Refocus on facts: Citizens insurance still a time bomb

Published Sept. 4, 2012

Florida's recent luck with Mother Nature has distracted the state's media, which is investigating relatively small issues at Citizens Property Insurance Corp. while ignoring the fiscal time bomb that is our property insurance market.

Some editorials say the Board of Governors of Citizens is "skirting the law" for considering responsible premiums for new customers, or "offering bribes" for encouraging private insurers to return to hard-hit areas. The senior staff of Citizens is portrayed as "spending lavishly" for not eating fast food while urgently scouring the globe to secure billions to pay claims and avoid "blue tarp Florida" after the next storm. It's time to refocus on the facts.

Lest we forget, today's premiums are suppressed by relying on assessments to retire the inevitable future debt. Some claim Citizens can "handle another Andrew without assessments," due to reinsurance and "surplus" built during the lucky run since 2005. The truth is more complex.

First, Citizens' "probable maximum loss," geek-speak for the likely cost of a storm with a 1 percent annual chance of striking, is four times its surplus, around $24 billion. That's according to scientists, who — with all due respect — have never met an aggressive Florida public adjuster or attorney. Financial projections of recent storms have been underestimated; Wilma's cost overruns amount to billions in just the past few years.

Second, $7 billion of Citizens' reinsurance is provided by the Florida Hurricane Catastrophe Fund. But the fund finances its promises with assessments on the same Floridians. You'll pay the same hurricane assessments whether the money is borrowed by the Cat Fund or Citizens; only the name on the bill will be different.

All this means the odds of future assessments are greater than you might think — better than 50-50 over the typical mortgage term.

Third, Murphy's Law could apply. The current arithmetic depends on the bond markets' willingness to lend billions quickly after a big storm to a state whose economy will soon be burdened by billions in new assessments. It further presumes every homeowner, driver and business owner will pay those assessments without delay, objection or avoidance. Is anyone sure everything will go just as planned?

Finally, the big question the critics avoid: Even if we defer funding the risk, and assume everything goes well after the storm, what do we do then? Citizens and the Cat Fund will start over broke, Florida will be further in debt, future generations can anticipate decades of assessments, and all those property insurance policies must still be renewed using someone's money to back the promises. Sounds like the "plan" right now in Washington, doesn't it?

Political and media leaders should respect Floridians and tell them the truth. Property insurance is expensive for two reasons. First, Florida holds 60 percent of the hurricane risk in America. Billions must be ready on demand to pay claims when the wind blows. Nobody risks that kind of money without charging up front. If you disagree, you should guarantee your neighbor's mortgage for free, since it "costs" you nothing now. That cost of capital, around one-third of your premium, can only be lowered by loss mitigation — not encouraging coastal overdevelopment with low Citizens premiums.

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Second, premiums must also fund routine claims, which have skyrocketed. Except for its coastal pool, Citizens actually lost money last year despite no hurricane strikes. It was inundated with claims for sinkholes and water damage, often pursued with help of third parties gaming the system. It takes many premium checks to pay for one big claim, and regulated rates follow costs — it's that simple. The solution is fewer middlemen and law changes to stop the claims "lottery."

Those truly unable to afford property insurance should be compassionately assisted by means-tested programs, not fantasy rates. It is unfair to subsidize waterfront residences by millions each year and penalize most Floridians, who cannot afford to pay their own property insurance bill and part of another's.

Citizens volunteer board and staff are diligently vetting many ideas to attract private sector capital and heal our property insurance market. It may be cathartic to criticize oversight and question expense reports, but responsible leaders should know it's more productive to educate Floridians on the risk and options for handling it.

John Rollins is a member of the Board of Governors of Citizens Property Insurance Corp. and an independent consulting actuary.