Yesterday, Out of the FIRE discussed the growing problem of sinkhole claims in the Florida insurance market, citing a piece by Heartland Senior Fellow Don Brown. Florida’s P&C insurance problem is a potential fiscal nightmare. The financial burden created by the state’s government-run insurer Citizens Property Insurance Corporation and Catastrophe Fund could drown the state in the aftermath of a major storm.
In a new piece recently published in the Treasure Coast Palm, Eli Lehrer, vice president of DC operations for The Heartland Institute, examines the many problems facing both Citizens and the state’s Cat Fund. Eli examines several of the programs’ biggest problems and outlines the long-term consequences to the state’s economy should state elected officials not act quickly.
“The state-run Hurricane Catastrophe Fund, which sells discount-rate reinsurance (insurance for insurance companies) to Citizens and all of the state’s private insurers, has about $4 billion in hard assets to pay for claims that theoretically could top $24 billion.
To pay off these bills, the Cat Fund would have to collect about $6,000 from each family of four. There’s no practical way for the state to collect this much revenue under current laws so Florida might have to seek some sort of bankruptcy-like protection to stay afloat.”
Despite these many setbacks, changing the broken system is possible and must begin soon. While Lehrer admits that a full-scale dissolution of both Citizens and the Cat Fund are politically and economically infeasible, efforts to scale back and shrink the programs can work and will make improve the state’s financial outlook and protect environmentally sensitive coastal lands.
“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 60 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 those who need it.
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 observed in 2007), and a prohibition of state subsidies for building in environmentally sensitive areas would all help reduce insurance rates while making residents safer.”
Eli’s piece, “Florida Legislature Must Act Swiftly to Fix Citizens Insurance, Catastrophe Fund” was originally published in the Treasure Coast Palm and is available online at:http://www.tcpalm.com/news/2011/feb/27/eli-lehrer-florida-legislature-must-act-swifty/