Guest Column
Should Citizens be the insurer of first resort? | Column
The state should encourage Citizens to take on more policies and to charge rates that reflect the risks — or perhaps limit Citizens to windstorm damage only.
Debris surrounds damaged homes in the aftermath of Hurricane Ian, Sept. 29, 2022, in Fort Myers Beach.
Debris surrounds damaged homes in the aftermath of Hurricane Ian, Sept. 29, 2022, in Fort Myers Beach. [ WILFREDO LEE | AP ]
Published Jan. 12

Is it in Florida’s best interest to encourage more companies to sell homeowners’ insurance? Competition is supposed to lead to lower prices and better service, but does that work for insurance companies? It might not. Here’s why.

Murad Antia is a finance instructor in the Muma College of Business at USF
Murad Antia is a finance instructor in the Muma College of Business at USF [ USF ]

Suppose you are visiting car dealers to buy a sedan. You kick the tires, look at reliability and review consumer satisfaction ratings. You pick a car. Other than warranty issues, your transaction with the seller is over. If that dealer goes under, you don’t care. You can go to another dealer to get the car serviced.

Not so with homeowners’ insurance. Homeowners are paying premiums for a service that they will need in the future. The insurers hold onto and invest the money until it is claimed in the future to repair damages. Until that time the insurers need to be responsible stewards of their policyholders’ money. But are they? How would a homeowner know?

An article in the Tampa Bay Times pointed out that in years when few hurricanes hit Florida, some insurers used premiums collected to pay their CEOs large sums of money. One small insurer paid their CEO more than the CEO of State Farm, a far larger and nationwide insurer.

Or they siphon off their positive cash flow to a sister company that provides services to the insurer at far above market prices. A reminder: The sister company executives’ compensation is not scrutinized because they are not the insurer.

This excessive compensation should instead have been reserved for paying claims in future years when the payouts exceeded the premiums collected. That is how insurance is supposed to work. So, picking an insurer that charges the lowest insurance premium might be a poor choice because shoppers have no idea about the future solvency of the insurer, or the quality of service when claims are made.

Knowing this, Mr. Flim-Flam starts Fly-by-Night insurance company, which would be easy because Citizens, the state insurer of last resort, is keen on shedding policies. To grease the wheels of its operation, Flim-Flam contributes to the coffers of influential politicians and marginally underprices policies. He is hoping that in the early years, premiums collected are substantially greater than claims paid leading to a huge net cash inflow. If that happens, Mr. Flim-Flam pays himself an ungodly sum of money as compensation because the company earned huge “profits.” He is now set for life. Actual profits would be far less if the accrual method of accounting rather than the cash basis method was used to calculate profits.

Next year the insurance company goes insolvent because claims exceed premiums collected and reserves held. But does Flim-Flam care? He is busy laughing all the way to the bank and we, the taxpayers of the state, are left holding the bag. The point is that more insurers competing does not necessarily lead to superior service and lower rates.

To fix this, the state could encourage Citizens Property Insurance Corp. to take on more policies and to charge rates that reflect the risks. A $5 million home on the water might need to pay $100,000 or more yearly for insurance. So be it. If the owner could not afford it, put a lien on the house so that the state can collect with interest the unpaid amount when the house changes ownership.

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The roadblock is that our politicians are afraid to allow Citizens to raise rates to levels that reflect the risks, which would anger homeowners who then might vote them out of office. So, we have a situation where homeowners are pressuring the government not to solve the problem. This will not end well.

An alternative: Limit Citizens to underwrite policies for windstorm damage only. This would cut the number of frivolous lawsuits. Insurance for all other risks such as fire and theft would be purchased from private insurers, who presumably would be willing to sell such policies because they would not be exposed to the massive liability that arises from hurricane damage.

Tom Cook, a retired insurance regulator, recommends that a designated mutual insurer for Florida windstorm property damage should be created. It is an excellent idea. Mutual insurance companies are owned by their policyholders. In years when excess premiums (premiums collected minus claims paid) are earned, the money is held in reserve for the policy owners for future claims.

This company or possibly more than one such company could compete with Citizens to attract policyholders. Financial metrics such as the number of policies, the total value of dwellings underwritten, amounts held as reserves as a percentage of the value of policies underwritten, administrative costs per policy underwritten, the number of claims adjusters employed per policy and the average turnaround time to service claims should be published regularly in the interest of transparency.

About 11 percent of homeowners do not insure their homes. In the event of damage and destruction, some will walk away leaving the state to clear out the mess and debris left behind. That can cost in the tens of thousands of dollars per abandoned home. So, there should be a law that every homeowner carry a minimal amount of insurance that will cover such costs.

All homeowners are currently paying a surcharge on their insurance premiums, in order to cover claims from companies that have entered receivership. Wouldn’t it make more sense to pay a surcharge which will be specifically used to subsidize homeowners to retrofit old homes so that they better withstand windstorms? It is a form of preemptive insurance.

If we are on the hook for unpaid claims, then it seems fitting that all insurers be subject to strict oversight regarding permitted investments, reserve requirements, dividend payouts and executive compensation. Like most states, Florida has an insurance guaranty association that can levy assessments to cover insolvencies, but it has little regulatory authority to prevent practices that lead to insolvencies. We are all in this together, so it is up to us to arrive at the best possible solution.

Murad Antia, now retired, taught finance at the Muma College of Business, University of South Florida.