What Should Be Done To Solve Florida's Property Insurance Crisis?
Both Citizens and the Cat Fund are just a single major hurricane away from financial insolvency -- potentially leaving Citizens' million policyholders without the resources to rebuild following a storm.
April 28, 2009 /24-7PressRelease/ -- What Should Be Done To Solve Florida's Property Insurance Crisis?
Article provided by Williams Law Association, P.A. Visit us at www.sinkholelawyer.com
A financial storm is brewing in Florida. Citizens Property Insurance Corporation, the state-operated insurance company founded in 2002 as an insurer of last resort, has become the state's largest insurer. Citizens is backed by a state-run reinsurance program, the Florida Hurricane Catastrophe Fund (known as the Cat Fund).
Both Citizens and the Cat Fund are just a single major hurricane away from financial insolvency -- potentially leaving Citizens' million policyholders without the resources to rebuild following a storm.
Florida legislators recognize that they must take action quickly to reduce the potential repercussions of a catastrophic hurricane. However, any action must balance a wide range of competing interests, which has prevented any single proposal from emerging with universal support among the people of Florida.
The Problem Facing Florida
Understanding the benefits and limitations of the proposed options first requires a thorough understanding of the current situation. Since early in 2007, the Florida state legislature has prohibited Citizens from raising insurance rates. This restriction, which extends until January of 2010, came as the result of soaring insurance rates in the wake of storms in 2004 and 2005.
As a result of this rate freeze though, the costs of property insurance in Florida do not accurately reflect the risks of living in coastal areas. These artificially low rates have left Citizens without the surplus necessary to cover the damage that would result from a major storm, and any significant storm could wipe out the corporation's funds in just a few hours.1
The problem extends beyond Citizens inability to pay claims, though. Insurance companies generally purchase reinsurance to cover the cost of excess exposure and mitigate the costs of damage claims. Unfortunately, Citizens reinsurer, the Cat Fund, is not in better shape to weather a storm.
The state-run Cat Fund relies on its ability to issue bonds to generate the funds necessary to cover losses. In light of the current credit markets, it is unlikely the Cat Fund could raise the necessary funds through the issuance of bonds. State officials are asking the federal government for a line of credit to support the Cat Fund, but thus far Congress has not approved the request.2
In the event of a major storm, nearly every policyholder in Florida could be required to compensate for these shortfalls through additional fees and assessments.
Proposed Legislative Solutions
Recognizing the looming disaster, several legislators are taking action. Proposed legislation in both the House and Senate would allow Citizens to raise insurance rates until these rates are "actuarially sound" but would limit the annual rate of increase.3 Both of these leading proposals would use a portion of the premiums to help Floridians strengthen their homes to better weather storms. Additionally, both would gradually reduce the limits of the Cat Fund so that Citizens would rely more heavily on private reinsurance.
However, these are not the only ideas. Recognizing that a recession is a terrible time to raise insurance rates, Senator Mike Fasano and Representative Eddy Gonzalez have proposed extending the current rate freeze.4 Representative Bill Proctor has suggested that the best option is a loosely regulated market, where qualified insurers could charge any rates they deem appropriate.5
The Best Answer?
Ultimately, the problem is that there is no best answer. The Florida legislature is searching for the best option in a bad situation, and none of the proposed solutions address all of the concerns.
No one doubts that this is a bad time to raise insurance rates. As is true across the country, the Florida economy is struggling. Everyone is seeking to cut expenses, and even a gradual increase in insurance rates may leave many in a bad position.
Among other things, a significant increase in insurance rates may prompt homeowners to let their insurance policies lapse. If this happens in sufficient quantities, the consequences of a major storm may be even more catastrophic than predicted.
However, in the absence of a rate increase, Citizens and the Cat Fund simply cannot cover the anticipated financial obligations following a major storm. The gradual increase will not immediately remedy this situation; it will take time to build reserves and balance the potential costs and risks. However, the gradual increase allows homeowners to adjust to the changes, while simultaneously shoring up a weak system. Furthermore, the proposed increase ensures that eventually homeowners will bear the risks of living on coastal property, rather than distributing this burden across all Citizens policyholders.
As legislators debate the merits of individual proposals, only one thing is indisputable: the current policies are not fiscally sound. Gambling on the weather is not a viable strategy for the state of Florida, and the legislature must take swift action to protect the state's financial future.
1. Fla. Lawmakers 'Waking Up' to Insurance Failures, Evan Lehmann, N.Y. Times, Apr. 9, 2009.
2. Florida Seeks U.S. Help to Back up Hurricane Catastrophe Fund, Beatrice E. Garcia, Miami Herald, Apr. 10, 2009.
3. HB 1495; SB 1950.
4. SB 862; HB 1273.
5. HB 1171; SB 2036.
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