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A Times Editorial

A failed insurance market

Reading the recent headlines regarding Florida's property insurance crisis is as depressing as watching gas prices rise. State Farm, the state's largest private insurer, wants to increase rates by an average of 47 percent. The state is paying $224-million to Warren Buffett's Berkshire Hathaway company for the privilege to borrow up to $4-billion to help the Florida Hurricane Catastrophe Fund pay claims if it comes to that. But there isn't any money left to cover free home inspections for responsible Floridians who want to learn how to harden their houses and qualify for discounts in premiums.

It does not take an actuary to figure out the trend lines aren't good. The state's efforts to make property insurance more accessible and affordable are not working. Hope and prayer for another hurricane-free season are the only things standing between Florida and financial disaster — and they aren't enough to substantially lower rates.

State Farm's proposed rate increases, which could be as much as 91 percent in parts of Pinellas County, are untenable for many homeowners. The company already is dropping 50,000 coastal policies and not writing new ones. This request suggests it is not all that interested in doing business here. Regulators should take a close look at the hurricane models State Farm used to justify the rates and how much reinsurance it is buying from itself.

But this rate filing is only the latest indication that the private insurance market remains broken, perhaps irretrievably. Paying Buffett's company a quarter-billion dollars in Cat Fund cash so it will loan the fund money that policyholders would have to repay is highway robbery. It was a desperate but necessary move to reduce the Cat Fund's exposure after a major storm — something the Legislature should have done but failed to during the regular session.

Before Florida's luck runs out, the state has to take more drastic steps to protect homeowners from premiums they can't reasonably pay before a hurricane and risk they cannot reasonably shoulder for damages afterward. Legislators who expect competition among private insurers to correct the situation are kidding themselves. The free market has failed. Chief Financial Officer Alex Sink's vision of a market where 30 companies each have 3 percent of the business now concentrated in a handful of large companies and the state-run Citizens Property Insurance Corp. is attractive. But small new insurers take time to grow, and they can easily go under if they do not have enough capital. In the meantime there are other areas to explore:

• Eliminating the ability of insurers such as State Farm to use spin-off companies to contain losses and maximize profits for the parent company. It was a mistake to allow these so-called "pups" to be created following Hurricane Andrew, and last year's move to prevent any new ones is not enough.

• Reducing the exposure of the Cat Fund. The fund could be liable for $28-billion in damages but has access to about $8-billion. The relatively modest reduction in some homeowners' premiums has not been worth the additional risk. If the Legislature had listened to Sink and reduced the fund's exposure by several billion dollars, the state would not have had to pay Buffett for the right to borrow money from his company after a major hurricane.

• Studying whether it makes sense for the state to set rates for hurricane wind coverage and hold the premiums. Private insurers would issue policies, collect premiums and settle claims. It might not work, but the current system sure isn't working.

• Finding more money to pay for more free home inspections. My Safe Florida Homes hit a few bumps, but by next month it will meet its goal of providing 400,000 free inspections that show homeowners how to fortify their homes by adding hurricane shutters and other reinforcements. Those homeowners can then qualify for property insurance discounts and sleep a bit easier as the next storm approaches.

Of course, every move by the state triggers a countermove by the insurance industry.

One of State Farm's justifications for an enormous rate increase? Those darn discounts insurers are required to give homeowners for making their houses stronger.

A failed insurance market 07/19/08 [Last modified: Tuesday, July 22, 2008 8:21pm]
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