INSURANCE: Property coverage costs too much and is too hard to get. What to do?

For a better Florida: Issues facing the 2007 Legislature

Published February 18, 2007

The Florida Legislature spent a week in special session in late January trying to fix the state's deepening property insurance crisis. When it was over, the reactions ranged from confusion policyholders to disappointment (the insurance industry) to guarded optimism (most lawmakers).

That was just the initial fallout.

"What's still left to be done?" House Minority Leader Dan Gelber, a Miami Beach Democrat, asked recently.


First, let's look at what happened.

Lawmakers changed the insurance landscape in two major ways:

- They allowed companies to buy more inexpensive reinsurance from the state-backed Florida Hurricane Catastrophe Fund (CAT Fund), with the provision that the savings be passed on to policyholders. Estimates run from 10 percent to 35 percent.

Good news, except that it will be at least April, after insurance companies make their rate filings, before we know what those savings will be.

- In what may turn out to be the most profound change of all, lawmakers also froze rates for policyholders of state-run Citizens Property Insurance at 2006 levels, and allowed Citizens to compete with the private market. Citizens no longer has to charge the highest rates, and it can sell other lines of coverage, such as fire and theft.

State regulators estimate that allowing the insurer of last resort to be competitive could add as many as 700,000 more policies to the 1.4-million the company already has. That would give Citizens close to half of the entire property insurance market at year's end.

By then, Florida will not only be in the insurance business. It will be the insurance business.

Fearing that insurance companies might try to sneak a rate hike or policy cancellations in before the law took effect, Gov. Charlie Crist and the Florida Cabinet stepped in a week after the session ended with an emergency order that placed a 90-day moratorium on premium increases and cancellations for those whose policies expire after Jan. 30.

None of this went over well with the insurance industry, which filed legal challenges last week, saying it was improper to bar them from dropping policyholders. The industry is also unhappy that Citizens is now allowed to compete.

The Florida Insurance Council, the state's insurance trade group, argues that for the next three years, taxpayers would assume up to twice as much liability as they do now if the state is hit by major hurricanes, and that homeowners in inland parts of the state are unfairly subsidizing those who live on the coasts.

But the private market also got some concessions. National insurers can still have Florida-only subsidiaries, and rate requests won't take into account the massive profits of a company's parents.

Critics of the insurance industry argue that its basic philosophy has changed from spreading risk to narrowing it, and they point to Florida as Exhibit A.

For most property insurers, Florida is not a good place to do business because hurricane models predict an increased risk of storms in coming years.

So to make their companies more attractive to shareholders, insurers pare down their greatest risks, which in Florida lay along the coast. The companies either stop writing new policies, get rid of existing policies, or both.

Nationwide, Liberty Mutual, Tower Hill, Hartford and others have done some of that, but no company matches Allstate Floridian, which has shed nearly 250,000 policies in the last two years.

"We're committed to the Florida market," said Allstate Floridian spokesman Adam Shores, noting that the company has an agreement with Royal Palm Insurance to take some of the dropped policyholders.

"But we have to make appropriate business decisions.

"We're looking at the necessity to pursue legal action to the emergency order because not being able to charge an appropriate rate, and to manage our book, severely affects our ability to maintain our role in the marketplace."

As the Legislature prepares for the regular session next month, many lawmakers say they have heard little in the way of hard opposition to the CAT Fund part of the new law.

It's the Citizens part that's drawing the most attention, and that's where the Legislature will likely focus.

Sen. Bill Posey, a Rockledge Republican who is chairman of the Senate Banking and Insurance committee, acknowledges that while the new law will lead to a rapid expansion of Citizens, the alternative - homeowners unable to find coverage or paying sky-high premiums - is far worse.

The ultimate solution, Posey says, is not a regional or national catastrophe fund, as many have suggested, primarily because Florida has done a better job than other states preparing for disasters and hardening homes.

"We'll be the donor," Posey said, "more than the collector."

Instead, he said, the answer lies in hardening homes, especially those built in the 1970s to early '90s. Those who can't afford to pay for mitigation could borrow the money and pay it back with the discounts from their premiums.

Assuming they get a discount.

"Well, there ought to be a minimum standard for premium discounts," Posey said, "because when the state is hardened, the crisis is over."

Posey has support from many of his Democratic counterparts, including Gelber.

"The changes with Citizens was a good first step," Gelber said. "But the bill nibbled around the edges of the problem."

One idea being floated now, Gelber said, is offering groups of Citizens policyholders to the private market in exchange for even more CAT Fund access - again using cheaper reinsurance as a carrot.

"You could depopulate Citizens into the private market with discount incentives," Gelber said. "Say to a private insurer, 'Take 200,000 or so policies out of Citizens and we will give you a CAT Fund discount for all your policies.'

"Which is better? Raising the CAT Fund exposure, or having everyone in Citizens? It's higher risk for the state no matter what.

"But if the state is going to assume risk, do it wisely and efficiently."

If Florida suffers a hurricane season like 2004 or 2005, the outlook no matter what the state does is not good, said Bob Hunter, director of insurance for the Consumer Federation of America.

"But if you stick with it in the long haul, it is good," Hunter said. "I like the idea of a competitive Citizens. You can't let the private companies cherry-pick all the good policies and leave the high-risk ones in Citizens."

And there yet may be one sure way to bring the private market back to Florida.

"If the Legislature starts to think about letting Citizens also write auto policies," Hunter said, "then it (private companies coming back into the market) will happen all by itself."

Tom Zucco can be reached at zucco@sptimes.com or (727) 893-8247.