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For a better Florida

Running for cover

Solving Florida's homeowners' insurance crisis will involve some painful choices.

By JONI JAMES
Published February 19, 2006

Bill Gyorkos didn't make it to the hearing in Clearwater earlier this month when Florida insurance regulators sought public input on the rate hike, averaging 80 percent, proposed for Citizens Property Insurance Corp.'s windstorm coverage.

Gyorkos, a toolmaker, had to work. That's what you do when insurance on your 1,250-square-foot home in Largo has quadrupled in the past four years to $1,600, even though you've lived there 20 years without a claim.

"I can't keep going like this," he said. "What's worse is that nobody is talking about it. Nobody is making an issue about it.

"People are desperate."

As recently as a year ago, state lawmakers were talking about "blowing up" Citizens after its poor response to settling claims from the 2004 hurricane season. In 2005, the state-run insurance company for those who can't find coverage on the open market didn't perform much better. Plus, a kickback scandal emerged just as property owners statewide were being asked to pull Citizens out of a financial hole.

But today no one is setting a fuse to Citizens. No one dares. Blow up Citizens without a replacement for hurricane coverage and Florida's real estate engine locks up.

Nor is anyone boasting about a solution to skyrocketing insurance rates.

Of the four statewide elected officials who now appoint the Citizens board and who pick the insurance regulator, only Chief Financial Officer Tom Gallagher, a former state insurance commissioner, has offered any insurance changes.

Gov. Jeb Bush promises a plan soon. Agriculture Commissioner Charles Bronson and Attorney General Charlie Crist (who, like Gallagher, is seeking the GOP gubernatorial nomination) haven't said a word.

In fact, only last week did anyone in the Legislature, the House Insurance Committee, offer any formal plan, after weeks of fretting and procrastinating. The Senate's plan is still under wraps. And when a bipartisan set of lawmakers unveiled a longshot plan last week to return to an elected insurance commissioner, they made no promise lower rates would follow.

The reason for so much silence is simple. The most obvious solution to Florida's insurance crisis is politically unpalatable: raising rates.

Citizens, which now insures more than 20 percent of Florida homeowners, can't be fixed unless the plan also includes a way to revive Florida's shrunken private insurance market in the face of increased hurricane activity. And you can't revive the overall market without significantly higher rates to persuade private insurance companies to gamble once again on Florida's market.

The House plan, for example, would allow insurers to raise rates annually as much as 10 percent on average statewide without any regulatory review.

"No one is going to like what we have to do," said House Insurance Committee Chairman Dennis Ross, R-Lakeland, shaking his head last month in his Capitol office.

"But no one is going to like it if we do nothing."

It wasn't always like this. As recently as 2002, state lawmakers were cocksure and cavalier.

When the state-sponsored wind pool that existed before Citizens sought approval for a 40 percent rate hike for windstorm policies, lawmakers passed a law capping the increase at 10 percent.

For 10 years, the state's post-Hurricane Andrew fixes had worked swimmingly. A state-created hurricane catastrophe fund, which provided cheap backstop insurance for insurance companies, had lured private carriers back to the market. And state-backed insurance companies provided coverage for those who couldn't find it anywhere else.

Florida's property market thrived, and so did builders, bankers, Realtors and insurance agents.

But all that changed in 2004 when four storms hit the state. Citizens burned through its reserves. Private insurers said they lost 12 years of profits. Then the 2005 storms, particularly Hurricane Wilma, consumed all the new premiums collected.

The scale of the problem sank in. Repair costs were far higher due to construction demand - and meteorologists warned Florida was at the start of an active hurricane cycle that could last a decade.

"I never considered the possibility, I don't think anyone did, of having multiple-storm events," said Sen. J.D. Alexander, R-Lake Wales, a citrus grower and one of the Legislature's most insurance-savvy lawmakers. "In the back of my mind it was a possibility, but not a probability."

This year, for the first time ever, Citizens assessed all Florida property insurance policy holders to cover its $516-million deficit, as allowed under state law. Another assessment for about $1.3-billion is expected in 2007 unless lawmakers use general revenue dollars instead. Bush and Senate President Tom Lee, R-Valrico, along with several House leaders, oppose that idea.

More bad news came last month. State bureaucrats warned the catastrophe fund is likely to run out of cash before the start of the 2006 hurricane season. For 14 years, that fund made Florida a more hospitable market for insurance companies by providing below-market reinsurance policies. Now, multiyear assessments on all Florida property insurance policyholders are possible.

Rep. Don Brown, R-DeFuniak Springs, makes his living as an insurance agent. He said the back-to-back storm seasons left "a truth that is glaring at us. Citizens didn't get enough premium. People are hurting with these rate increases. And Lord knows my heart goes out to them. But the hard reality is that (Citizens) ran out of money."

