Greetings from unseasonably warm Florida, where citizens are beginning to petition Al Gore to host a global warming summit to hopefully attract a Nor’easter to cool us off a bit.

Late last week, Floridians saw the national business publication the Wall Street Journal chime in on an issue that is very Florida-specific.  In its Feb. 17 editorial, the Journal lauded Florida Gov. Rick Scott—arguably the state’s first adult governor since Jeb Bush—for his leadership on property insurance reform. The Journal joined a chorus of lawmakers, consumer advocates, economists, and Heartland analysts in calling for swift reforms to the state’s broken property insurance system, specifically the state-run Citizens Property Insurance Corp. and the Florida Hurricane Catastrophe Fund.

Reforming these two entities has been my professional priority the last three years, and it is refreshing to finally have a governor who understands the need for it.  Unfortunately, politics all too often gets in the way of good policy. Some legislators—including some in the governor’s own party—have stood in the way of needed reforms and have, in some cases, unilaterally thwarted them.

The Journal editorial is making waves down here, as it is unusual for a publication with such a broad, national focus to be taking an interest in such a narrow issue.  It would appear that editors in New York City care more about Florida’s economic future than many of its own lawmakers. But I digress.

On the political front, there seems to be quite an internal fight bubbling to the surface, and that is the Florida State Senate presidency for the 2015-2016 legislative term.  Barring an unprecedented political shift, Republicans are widely expected to retain control of the State Senate after this year’s election cycle and the 2014 cycle, and it has been a long-held tradition in Florida that each party caucus chooses its leader well in advance of the legislative term.

The two currently vying for the presidency are current Senate Majority Leader Andy Gardiner, R-Orlando, and Sen. Jack Latvala, R-St. Petersburg.   Though from the same party, Gardiner is largely supported by the more conservative members of the caucus, as well as business and industry interests, and Latvala is largely supported by more moderate elements of the party along with trial lawyers and unions.  It is a classic conservative vs. liberal Republican fight, and this week it has garnered more media attention than past presidency contests.

Who wins will most likely be decided by primary Republican races across the state, pitting pro-Gardiner candidates against pro-Latvala candidates.  Whoever has the most allies win in the August primary will likely win the Senate presidency.  Never a dull moment in Florida.

Until next time!

There’s an elephant in the room I probably should mention:  someone impersonating a Heartland Institute trustee defrauded Heartland last week, stole internal documents and created one outright fake.  The identity thief has since been revealed to be Pacific Institute President Peter Gleick, although he insists that he “received” the fake document in the mail anonymously and was not its author. Heartland’s official statement on the issue is here.

Heartland’s Center on Finance, Insurance and Real Estate, which I run and which publishes this blog, doesn’t work on the climate change issues that are the focus of the dispute. OOTS readers interested in them should visit our sister site, on Environment and Climate Policy.  With that out of the way…

***

At a time when about half of the insurers in the most windstorm-prone state in the country (Florida) are at serious risk of insolvency, the Consumer Federation of America has announced that homeowners insurance rates have to be suppressed always and everywhere in the name of fairness. As OOTS editor Ray Lehmann explains in this press release, that’s totally untrue and based on faulty analysis of the data that conflates all lines of insurance with the homeowners line. But even Ray’s comments and my own don’t get to a deeper issue: homeowners’ insurance is a lousy business.

This doesn’t mean that insurers are all going to the poor house.  Insurance, taken as a whole, is a pretty good way to make money. It’s not as good as, say, being Apple but better than being an airline or a newspaper. Companies that operate in the admitted insurance market where most people buy their risk transfer products are pretty stable. But, among the major products sold in the admitted insurance market—auto, life, workers’ comp, and commercial insurance—homeowners is almost certainly the worst business.

Let’s look at the facts. For a variety of reasons – including the relative infrequency of claims, the large magnitude of expected claims and the fact that homeowners insurance policies aren’t loaded down with extras – a look at any ten-year period will show that insurers pay out just about what they collect in premiums, meaning that they can only make money off of investments.

The results are pretty clear in the market in three ways. First, no sizeable company, to my knowledge, writes only homeowners’ insurance while there are any number of companies—including some household names like GEICO (auto) and John Hancock (life)—whose insurance businesses are confined to a single line. (Some also sell non-insurance products.)

Second, even though I have every reason to be hyper-aware of it, I can’t recall seeing a single advertisement for homeowners’ insurance anywhere in the past year. If it’s such a great business, why don’t companies want more of it?

