With the state capital consumed by the budget crisis, the property insurance crisis is no longer center stage. Yet coverage remains unaffordable and often unavailable in many areas, and the enormous financial risk the state and its residents have assumed for hurricane losses has not produced significant benefits. Lawmakers are still tinkering, but their efforts lack a coherent focus.
Most unsettling is a Senate bill that encourages expansion of the state-run Citizens Property Insurance Corp. and extends the reliance on luck rather than sound rates. The rate freeze that is scheduled to expire at the end of the year would be extended through 2009. That may be good election-year politics, but it is financially irresponsible. Citizens' rates are not actuarially sound, and more than $10-billion in assessments on all insurance policyholders would be required after a 1-in-100-year hurricane. The strategy of delaying financial pain until after a storm in return for lower rates now has been extended too far. A better approach would be to start gradually increasing Citizens' premiums next year instead of risking huge premium increases or assessments later.
While senators are sensitive to raising premiums, they are perfectly willing to transfer risk and costs in other ways. The Senate bill would allow Citizens to start insuring homes worth $1-million or more. That means less affluent Floridians who struggle to afford a home would help pay to rebuild the homes of far wealthier residents after a major hurricane. There is a public purpose in spreading the risk of hurricanes as broadly as possible, but this cost shift would be fundamentally unfair.
Another provision would create a more immediate financial hardship. As Florida endures an economic recession, owners of homes with an insured value of $500,000 or more in high-wind areas such as Pinellas would have two years to install hurricane shutters or similar protection. No shutters or shatter-resistant windows, no coverage from Citizens in 2011. While this is a well-intentioned attempt to harden homes and reduce Citizens' risk, many middle-class Floridians struggling to pay mortgages in overvalued houses would find this mandate difficult to meet. If homeowners cannot find insurance and cannot get into Citizens because they cannot afford to spend thousands on shutters, how are they going to keep their mortgages and stay in their homes?
There are some bright spots. The number of Citizens policyholders has slipped to 1.2-million, reversing an upward trend as private insurers have taken out more than 250,000 policies in the past year. More than a dozen small, instate companies also took advantage of a $250-million state incentive program. The House is wise to seek to extend that program and help grow more local insurers — but certainly not by taking money from Citizens.
Most importantly, legislators are embracing Chief Financial Officer Alex Sink's proposal to reduce the state's risk regarding the Hurricane Catastrophe Fund, which offers cheap reinsurance to insurers. There is legitimate concern that the state would have trouble selling bonds in the difficult financial markets to cover CAT fund liabilities, and the assessments on Floridians to pay back the money would be untenable. The CAT fund sold an additional $12-billion in reinsurance last year in a partially successful attempt to reduce rates. The Senate would reduce that total by $3-billion, and Sink suggests it might be possible to cut further without affecting homeowners' premiums.
That is a step in the right direction. But legislators have to be willing to responsibly reduce exposure with both the CAT fund and Citizens, which can each assess policyholders when they run deficits. Tackling one but avoiding the other for political reasons would be a mistake that would prove costly after a hurricane.