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House offers wise rate cuts

As Florida legislators head into a weekend of negotiations on a property insurance bill, they are wrestling over how the state would assume more risk after a monster hurricane in return for lower premiums now for homeowners. Gov. Charlie Crist and state lawmakers need to be extremely careful about overpromising rate cuts to Floridians desperate for relief and jeopardizing the state's future financial stability. As House Speaker Marco Rubio said Thursday, the legislation expected to come up for a final vote Monday has to be both meaningful and responsible.

The consensus is that the best way to prod insurers to lower rates is to reduce their liability after a Katrina-type hurricane. The House would offer an additional $12-billion in low-cost reinsurance to insurers, which would each decide whether to buy the coverage. The Senate would take a radically different approach, guaranteeing that the state would pay roughly $13-billion in insurance claims after a $40-billion hurricane. Insurers would not pay anything up front to take advantage of that guarantee, and the state wouldn't decide how to come up with its money until after the storm.

The House plan is the prudent, fiscally responsible approach. Insurers would pay for coverage up front, and taxpayers' liability would not be so open-ended. Insurers would be required to pass on their savings to their policyholders and cut their windstorm premium by at least 25 percent. The down side is that insurers would not have to sign up for the coverage, so there is no guarantee that every homeowner would see a significant reduction in his or her rates. But the state should require that insurers that buy reinsurance from their parent companies or elsewhere pay no more than the price offered by the state for the additional reinsurance.

The Senate's proposal to cut rates now and pay later if a major hurricane hits is tempting as angry homeowners clamor for help. There is a greater likelihood that all homeowners would see significant reductions in their premiums, and it wouldn't cost the state or insurers a dime up front. Fiscally conservative senators argue that the state always would be forced to spend billions after a major hurricane that bankrupts small insurers and causes widespread devastation. They say their approach only puts the state's obligation in writing and besides, the federal government would ride in after a disastrous storm.

But the Senate plan is really writing a check now with no money in the bank to cover it, and we share Chief Financial Officer Alex Sink's concerns about its viability. The state's potential liability would be equal to roughly 20 percent of the annual state budget. It could damage the state's financial position with the bond markets, and it appears to be at odds with constitutional restrictions on how the state can borrow money. It could force substantial cuts in state services and trigger a 1-cent increase in the state's sales tax. The last thing Floridians would want to see after their homes and neighborhoods are destroyed by a disastrous hurricane is an inevitable tax increase or a reduction in services when they need help the most.

Keep in mind that there will be tremendous demands on general tax money after a major hurricane even without the Senate's plan. After Hurricane Andrew in 1992, increased state revenue from the recovery effort in South Florida went to rebuild. Policyholders would face huge assessments for deficits in the state's Citizens Property Insurance Corp., and there would be pressure to kick in tax dollars to lessen that burden. The situation would be similar with the state's existing Hurricane Catastrophe Fund, the existing reinsurance account which also would have to assess policyholders and borrow money to cover up to $16-billion in damages.

The rush by the governor and state lawmakers to fulfill campaign promises and cut property insurance rates is understandable. The crisis is real, and Floridians need real relief. There is little sympathy for an insurance industry that jacked up rates, didn't renew thousands of policyholders who have never made claims and pocketed $59-billion in national profits last year. But the governor and the Legislature also have a duty to responsibly manage the state's financial obligations and look beyond the next headline. To latch on to any idea that would let them claim big rate cuts now without regard to the consequences later would be irresponsible.

[Last modified January 19, 2007, 01:34:30]