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Politics

Reforms mean insurers compete

By CHRISTOPHER M. KISE Special to the Times
Published February 6, 2007

Florida's recent bipartisan insurance reforms signed into law by Gov. Charlie Crist represent a measured response to a deepening crisis through the appropriate use of government's fiscal and regulatory stimulus to induce a more competitive free market. Of course, had insurers self-policed, government intervention would have been unnecessary. But since there is simply no possible rational justification for 500 percent single-year premium increases on a $150,000 non-coastal home, this appears, for now at least, unlikely.

For too long, Floridians had been subjected to the same insurance industry rant: "The risks are too great and the rates are simply too low. Let us raise rates and you will then see real competition." But remember how we arrived at this breaking point. For the past several years, the private market has been shedding the higher-risk (and more abundant in Florida) coastal properties. Those properties landed in the state-run Citizens Property Insurance Corp. Yet even while the private market risk profile improved at taxpayer expense, private market rates (and corresponding profits) continued to escalate at unprecedented levels.

Faced with mammoth rate increases and the realization that, like it or not, Florida was already in the insurance business, Gov. Crist chose wisely to lead the state in a new direction. Under the new law, government displaces to an extent and for a limited time the overpriced, highly profitable private reinsurance market. Far from an abandonment of the free market, this responsible solution both lowers rates and induces free-market competition. By requiring insurers to pass savings through to the consumer, this lower cost reinsurance translates into lower policy premiums. This has at least two benefits: Consumers get immediate reductions in premiums, albeit differential reductions depending on the company and the property location; and consumers get more choices once reinsurance savings are reflected in the rate structure.

For example, suppose right now Company A charges $2,000 to insure your home. Company B, a competitor, quotes you a rate of $2,200, or 10 percent more. If you are like most consumers, you will likely stick with Company A. After implementation of the new law, Company A reduces its rates by 7 percent but Company B reduces its rates by 20 percent, the difference in savings due to the difference in the price each company pays currently for reinsurance. Thus Company A will charge $1,860, but Company B will charge $1,760, or 5 percent less than Company A. You may now consider purchasing insurance from Company B. Company A will have to match the lower rate or lose your business. To remain competitive, Company A may decide to reduce its underwriting profit or become more efficient, or both, in an effort to lower the rates it offers to consumers and capture more market share. No matter your choice, the net result of government intervention will be both lower rates and increased competition.

The reforms applicable to Citizens will likewise result in lower rates and more competitive choices. Moreover, because the aforementioned overpriced, highly profitable reinsurance market has been displaced, those market participants may need to make similar adjustments to become more competitive and re-enter the market.

Perhaps in time the insurance industry will return to competitive free-market behavior without the need for government intervention or stimulus. In the interim, Florida's governor has scored an unexpected victory for the people through a responsible approach to a crisis threatening both personal quality of life and continued economic expansion.

Christopher M. Kise is counselor to Gov. Charlie Crist.

[Last modified February 6, 2007, 01:03:42]