Guest AuthorFlorida’s property insurance system has been on a roller-coaster ride over the past 10 years. Since Hurricane Wilma struck Florida’s coast in October 2005, the Sunshine State has lived up to its moniker, having gone more than nine years and four months without a landfall.
And that unprecedented streak of luck has allowed the state to stabilize what had become an incredibly broken property insurance system, a system that amounted to socialized risk, and which subsidized wealthy coastal properties at the expense of ordinary taxpaying Floridians.
Citizens Property Insurance Corporation and the Florida Hurricane Catastrophe Fund (Cat Fund), both state-run providers of insurance and reinsurance, became a financial catastrophe waiting to happen for Florida.
Citizens, originally intended to be the “insurer of last resort” for properties that couldn’t find insurance in the private market, ballooned to 1.5 million policies with more than $500 billion in exposed risk as a result of changes made back in 2007. The Cat Fund swelled to a statutory requirement of $17 billion in obligations, a figure that it, for most of the past eight years, was in no way capable of meeting.
And to further challenge the structure of the system, both organizations levied assessments on their own policies, as well as on policies from other insurance providers in Florida. You may not have had a policy in Citizens, but you were paying to help subsidize those who did.
Reforms undertaken between 2011 and 2014 have brought some sanity to both Citizens and the Cat Fund. Citizens reduced its risk to roughly 600,000 policies and $300 billion in exposed risk.
And as it stands now, the Cat Fund is finally able to meet its statutory obligations. These successes have been a result of two things – the efforts made by policymakers, and the sheer luck of an almost 10-year hurricane drought.
So, after nine years of fair-weather hoarding, both Citizens and the Cat Fund have finally reached a point where they can declare themselves able to cover a major hurricane.
But what happens after?
How would these state-run entities be left financially after a catastrophic hurricane season? How prepared are they to deal with even a moderately bad season thereafter?
While we have used this welcome stretch of storm-free years to move our insurance system in the right direction, and we have made substantial improvements, we need to be realistic, open and frank about where Florida stands in order to continue the forward progress. We are now at the place where Citizens and the Cat Fund are no more than “one-hit-wonders.”
Much like Vanilla Ice, they can carry a tune, but don’t have much staying power.
Our sound decisions, effective management and good fortune have brought the system to the place where we could withstand one bad storm, and maybe even a season with a couple of bad storms, but that would effectively bring us right back to where we were at the end of 2005, and possibly further back.
The 2015 legislative session offers Florida policymakers an enormous opportunity. Although nine hurricane-free years coupled with modest reforms have allowed the state to largely stabilize its property insurance market, it continues to pose a risk to taxpayers and the economy. This is especially magnified if a severe storm or hurricane season were to follow another.
Legislators should continue to embrace and encourage the depopulation of Citizens, remove non-primary residences from its rolls, enact further eligibility reform that makes Citizens what it was truly intended to be, and improve notification requirements to protect policyholders.
In addition, the Cat Fund should be allowed to leverage the current market conditions for risk transfer, gradually reduce its statutory obligations to $14 billion, increase its flexibility in surplus protection (a requirement for private reinsurers), and enact significant conflict of interest reforms to protect taxpayers who are ultimately on the hook for the bill.
A new research study from The James Madison Institute and R Street Institute provides a detailed roadmap for practical policy solutions in this arena. The report can be accessed at www.jamesmadison.org.
It’s time to turn Citizens and the Cat Fund from Vanilla Ice to a niche industry performer with long-term staying power. I’m thinking Neil Diamond.
Sal Nuzzo is the vice president of policy for The James Madison Institute, one of Florida’s oldest and largest think tanks. Column courtesy of Context Florida.