Finally, mutual companies’ share of the homeowners’ insurance market—about 60%—is the highest market share of mutuals in any line of insurance.  This is probably because many mutual companies tend to reward their staff based more on sustainable growth (number of customers served where the company produces a normal profit) than on pure economic profits per se.

There are plenty of problems in the homeowners’ insurance market. But excessive rates aren’t one of them.

***

Last week, Heartland’s Joe Bast and a number of other organization CEOs including National Wildlife Federation CEO Larry Schweiger and American Rivers CEO Bob Irvin gathered together with Senators David Vitter and Jon Tester to call for reform to the National Flood Insurance Program. I spent a good part of the day with the CEOs and their subordinates meeting with other Senate offices and trying to educate them about ways that the bill is good public policy.

My main finding—the one that frustrates me the most—was pretty simple: the entire problem relates to politics, not anything about the substance of the bill. Gridlock has its uses but delaying the flood bill isn’t one of them. Arghhh…

Alabama Gov. Robert Bentley has thrown his support toward efforts to promote better disaster preparedness, endorsing an annual one-week tax holiday for items like first aid supplies and electric generators.

Bentley said in connection with his proclamation of Feb. 19-24 as Severe Weather Awareness Week in Alabama that efforts are ongoing to put recommendations for the sales tax holiday in place. No legislation has been introduced in the state Legislature, as yet.

The idea was suggested by the Tornado Recovery Action Council formed following the deadly April 27, 2011 tornadoes that killed at least 250 people in the state. Alabama already has a similar sales tax holiday in August for back-to-school supplies.

“Anything we can do to encourage people to take this seriously,” Alabama Department of Emergency Management Agency Director Art Faulkner told the Associated Press. “It’s great to give people an incentive to be proactive.”

Florida has been walking the tightrope with its windstorm insurance policies for years.  Ever since Hurricane Andrew hit Florida in the early 1990s, the state has relied heavily on two state-run entities to insure and manage the states windstorm risk. Both the Florida Hurricane Catastrophe Fund and Citizens Property Insurance Corporation, the state’s windstorm reinsurer and insurer, create a substantial liability to taxpayers that could be imposed in the event of a major storm.  These problems have been evident for years, but due to a combination of politics and sheer luck, little progress has been made on revamping the system and minimizing taxpayer’s exposure windstorm risk through the Cat Fund and Citizens.

In a recent article by the Associated Press, the author discusses recent efforts by some legislators to reform the Catastrophe Fund, and the reluctance of many others to move the proposals forward. Industry experts attribute these setbacks to election year politics; many legislators have shown a reluctance to enact any bill that could potentially raise rates, even though there is no guarantee that the current Cat Fund proposals would raise rates.

From The Associated Press:

“State lawmakers have gambled with their constituents’ money for years when it comes to dealing with Florida’s property insurance issues.

But now, many top industry analysts suggest, the odds may be turning against them after six years without a hurricane hitting Florida. Insurance experts say the Florida Hurricane Catastrophe Fund needs more money and an overhaul before a major storm or series of them strikes the state. If not, consumers could be paying massive surcharges on their insurance coverage and the state government left in financial straits for decades, they say.

Despite these warnings, it doesn’t appear the Legislature will act before the end of its annual session March 9 because any fix will cause higher insurance rates — not a popular decision, particularly in an election year. But any increase would be minuscule compared to those that will be required if a disaster strikes before a fix is made.

Officials have already abandoned a special $12 billion expansion of the fund when it became apparent they wouldn’t be able to fund it and are worried about their ability to meet the present $11.7 billion obligation.”

Proponents of Cat Fund reform, including Jack Nicholson, head of the Florida Cat Fund and Governor Rick Scott, have argued that the Cat Fund doesn’t have the capacity to withstand a major storm and that efforts need to be made to encourage insurers instate to purchase private reinsurance and not rely solely on the Cat Fund.

“Our luck is eventually going to run out,” longtime fund head Jack Nicholson testified at a House Insurance and Banking subcommittee meeting recently. “You can’t continue to roll the dice and be lucky every time.”

Nicholson isn’t sure they would be able to bond more than $8.5 billion, leaving a $3.2 billion shortfall.

He gets plenty of agreement in high places, albeit apparently not enough in the Legislature.

Gov. Rick Scott and others have been pushing legislators to reduce the state’s exposure by forcing the insurance companies to buy more of their reinsurance from private companies. They argue that while that will raise rates, the increase will be much smaller than the post-catastrophe surcharge will be.

“Don’t create a state organization that says they’re selling a product that they’re really not selling. To believe that you can go borrow money after a significant disaster is not realistic. We’ve got to live in reality,” Scott said.

