Solving the Citizens Squeeze

"Citizens' consultants used statewide exposure information to calculate premiums for ZIP code areas, resulting in recommendations for a statewide average 80 percent hike and as high as 253 percent in parts of Pensacola."

-- Paige St. John, Tallahassee Democrat Nov. 10, 2005

The news all week out of Tallahassee has been about battle lines forming over how to repair Florida's broken property insurance system. Citizens Property Insurance Co. is planning statewide back-to-back double-digit rate increases this year and next.

As Mary Ellen Klas of the Miami Herald neatly summarizes it, "Citizens Property Insurance officials announced Wednesday that they will ask their board to raise Citizens' rates an average of 15.9 percent beginning in February, followed by an average increase of 48.4 percent later in the year."

Paige St. John offers a detailed explanation:

Claims from Hurricane Wilma threaten to wipe out reserves in the state-run Citizens Property Insurance, and all Florida homeowners could have to make up the difference through extra charges on insurance premiums.

The company's losses are estimated at $1.4 billion, according to figures released Wednesday. If that cost is passed on to private insurance companies and their customers, it would mean homeowners with a $2,000 annual premium would pay $220 more.

It would be the second time in as many years Citizens reserves were wiped out because of hurricane claims. Florida homeowners already are paying a surcharge to make up for last year's losses.

Citizens is the insurer of last resort for people who can't get insurance elsewhere, usually because they're in high-risk locations such as coastal areas.

Some think it's unfair to impose uniform statewide premium increases. They would prefer to redistribute the burden according to risk levels, as measured (somewhat crudely) by zip codes:

Citizens' consultants used statewide exposure information to calculate premiums for ZIP code areas, resulting in recommendations for a statewide average 80 percent hike and as high as 253 percent in parts of Pensacola.

Others, notably current Governor Jeb Bush and would-be governor Tom Gallagher, who's currently the state's Chief Financial Officer, are suggesting that Florida should dip into what seems to be a bubble of sales tax revenues from the increased sale of repair contracts and construction materials.

Still others, like Florida State Senate President Tom Lee, scoff that using any one-time increase in sales tax revenues won't solve the root problem. He told reporter St. John:

"The problem is: Citizens is not actuarially sound... . We've had a pay-me-now, pay-me-later system for a long time, and we've chosen pay-me-later. And it's caught up with us ... that's not a sustainable public policy."

In today's Miami Herald, state house minority leader Rep. Dan Gelber (D-Miami Beach) attacks the problem free of any ideological baggage or immediately evident personal ambitions. Citizens Property Insurance, he says, "was created on the premise that if 'free market' principles were applied wholesale to Florida's insurance market, Citizens would merely fill in any temporary voids until private insurers could be lured back when the market stabilized."

The reality, he says, is "our insurance market never stabilized. And even though insurance companies have received repeated approvals from Tallahassee to charge consumers higher rates, they are still fleeing the state."

It is time for Tallahassee to open its eyes to the utter dysfunction of Florida's windstorm market and provide real reform that will stabilize insurance rates and allow our residents to affordably insure their most valued possession: their home. We need a plan that will provide real relief to homeowners and bring stability to the insurance market. Here is just such an idea.

Florida should revamp its Hurricane Catastrophe Fund (CAT) to enable it to provide insurance directly to homeowners. Currently, the CAT fund can only be tapped by insurers to help mitigate losses. Under our plan, the CAT fund would become Florida's Hurricane Insurance Fund, and actually provide hurricane wind-damage coverage to all Florida homeowners who need it.

This plan would allow the CAT Fund to work just like conventional insurers: by stockpiling reserves and investing them so there is an adequate cushion to pay hurricane claims in bad years. It could even buy reinsurance from other insurers, so it wouldn't have to absorb a claim's entire loss. And it could borrow money if it needed to pay claims.

As Gelber acknowledges, his proposal is not new. Most recently, as we noted elsewhere, it was revived by a politically influential association of Florida insurance sales agents. Yet, some Republicans still "reflexively dismissed it as socialism," Gelber says.

Ideological name-calling is not going to get us closer to a practical, long-term solution to Florida's hurricane insurance problem. If it works, who cares if it's called "socialism" or "compassionate capitalism" or, for that matter, "overly ripe bananas"?

Giving expanded casualty-insurance authority to the separate Florida Insurance Catastrophe Fund is simply common sense. The CAT fund, itself initially modeled on the National Flood Insurance Program, has a sound administrative track record. Indeed, it is being seen by industry professionals as a useful model for a reformed national catastrophe insurance plan.

What Floridians need and want, as Gelber urges, is "a common-sense, nonpartisan approach" that "takes into account the harsh, permanent realities of Florida's windstorm market." Politically correct band-aids just won't do when the next ferocious hurricane season rolls around. No more than a thin blue sheet of plastic will protect your ruined house while you're still wrestling with last year's insurance claim adjuster.