By HOWARD TROXLER, Times Columnist
Published August 30, 2005
Think about fire insurance. As a business, fire insurance makes perfect sense.
Millions buy it. Only a few have fires. The losses are predictable, a matter of statistics.
Car insurance too. Insurance companies are good at predicting how many folks will have wrecks. So they have a solid basis for setting their rates.
Now, what would happen if every single customer of State Farm Insurance had a car wreck or a fire tomorrow? What if even half of them did? Huge problem.
The key idea behind insurance, the reason that we invented it in the first place, is that bad things don't happen to a lot of people all at once .
Hence the challenge of homeowners' insurance in Florida. After decades of luck and laxity by all parties concerned, we are living in a new age of harsh reality.
After Hurricane Andrew, and as shown yet again by Katrina, we realized that even a slight turn can make the difference between a small loss or - in the current worst-case scenario - $125-billion.
That range of loss can't be predicted in the same manner as car wrecks and house fires. Neither can it be covered under the ancient model of, "Let's all chip in a little bit this year to cover this year's statistically predictable losses."
Given that reality, the truly big news in Florida over the past year might be that the homeowners' market has not collapsed utterly, thanks to post-Andrew changes. Some companies are not writing new policies, but some smaller ones are. The state's "last resort" insurance company is not growing any faster.
I'm not taking the insurance companies' side, nor endorsing predatory or cut-and-run tactics. I'm stuck in the state's "last resort" pool just like a bunch of other Florida policy holders. Ouch.
But anybody who thinks this problem is simple is wrong. We can't just pass a law saying, "Okay, you no-good so-and-sos, you HAVE to sell homeowners' insurance if you want to stay in Florida. You can't cancel anybody, either. And you can't jack up your premiums."
Kevin McCarty hears that get-tough theme a lot. He is the state's top insurance regulator. Angry people ask him about get-tough laws everywhere he goes. He explains that (1) more companies would just leave Florida, making things worse and (2) it makes little sense to command, say, an auto-only insurer to enter a different kind of business.
"I even talk to people who call themselves conservative free-market people, and they ask that question too," McCarty told me. "But it is an appropriate topic for public debate. And I think it's going to be explored, whether I think it's a good idea or not."
We spoke last Thursday, a few hours before Katrina first made landfall. Great timing. McCarty's overall message was that Florida has to do a lot of different things to improve the insurance market. The feds need to do some things too.
One of the key problems is that insurance companies can't cover the upper end of their potential losses with "reinsurance," McCarty said. Reinsurance is, basically, insurance for insurance companies.
I asked: Well, didn't Florida start its own "catastrophic" fund after Andrew for that very purpose? Why didn't that work?
McCarty replied that it has worked great. It's how we got through 2004 without a market collapse. Even so, Florida's fund is only a fraction of the worst-case loss.
His recommendations are not glamorous. Florida has to get more Floridians to retrofit their homes. We have to keep strengthening building codes, keep building the catastrophic fund.
Part of the job belongs to the feds, he said. Perversely, our tax code punishes insurance companies for building up reserves that carry across the years. And the United States ought to have a national catastrophic fund. Congress is starting to look at it.
Not simple, and not emotionally satisfying either. But Florida has more exposed coastline than any other state. We keep building on it, and what we build is more and more expensive. Either we create a new private-sector model that works, or else have the government take over the whole shebang. Talk about a worst-case scenario.
