Property Insurance Reform: Living on Borrowed Time

Published February 11, 2011

Sometime soon, maybe even this year, the run of good luck that has brought Florida five consecutive hurricane-free years will end. When it does, the state could face a fiscal crisis that would make this year’s $3.6 billion budget gap appear trivial. If legislators do not quickly enact reforms that cut the size of the Florida Citizens Property Insurance Corporation, reform the state’s Hurricane Catastrophe Fund, and improve the safety of the state’s built environment, quite simply, they will not have done their job.

A look at the facts about Citizens and the Cat Fund shows just how serious the situation has become. Rather than leaving the risk to private insurance companies, Citizens, a state government agency that sells property insurance to about a quarter of all Floridians, could force taxpayers to shell out billions for damage to homes all across the state. And the state-run Hurricane Catastrophe Fund, which sells discount rate reinsurance (insurance for insurance companies) to Citizens and all of the states’ private insurers, is an even worse mess. It has about $6 billion in hard assets to pay for claims that, in a particularly bad year, could theoretically top $24 billion.

To pay off these bills, the Cat Fund would have to issue at least $18 billion in bonds and then collect about $6,000 from each family of four to pay them off. Since there’s no practical way for the state to collect this much revenue under current laws, Florida would probably have to either impose a state income tax or seek some sort of bankruptcy-like protection in order to stay afloat.

Bad as all this sounds, change is possible. In fact, a few reasonably simple pieces of legislation could fix the system without causing major disruptions for Florida residents.

Proposals that shrink Citizens should come first. Rather than abolishing Citizens immediately, as desired by some in the insurance industry, the Legislature should take a middle course and work to shrink Citizens sixty percent over four years. A gradual reduction in Citizens’ size and scope would significantly cut the liability imposed on taxpayers while still providing “last resort” coverage for high-risk homeowners in the Keys and elsewhere. Louisiana, which weathered a disaster far worse than Florida’s, successfully shrunk its own version of Citizens by a similar amount over the past four years; Florida can do the same.

Changes to the Cat Fund, likewise, would make the state more secure against hurricanes while simultaneously removing liabilities from taxpayers. Instead of using the Cat Fund to displace private reinsurance, the Legislature should shrink the Cat Fund’s overall size and ensure it has a mix of cash and private market risk-transfer instruments (bonds and reinsurance) to pay any potential claims.

Finally, the Legislature should work to make Florida’s homeowners safer. While significant new spending isn’t practical, creative use of existing federal grant dollars, a revival of the hurricane mitigation sales tax holiday (last held in 2007), and a prohibition of state subsidies for building in environmentally-sensitive, hurricane-prone areas would all help reduce insurance rates while making residents safer.

In the end, Florida must realize that poorly conceived regulations and market interventions sit at the root of its problems with property insurance. The state cannot avoid storms, and one way or another, its residents will pay the costs implicit in living on a low-lying peninsula in the middle of a hurricane-zone.

Citizens, competing directly with private insurers, and the Cat Fund, making promises that it cannot keep, have made it nearly impossible for nationally-known private insurers to write new policies in Florida. This has left taxpayers with a huge tab. If state leaders reform Citizens, shrink the Cat Fund and make its residents safer, Florida can and should expect private firms to return and relieve taxpayers of the enormous risks implicit in retaining the current, broken property insurance system.