Scott also worries about the state’s ability to meet its current obligation. The state-backed insurer of last resort, Citizen’s Property Insurance Corp., would also be borrowing billions of dollars, driving up interest rates and, ultimately, consumers’ costs in the wake of a catastrophic storm.”

Two Cat Fund reform bills have been considered in the most recent session of the Florida legislature. The first bill, proposed by Rep. Bill Hager, a Republican legislator from Boca Raton was unable to pass out of committee. The second bill, proposed in the Senate by Sen. JD Alexander, is still under consideration but faces a difficult path to passage.

“Hager’s bill (HB 833) would have reduced the state’s liability to $12 billion within four years but the House insurance subcommittee pulled it last month, effectively killing it without a vote, even though it was supported by consumer and business groups.

A similar bill (SB 1372) was approved by the Senate Banking and Insurance Committee on Thursday, but has a long way to go in a short time to win passage. Sponsor JD Alexander, a central Florida Republican, says it’s a priority.”

While some consumer advocates, including Robin Westcott of Florida’s Department of Financial Services argue that the proposed bills were too aggressive, supporters argue that the status quo could lead to dire financial consequences.

Robin Westcott, the consumer advocate in the Department of Financial Services, thinks Hager’s bill was too aggressive. She thinks a drop to $15 billion in exposure is more palatable — it would reduce the state’s long-term risk but lessen the immediate blow to property insurance rates.

“Consumers feel right now that they pay enough for homeowners insurance,” Westcott said. “Anytime you do something this aggressive in one place it will cause a ripple in another.”

Hager is blunt about his colleagues’ inaction.

“A recipe for disaster,” Hager said. “We need to change the CAT fund structure to reflect reality.”

Calling the Texas Windstorm Insurance Association’s present structure “unsustainable,” Texas Insurance Commissioner Eleanor Kitzman has put forth a proposal to hire consultants to reduce the state-backed insurer’s exposure and “improve service to policyholders.”

Noting that the residual market entity’s share of the Texas market has grown to 57.2% in 2010 from 17.9% at the turn of the century, Kitzman declared in a Feb. 17 statement that a “fundamental restructuring of TWIA is necessary.” In addition to issuing a request for proposals, Kitzman intends to name a technical advisory committee to offer input on restructuring.

The committee and consultant would both be chosen by April 1, and a preliminary report would be prepared by the June 1 start of the 2012 hurricane season, the Texas Department of Insurance said. Among the options that could be explored are a member reinsurance program and a program under which insurers would be paid fees to service TWIA policies.

“TWIA was supposed to be the market of last resort for the 14 coastal counties that comprise Tier 1, but that is not the case anymore,” Kitzman said.

With no other significant source of funding to pay claims, this growth in exposure is an excessive burden on coastal citizens.  Additionally, it is not reasonable to expect that any single organization can effectively manage the explosive growth in claims activity that occurs after a significant tropical storm. On July 1, 2008, TWIA had 247 open claims; 90 days and two storms later, it had over 65,000 claims and was simply overwhelmed.

According to a November 2011 response from TWIA to a public information request from Austin-based author and activist David Crump, TWIA faces a maximum loss outcome of $14.7 billion and probable maximum loss of $5.3 billion should a Category 4 hurricane strike Corpus Christi and a PML of $6.4 billion and MLO of $14.5 billion for a similar storm striking Galveston.* TWIA’s total insurance liability, including adjacent areas, is $15.4 billion for Corpus Christi and $37.9 billion for Galveston.

The authority projects it will have between $250 million and $275 million in its Catastrophe Reserve Trust Fund by the June 1 start of the 2012 hurricane season. TWIA said it expects another $100 million in funding from premiums and other revenues, which would constitute the first layer of funding to pay any 2012 losses.

Should both premiums and reserves be exhausted, TWIA can raise an additional $2.5 billion through the issuance of three layers of post-event securities, and has the option to purchase reinsurance, either in addition to or in concert with the reserve trust and securities layers. In 2011, the authority had $636 million in reinsurance above an initial $1.6 billion retention.

* This article initially misrepresented the maximum loss outcome figures as probable maximum loss.

Over the weekend, the Wall Street Journal weighed-in on Florida’s insurance crisis, shedding light on the concerns economists, actuaries, insurance experts, consumer advocates and Heartland Institute analysts have been warning about since former Gov. Charlie Crist drastically and dangerously expanded the state’s role in the property insurance market.

