Ignoring Citizens’ problems will hurt Florida

by Matthew Glans on March 14, 2012

Once again Florida has gone through a legislative session without addressing the many potential problems created by Citizens, its state-run windstorm insurer and proverbial 10,000 pound gorilla in the room. Since its inception, Citizens the so-called state-run insurer of last resort has become anything but, it is now the largest windstorm insurer in the state, covering the majority of homes along Florida’s high risk coastline.

A new editorial from the Tampa Tribune does an excellent job covering this important issue, both by highlighting the many problems that Citizens poses for the state and by arguing for its reform.

The Florida Legislature unfortunately ended its 2012 session Friday without taking steps to further “depopulate” the state-run Citizens Property Insurance Corp. Lawmakers and other state officials must make it a priority.

Intended as the property insurer of last resort in Florida, Citizens has swelled to the state’s largest, with 1.5 million policies. This dangerous policy must be reversed.

Citizens’ customers in many cases enjoy rates below those charged by the private market, which dropped them. But giving a good deal isn’t Citizens’ purpose. It should not continue providing low rates and coverage in direct competition with private insurers and deterring more private capital from investing in Florida.

Neither Citizens nor the state Catastrophe Fund can claim strong fiscal health. Florida’s Cat Fund, the main reinsurance provider for Citizens, currently has tens of billions in potential liabilities. These are unpayable. No state has ever issued more than $11 billion in bonds all at once. These liabilities create the potential for fiscal collapse in the event of a significant storm, necessitating tax increases or service cuts to cover costs.

The state and all its insured property owners are on dangerous turf because of Citizens’ vast umbrella. As of late September, Citizens had a total exposure of more than $508 billion. Yet, according to state reports, it had only $12.9 billion available to pay claims last hurricane season.

Citizens has estimated the “one-in-100-year” hurricane, which officials say has a 1 percent probability of striking, would cost more than $22 billion. This is simply too much risk for all insured property owners in the state — who must pay assessments when Citizens doesn’t have enough money to pay claims.

Citizens is required to maintain a program to reduce its number of policyholders, and it is making inroads. In 2009 and 2010, Citizens shed a total of more than 200,000 policies.

Any policy argument regarding Citizens’ property insurance rates should begin and end with asking how Citizens can be phased out, not expanded. Citizens was never meant to be the chief provider of windstorm insurance for Floridians. Residual markets erode the private market and have generally pushed consumers towards the state-run companies, which were created to be insurers of last resort.

The editorial did disagree with one of the reforms, the proposal to pull homeowners’ policies out of Florida Citizens and place them in the private surplus line market. The authors argued that homeowners should make the choice to leave Citizens and that the takeout plan is unfair.

A major flaw in the bill was that surplus lines firms — which would have had to meet certain legislative requirements, including “maintaining” $50 million “in surplus” — would have been able take a Citizens’ policy without a policyholder initiating it.

While a property owner could have elected to stay in Citizens, such a forceful policy is unfair. It should be up to a property owner to make that decision after evaluating the risks — the state shouldn’t allow a company to make the decision and then tell an owner to “opt out” if the terms aren’t right.

Fortunately, the legislation was amended in the Senate to protect Citizens’ customers from being targeted so easily, and that helped lead to its death in the House.

Would surplus lines insurance help reduce Citizens’ scope? It’s worthy of more consideration. It could be another much-needed tool, not only to shrink Citizens but to offer property owners more choices.

Expanding the role of the E&S market in covering high-risk Florida properties makes sense; the market is already well-adapted to provide insurance in high-risk areas and, for many homeowners, E&S policies would save money. A larger E&S market isn’t a total solution to Florida’s significant property insurance problems, but it would be a step in the right direction. It is an idea that needs to be considered again at some point in the future.

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