A Risky State To Cover

By DENNIS A. ROSS Special to The Tampa Tribune

Published: Jul 9, 2006

The numbers speak for themselves: Florida has been struck by hurricanes eight times in less than two years. These storms resulted in $39 billion in damages, and hurricane experts believe we have yet to hit the midway point in a 30-year cycle of above-average hurricane activity.

The past two storm seasons, coupled with the threat of future storms, are causing some insurance carriers to leave the state, while others are being highly selective in renewing existing policyholders. The rise in the cost of property insurance has financial impact on homeowners, condominium owners, manufactured home owners and business owners - practically anyone who pays a mortgage or rent in the state of Florida.

During this election season, many politicians will use this opportunity to point fingers and provide "overnight" cures. Those cures, however, will require rate freezes or rate subsidies - all, ultimately, at the expense of Florida taxpayers.

At a time when we should be working in unison to find solutions to protecting our homes and businesses from the ravaging winds and rain that hurricanes cause, some political aspirants choose instead to politicize hurricanes for their own personal gain.

Their promises of immediate lower insurance rates are a shell game. Ultimately, these political "quick fixes" will result in higher taxes to make up the difference between where actuarially sound premiums should be and where the suppressed rates actually are.

To determine the source of the collapse of the Florida property insurance market, we need look no farther than the 2005 hurricane season. Citizens Property Insurance Corp., the government-run insurer of last resort, by law must charge the highest rates in the state so as not to compete with the private insurance market. Conversely, private insurers must charge rates less than Citizens'. Citizens was charging rates so severely suppressed that it endured a $2 billion deficit, solely due to the 2005 storm season. If Citizens, theoretically charging the highest rates, cannot at least break even, how can the private insurance carriers compete at lower rates?

To make up for the $2 billion Citizens deficit, and in order to pay its claims, Citizens required a cash infusion. That infusion could come from only two sources: either policyholders other than Citizens policyholders or Florida taxpayers. If it were to come from the policyholder, it would have meant a substantial surcharge on every homeowner's policy in the state, an additional charge of $200 per $1,000 in premium. The other route was to make up the deficit with tax revenues.

The Florida Legislature this past session chose a blend of the two options. It used $715 million of surplus sales tax revenues and a smaller surcharge on homeowners' insurance policies spread out over the next 10 years to alleviate this deficit.

In addition, the Legislature this year passed legislation requiring Citizens to be actuarially honest in its rate filings. This means premiums must be sufficient to cover the risk Citizens insures, so that if Florida should endure another serious hurricane this year, it will have the funds to pay resulting claims without again depending upon surcharges or tax revenue.

To be fair, Citizens should not be singled out as contributing to our collapsed insurance market. The rising cost of reinsurance, which is included in the rate paid by consumers, is another factor. Reinsurance is the insurance that insures insurance companies. It spreads the risk globally; thereby helping keep costs as low as possible.

Storms in Florida and the losses in neighboring Mississippi, Alabama and Louisiana have combined to cause reinsurance rates to rise dramatically. For example, one major private insurer paid slightly more than $200 million for reinsurance in 2005. This year that same insurance company is paying close to $800 million for the same reinsurance. Well-capitalized carriers may not be able to find all the reinsurance they need at any price and not-so-well-capitalized carriers may not be able to get reinsurance at all.

Either case may result in the insurer shedding some of its risks, keeping its existing risks or possibly incurring claims it can't pay. Those claims are then paid by the Florida Insurance Guaranty Fund, which ultimately may be subsidized by tax dollars.

Another contributing factor is the rapid increase in property values. Much of that increase is due to the dramatic rise in the cost of building homes and other dwellings. Property values have increased 25 to 30 percent just in the last couple of years. It goes without saying that the higher the value of an insured property, the higher the cost to insure it.

In addition, Florida has experienced unprecedented growth and development, especially in its coastal areas, which are at greater risk of incurring storm damage. This growth has contributed to a shortage in supply, or capacity, of insurance available for sale. Insurance, like any other commodity, is finite; there is not an unlimited supply. As demand becomes greater, supply - or, in this case, capacity - to meet the demand becomes less.

The "fix" to the property insurance crisis is not any easy overnight cure. However, if politicians, policy makers and regulators are honest about what is in the best interest of the Florida consumer, then they must all agree that private capital provided by private insurers and not taxpayer dollars should be used to cover the property risks of this state.

After all, insurance is the transfer of risk from one entity to another. We can choose to transfer that risk either to private insurers or to the taxpayers of the state. With more than a trillion dollars in property values at risk in Florida, I believe it is our responsibility to the taxpayer to create a competitive market of private insurers whereby competition will stabilize and lower insurance rates.

In addition to taking steps to revitalize the private market, homeowners should exercise personal responsibility in the locating, building, maintaining and retrofitting of their dwellings in order to withstand hurricane-force winds. Homes that are built to the stronger building codes enacted in 2001 are structurally more sound and better-equipped to withstand storm and hurricane-force winds.

Unfortunately, there are literally millions of homes built under less stringent building codes. That is why the Legislature appropriated $250 million in matching grants for homeowners to retrofit and harden their existing homes as part of the property insurance package approved this past session.

This amount, however, is merely a down payment. We need to commit much more money every year to harden the dwellings of our vulnerable Florida residents. It is far better to invest in the prevention of hurricane damage than to have to invest in cleanup after a storm. Homeowners who invest their dollars to mitigate the risk of hurricane loss should, without question, receive an adequate discount or credit on their insurance premium.

The bottom line is this: The more we can do to prevent damage to our homes, the less we will have to pay to insure against the dangers of hurricanes. We must assume the personal responsibility to protect our property. The only other solution is to allow politicians to utilize taxpayer dollars and impose artificial rate freezes to lower rates.

In reality, such a solution not only drives out the private insurance market, but also requires everyone to pay more - even those who accepted personal responsibility and built stronger homes and built them in places less prone to hurricanes.

While there is no quick fix to our state's insurance crisis, the measures taken by the Legislature this session are a positive first step in providing the incentives and assurance needed by private insurance companies to re-enter the state and bring back a competitive, affordable marketplace.

The problem will not be solved overnight, but with a long-term plan such as the one passed by this Legislature. We are moving in the right direction and taking a proactive stance in revitalizing our faltering market.

State Rep. Dennis A. Ross, R-Lakeland, chairs the House Insurance Committee.