize the extremely vulnerable position it put itself in over the past several years," said Robert Hartwig, president and chief economist of the Insurance Information Institute.
Politicians still gain from low rates
Florida is the United States' test tube on climate change. More than a dozen coastal states are experimenting with ways to insure shoreline properties as seas rise, winds strengthen and storm surges penetrate deeper inland. Nowhere is the danger greater than in Florida. The state is home to one-quarter of the country's insured coastal property, worth $2.5 trillion in 2007.
"If the price of living along the coast more accurately reflects the risk of living along the coast, as reflected in the cost of insurance, that will potentially slow coastal development," Hartwig said.
The moves in Tallahassee seem to represent a blow to the public insurance model in Florida, critics argue, noting that politicians too often seek to please constituents rather than impose far-sighted policies.
"The Legislature has typically swarmed around an issue du jour," said Florida state Sen. Garrett Richter, a Republican and the author of the bill raising rates 10 percent a year. "The previous decisions were short-term decisions to address the political issue at that time."
While the rate hikes proposed by lawmakers might seem high, they're designed to soften explosive spikes that could otherwise come. When the rate freeze expires in January, the law requires Citizens to charge policyholders "actuarial sound" premiums. Translated: The rates must reflect the real risk of living in Hurricane Alley. No more subsidies.
That could mean an instant 55 percent hike for the riskiest policyholders. "That is probably low," admitted John Kuczwanski, a Citizens spokesman.
Praying for no hurricanes
Supporters of the legislation say incremental hikes could provide a smooth "glide path" on the way to actuarial sound rates. Annual rises would continue until that target is met.
But some lawmakers wonder when -- or if -- the price hikes will stop. They warn that residents are increasingly allowing their policies to lapse, even as bigger weather risks brew.
Despite the frailty of Citizens, some officials are pushing for an extension of the rate freeze. But the alternative to raising rates, it seems, is left to luck.
"Hopefully, we won't have hurricanes this year ... and we'll be able to build up the reserves, so the increase won't be as necessary," said state Rep. Richard Steinberg, a Democrat from Miami Beach. "In the middle of a recession is not the time for the state to impose an increase in insurance rates."
The legislation also takes aim at the state's reinsurance catastrophe fund. Two years ago, lawmakers doubled its capacity to $28 billion, vastly increasing the risk to state policyholders. Now, lawmakers want to shed some of that exposure by shrinking the fund by $12 billion over six years. That means Citizens and private insurers would have to find expensive private reinsurance to fill the gap, an increase that would likely be passed down to policyholders.
State Farm: a bad neighbor?
But there's little choice; the fund is unable to issue bonds and is facing a $17 billion shortfall. With hurricane season on the horizon, state officials are asking the federal government for a line of credit to cover the gap.
"There is an acknowledgement that we no longer can bury our head in the sand," said Sam Miller, executive vice president of the Florida Insurance Council.
A grim backdrop is coloring every move in the state. State Farm Insurance, the second-largest insurer in Florida, announced in January that it will stop writing homeowners policies there. Reagan, the speaker pro tem, believes about half of the company's customers -- or about 400,000 -- could end up with Citizens. That would increase the state's exposure.
"That's the exact opposite of where we need to go," Reagan said.
State Farm's decision came after state regulators prohibited the company from raising its rates 47 percent.
Hartwig, of the Insurance Information Institute, said the pullout underscores the state's "disease" related to "suppressed" insurance rates.
"By building up its own resources, [Florida] will nurse itself eventually back to some better state of health, presumably," he said. "It's going to do that by raising rates for its policyholders."
Like what you see?
We thought you might.
Start a free trial now.