As recently as four months ago, state leaders were far more optimistic about Florida's insurance future. The devastation of Hurricane Katrina along the nation's Gulf Coast, they surmised, would heighten interest in a national catastrophic fund. By spreading the risk of backstopping insurance companies nationwide, the theory goes, costs would decrease everywhere.

U.S. Rep. Ginny Browne-Waite, R-Brooksville, filed the bill on Capitol Hill. Florida Insurance Commissioner Kevin McCarty and regulators from three other states hastily organized a California summit to promote the idea. Gov. Bush, whose brother is in the White House, and the state Cabinet embraced it.

But no federal leaders signed on. As early as December, Bush acknowledged success was doubtful.

"We're working on it, but I haven't seen any of the leadership of Congress embrace the idea yet and that's a bad sign," the governor said.

So lawmakers will tweak and trim, mold and shape, with a single idea in mind: lessen risk so private insurers might return en masse to Florida.

Florida law requires insurance to be nondiscriminatory, actuarily sound and not excessive. There's no mention of "affordability."

"High rates may not be the best answer," said insurance committee chairman Ross. "But it may be the only answer."

Who is likely to get hurt the worst? The snowbirds with coastal property who depend on Citizens for insurance. And those with multimillion-dollar homes.

Who might win? Those willing to harden their homes against hurricanes.

The most radical legislative proposal by far is the idea to create two classes of insurees in the state's windstorm pool: one for homesteaded properties and one for homes owned by investors or part-time Florida residents. The latter would pay higher premiums.

Perhaps more significant is that nonhomesteaded property owners would be on their own to cover any deficits in their insurance pool. Under the plan, being pushed in the House, any deficits for claims in the nonhomesteaded account would be assessed only on other nonhomesteaded Citizens policyholders - a policy change lawmakers are hoping might encourage those property owners to seek insurance from surplus lines, policies sold by unregulated companies.

Little would change for homesteaded owners in Citizens, though the House has floated the idea of basing rates for homesteaded properties on 50-year storm cycles, rather than the current 100 years.

And they'd still get to tap every residential insurance policyholder when the pool ran a deficit.

A favorite of the House leadership, the plan has yet to receive a financial analysis on how much such a program might ease Citizens' overwhelming risk. But lawmakers are betting it could be huge. No longer would all the state's policyholders be the backstop for damage to million-dollar seaside mansions belonging to non-Floridians.

"What obligation do the citizens of Florida owe an investor to subsidize their investment?" Brown asked. "If we owe anyone, it's the homesteaded property owner."

Other ideas in the works:

* Cap claims in Citizens' windstorm policies at $1-million, forcing those 6,000 high-end policyholders currently in the pool to buy additional coverage from out-of-state insurers. Bush has suggested an even lower threshold, $500,000, might be appropriate.

* Consider shifting all windstorm coverage to the state windstorm pool with significant changes in its structure. Claims would be administered by private insurance agents, whose professional organization, the Florida Association of Insurance Agents, first floated the plan. The agents would earn a serving fee.

The upside would be an end to Citizens' troubled administration. The downside is it would remove any private capital from hurricane risk, placing it all on Florida's government and taxpayers. Plus, the plan provides no incentive for private insurers to be judicious in settling windstorm claims on the state's behalf.

Alexander's counterproposal favors keeping private insurers responsible for 25 percent of any windstorm policy and for collecting 25 percent of the windstorm premium. That, he believes, would insure prudent claims administration.

"I want them to do the right thing by policyholders, but I also want them to do the right thing without spending another 10 to 20 percent of the windstorm pool's money," Alexander said.

* Repeal the Florida Panhandle's exemption from the state's building code.

"I hope everyone realizes after the last two years that that has got to change," Bush told the Florida Chamber of Commerce earlier this month.

* Provide funds to help Florida homeowners harden their homes against hurricanes. The governor has proposed spending $50-million in grants to help low-income homeowners retrofit their homes. But legislators are also contemplating a no-cost loan program to serve a wider economic spectrum all along the coast.

The problem, said Rep. Don Brown, is insurance companies can't discount rates enough to make mitigation options - such as hurricane shutters - economically rational for most families. Only $500 of an annual premium might be due to windstorm damage, he noted, and a $150 discount annually doesn't go very far in buying $6,000 worth of shutters.

"We want to motivate people as much as we can to protect their families and homes," Brown said.

Because protection from higher insurance costs won't come anytime soon.

Staff writer Tom Zucco contributed to this report. Joni James is the Times deputy Tallahassee bureau chief. She can be reached at 850 224-7263 or jjames@sptimes.com

[Last modified February 17, 2006, 18:36:02]