6/13/2012
Herald Tribune
Gov. Rick Scott and Florida's legislative leaders
have frequently sounded alarms over the potential
insolvency of the state-run Citizens Property Insurance
Corp.
If a catastrophic hurricane hits, they warn,
Citizens' reserves will be insufficient to pay the
claims and, by law, it will have to assess insurance
policies statewide to make up the difference.
We hope that Scott and the Legislature are just as
worried -- if not more so -- about a state agency's
report that inadequately capitalized private insurers in
Florida are more likely than Citizens to fail and force
post-hurricane assessments.
The report, by the state's Office of the Insurance
Consumer Advocate, should cause the governor and
Republican lawmakers to:
1. Rethink their ideologically driven campaign to
shrink Citizens -- by raising its rates and reducing its
coverage -- and push consumers toward undercapitalized
private insurers.
2. Demand tighter state regulation and monitoring of
Florida's private insurance market.
The likely scenario
The Consumer Advocate's report,
"Potential Assessments from Florida Hurricanes," issued
in April, found that private insurers "are as much or
more of a financial risk" as Citizens in the event of a
major hurricane, the Herald-Tribune's Zac Anderson noted
in an article published Sunday.
In the most likely scenario -- a storm causing $21
billion in damage -- "Citizens would not need any
assessment money, while a $200 million bailout would be
needed to pay the claims of private insurers that fail,"
Anderson reported.
Only in the Consumer Advocate's worst-case scenario
-- a hurricane causing $50 billion in damage -- would
Citizens pose a much greater financial risk than private
companies. Citizens would need to make assessments of
roughly $10.3 billion, double the estimated $5.1 billion
in assessments required to cover private insurers'
claims.
Damage of such magnitude would exceed that of
Hurricane Andrew, the Category 5 storm that devastated
parts of South Florida in 1992. It caused about $26
billion in damage, or roughly $42 billion in today's
dollars.
Such a storm is expected to occur once every 100
years, the Consumer Advocate pointed out, while the
likelihood of the $21 billion scenario is once every 25
years.
The reason that Citizens -- despite the criticism by
Scott and others -- is better able than private insurers
to handle a major hurricane is partly the luck of the
weather, and partly the failure of Florida's regulatory
system.
Because Florida has gone an unprecedented six years
without a hurricane strike, Citizens has been able to
accumulate $5.6 billion in reserves. Citizens, like some
private insurers, also has purchased reinsurance from
the state-run Florida Hurricane Catastrophe Fund. The
Cat Fund, too, has grown stronger in the absence of
storms.
In contrast, numerous small, undercapitalized
insurers operating in Florida are in perilous financial
condition.
The Pulitzer Prize-winning series by the
Herald-Tribune's Paige St. John depicted a state
insurance regulatory apparatus that not only permits
private insurers to carry dangerously low reserves, but
encourages them to take on more homeowners policies than
they can safely cover.
Smaller reserves
In the wake of Andrew and continuing through the past
decade, major insurers have either left Florida or
sharply reduced their exposure in areas, like Sarasota,
Manatee and Charlotte counties, that are on or near the
coast.
Into the breach have stepped small, undercapitalized
companies, many of which operate only in Florida. Some
major insurers, such as State Farm, have even set up
Florida-only subsidiaries that maintain much smaller
reserves. These companies now hold almost three-quarters
of the homeowners' policies in Florida.
Florida's private insurers have collected record
amounts in premiums during the recent, hurricane-free
years but apparently haven't used the money to build
adequate reserves.
Instead, as the St. John series revealed, they've
shifted profits to affiliated management companies and
reinsurance providers. Having removed the gains from
their books, they seek even higher rates from the state.
Unfortunately, state officials appear receptive to
the idea.
Double standard
Scott and legislative leaders have consistently
pushed to increase premium rates for Citizens, which,
with 1.45 million policyholders, is the state's largest
single insurer. They contend that the higher rates will
create more competition and encourage larger insurers to
return to the Florida market.
Yet, major insurers offer no assurances that they
will write more policies in the state in return for
higher rates.
And, while the smaller companies may charge rates
that are more competitive with Citizens', neither Scott
nor the Legislature has shown any indication of
requiring that private insurers show they have resources
sufficient to cover the policies they write.
So far, such hard-nosed demands are directed only at state-run Citizens. In light of the Insurance Consumer Advocate's report, state leaders should explain why a public insurer is held to a high standard, but private insurers get a pass.