In a Feb. 17 editorial, the Journal lauds the efforts of Gov. Rick Scott and other state lawmakers who understand the need for reforms to state-backed Citizens Property Insurance Corp. and the Florida Hurricane Catastrophe Fund, despite the political risks involved in supporting policies that may gradually and methodically increase rates.

On the CAT Fund issue, the Journal opines:

[The CAT Fund] also has problems, and here too Republicans have stepped up with good ideas. Senator J.D. Alexander and Representative Bill Hager want to shrink its size, bolster its capital base and reduce its ability to levy taxes to cover deficits. The main obstacle is Port Orange GOP Representative Dorothy Hukill, who chairs the Economic Affairs Committee and pulled the Hager bill from consideration last month, claiming the text “wasn’t ready.”

Much of the credit for the progress so far belongs to Governor Scott, who is risking short-term unpopularity to protect taxpayers from a future disaster. This is what political leaders are elected to do.

Absent the necessary reforms, Floridians risk not only having to bail out Citizens and the Cat Fund through dramatic and unprecedented increases in the cost of their overall insurance—auto, homeowners, business, etc.—but the very real possibility of the existing system not being able to meet its claims obligations. In fact, Florida law currently requires the Cat Fund to sell reinsurance coverage that it cannot realistically pay for. And lawmakers know this.

If a sufficiently bad hurricane season impacts Florida, thousands of homeowners will likely be left with their hurricane claims at least partially unpaid, which would immediately plunge the state into an economic tailspin. It is legislators’ moral obligation to enact the reforms necessary so the Cat Fund is able to meet its obligations.  Anything short of that is no different than knowingly peddling Floridians a defective product.

In a special dispatch from the 2012 Conservative Political Action Conference – held Feb. 9 to 11 in Washington D.C. – this week’s episode of the FIRE Podcast features Center on Finance, Insurance and Real Estate Director Eli Lehrer on a CPAC panel on the dangers of over-criminalization.

Other panelists included Mary Schmid Mergler, senior counsel to the Constitution Project’s criminal justice program; David Keene, former chairman of the American Conservative Union; and moderator Pat Nolan, vice president of the Prison Fellowship.

The panelists also discuss the Right on Crime Statement of Principles (Lehrer, Keene and Nolan all are signatories) and broader efforts to convince conservatives that criminal justice reform is a worthy goal. “We shouldn’t be afraid to get rid of bad laws,” Lehrer noted, adding that states could begin this process by striking any criminal statutes more than ten years old that have never been used.

The proliferation of laws is invitation for prosecutors to run amok. American states, localities and the federal government define far too many crimes. The proliferation of criminal law threatens our liberty and undermines our core institutions. We can turn back the clock on this, and as conservatives, we must.

Listen to the episode here, or subscribe to the FIRE Podcast in iTunes.

The National Flood Insurance is in dire need of reform, facing massive deficits and systemic risk issues.  Despite these growing problems, legislators have paid it little attention, kicking the can down the road with short term extensions. The NFIP has not seen a long term reauthorization since 2008, when its last long term authorization expired. Since then, NFIP has survived through short term reauthorizations; the most recent came in December of 2011, with President Obama signing a temporary reauthorization until May 31, 2012.

While originally designed to be self-sustaining, the NFIP currently owes the Treasury more than $18 billion and has no practical way to ever pay it back. In addition, while many of the program’s founders promoted it as a way to promote wetlands conservation, it has, in fact, provided a subsidy for the development of wetland areas.

For the first time in years, real progress towards a long term reauthorization of NFIP with reforms to stabilize its finances and address the issue of repetitive loss properties is now being considered in Congress. One proposal, supported by Sen. David Vitter (R-LA) and Sen. Jon Tester (D-MT) would take steps to address several of these issues while creating a long term extension of NFIP.

In a op-ed published February 16 in Roll Call, Senators Vitter and Tester argue that an extension of the NFIP is necessary with added reforms to place it on better financial footing.

From Roll Call:

“The program is currently in an $18 billion hole, mostly because of claims paid out after major hurricanes, including Katrina and Rita, caused damage on an unprecedented scale. The House and Senate bills would take steps to address that shortfall, including a gradual increase in premiums on certain high-risk properties.

We’re working together to ensure that whatever the final bill looks like, it does two specific things. The bill should return the Army Corps of Engineers to its traditional role in levee certification, and, consistent with warnings from the Government Accountability Office, it must not increase premiums so sharply that homeowners are discouraged from purchasing flood insurance. The goal is to make the NFIP as sound as possible, for as many folks as possible, for as long as possible.”

Given the failure earlier this month of a bill to enact a single-payer health care system in California, it is a good time to revisit the effort launched in Ohio several times in recent to enact the single-payer Health Care for All Ohioans Act.

