Citing the potential financial risk of all Floridians being forced to cover property losses after a major hurricane, state officials are pushing to privatize the state-run Citizens Property Insurance Corp. Gov. Rick Scott, Citizens board chairman Jim Malone and state Sen. Garrett Richter appear unfazed by the extraordinary premium increases it would force onto homeowners or the negative impact it would have on the state's anemic real estate market. Privatizing Citizens or letting commercial insurers pick off the safest policies is not a solution to Florida's insurance crisis.
Politicians from both parties have warned of the systemic risk the state faces because Citizens has grown into Florida's largest property insurer with 1.4 million policies. When Citizens runs a deficit, as it did after the 2004 and 2005 hurricane seasons, nearly all lines of insurance in the state are assessed to cover the claims — though Citizens policyholders pay a significantly higher assessment. But Citizens has also built up a $4.5 billion reserve since then and has about another $1 billion lined up in financing.
Since at least February, Scott has been pushing to shut Citizens down. Records obtained by the Sarasota Herald-Tribune earlier this year found the governor's staff suggesting that Citizens be phased out in four years, even though the state's regulated private insurers warned they couldn't absorb the influx even with rate increases.
Last week, Malone suggested Citizens could shift a significant number of policies to a private company. Unspoken is what incentive the state would offer to attract a bidder since so few private insurers currently exercise the option to take policies out of Citizens. Incentives are sure to include allowing the insurer to cherry-pick policies and charge significantly higher premiums as well as banning those policyholders from returning to Citizens. Perhaps it would even include some of Citizens' $4.5 billion surplus.
In other words, the private company would get the least risky policies while Citizens is stuck with everything else. That won't solve the problem of systemic risk. Citizens, for all its faults, is serving an integral part of the insurance market and is on a glide path to stronger financial status at a far more consumer-friendly pace of 10 percent a year.
In a moment of wishful thinking, Scott claimed to reporters that privatizing Citizens could make insurance more affordable.
It might lessen the risk Floridians will pay post-storm assessments, but it's guaranteed not to lower premiums. The quickest way to kill any recovery in the housing market is to make private property insurance even more unaffordable.
Before handing off Citizens' most attractive policyholders, the state should take another look at what's really driving the property insurance crisis — including the manipulation of hurricane models used by private insurers to set rates and the high cost of unregulated reinsurance that protects those insurers after major hurricanes.