Fewer lawmakers voted for the California bill this year than before, while Ohioans voted overwhelmingly last November in favor of a constitutional amendment prohibiting the state from requiring its citizens to buy particular kinds of health policies. Both developments highlight the prospects for a state-run system here as one form of the insurance exchanges that many (but not all) states are fashioning.

As for public interest in a single-payer system, a Rasmussen poll conducted in October 2011 found that 49% of Americans opposed a single government system, 33% favored one and 16% either had no opinion or were undecided.

From both a policy and a practical perspective, there are several facts to be considered when contemplating whether or not a single-payer system would be a good option for Ohio.  The goal of any system should be to secure better health outcomes at no greater cost than current plans, and the best evidence is not predictions, but current systems here and in comparable countries.  That evidence is not comforting.

In the first place, patient outcomes are not improved.  Americans have better survival rates for common cancers than Europeans, and also lower mortality rates from cancer than Canadians.  We are more satisfied with our health care overall and spend less time waiting for care than patients in the United Kingdom and Canada.  Lower-income Americans are in better health than comparable Canadians, and twice as many American seniors with below-median incomes self-report “excellent” health (11.7 %) compared to Canadian seniors (5.8 %).  According to current responses, more than 70% of British, German, Australian, Canadian and New Zealand adults say their government health care systems need either “fundamental change” or “complete rebuilding.”

In order to successfully diagnose the appropriate care, the United States has about twenty-seven Magnetic Resonance Imaging machines per million residents, compared to about six per million Canadians and residents of the United Kingdom.  The top five U.S. hospitals conduct more clinical trails than all the hospitals in any other developed country.

When you compare administrative costs of Medicare, the federal flagship medical benefits program, to private insurance plans, a report issued in 2009 revealed that Medicare’s administrative costs were 24.8% higher on average when calculated on a per-person basis.  Buried deep in the federal health care plan enacted by the Congress in 2010 is a requirement for a recovery audit of money wasted through improper payments by the federal health plans, which the Government Accountability Office estimates to be 8% to 10%, and possibly much higher. Such estimates do not even include the additional burden of fraud.

For these reasons and many more, even though the current American health-care system is fiendishly complex and inefficient in many ways, at least some elements of competition still seem to be the likeliest solution for a system that would be an improvement for all Ohioans.

Sens. Jon Tester, D-Mont., and David Vitter, R-La. – authors of a bipartisan letter urging Senate leadership to schedule a vote on the Senate Banking Committee’s flood insurance reform legislation – both say they are confident that the bill would receive the 60 votes needed to avoid filibuster should the measure make it to the Senate floor.

Tester and Vitter appeared at a Feb. 14 Capitol Hill press conference with the CEOs of a number of organizations – including American Rivers, the National Wildlife Federation, the National Association of Mutual Insurance Companies, the Reinsurance Association of America, Taxpayers for Common Sense and the Heartland Institute – to press for immediate passage. Tester and Vitter’s letter now has signatures from 41 members of the Senate.

The National Flood Insurance Program currently is set to expire May 31, one day before the start of the 2012 hurricane season. Heartland Institute CEO Joseph Bast noted at the press conference that, while Heartland believes the bulk of flood insurance should ultimately be written by the private sector, the reform bill takes a number of important first steps toward that goal, including phasing out subsidies and opening the program to private reinsurance.

As reported by National Underwriter:

Tester acknowledges that support for the bill is not the holdup; the holdup is that Reid is concerned that McConnell will seek to use the must-do bill as an engine to push through controversial provisions opposed by Senate Democrats.

“Sen. Vitter and I are very well aware that that possibility exists on all bills, and we will have to work hard to ensure that the bill remains as narrow as possible,” Tester explains.

Vitter adds that, “for no good reason the NFIP has been shut down for 53 days in 2010” because an extension to the program ran out.

As a result, adds Vitter, 1,400 home closings were either cancelled (or) postponed.

The more than six-year-long odyssey to pass significant reforms to the flood program now arguably stands closer than it ever has to completion. There are few differences the House bill, which passed by a 406-22 margin in July 2011, and the bill referred out by the Senate Banking Committee in September.

Alas, even as one set of flood insurance subsidies appears finally, after more than 40 years, on their way out, already there are efforts underway to create new ones. Rep. John Garamendi, D-Calif., who many may remember was California’s insurance commissioner from 1991 to 1995 and from 2003 to 2007, has introduced legislation that would provide subsidies to farmers whose land is impacted by the downgrade of aging levee systems.