EDITORIAL: An opportunity as insurance rates head lower

Mar 20, 2008

Sun-Herald--Mar. 20, 2008

OUR POSITION: Free markets and a capitalist system are gradually bringing insurance rates back into line. Our state legislature needs to take advantage of this favorable period to dramatically reduce the taxpayers’ $485 billion insurance exposure.

After the devastating hurricanes of 2004 and 2005 insurance rates soared across Florida. Insurance premiums doubled and tripled. Fortunately, rates are gradually heading down. Here’s why rates went up and are currently heading back down.

Insurers charge premiums based on anticipated losses. Unfortunately for us, after 2004 and 2005, the anticipated future losses in Florida soared anticipating additional powerful hurricanes.

At the same time perceived risk rose we entered a real estate bubble. The underlying value of insured property doubled and tripled in many cases. Even if there had been no hurricanes, insurance would have gone up because of the real estate bubble.

Two years with no significant bad weather means insurance companies are feeling more confident. The loss they anticipate from hurricanes is going down. Warren Buffett noted in his annual report that, “it’s a certainty that insurance industry profit margins, including ours, will fall significantly in 2008.”

In addition to being less concerned about the weather, property values are falling. Insurance premiums should gradually go down because property is no longer worth as much.

That brings us to our state Legislature and taxpayer-owned Citizens Insurance. As insurance rates skyrocketed in 2004 and 2005, our legislators rushed in with a government solution to this free market problem. In their haste, our state Legislature put taxpayers on the hook for over $485 billion in potential claims.

Only an apocalyptic scenario would trigger claims that high. For example, the eight storms that hit Florida in 15 months in 2004 and 2005, caused $35 billion in insured damage. But in a state where a drop in retail sales and real estate transactions triggger a budget crisis, Floridians have no business being in the even more volatile insurance business.

Right now other insurers are coming back to the market but are cherry- picking policies that are in the interior of the state. Others, such as State Farm, are still dropping coastal coverage to limit their exposure to future storms. Citizens Insurance, and taxpayers, remain on the hook for the $485 billion of insured property that is in the highest hazard areas along the coast.

Our Legislature is back in session. Watching our state legislators try to affect insurance rates is like watching a fly on the elephant bragging about what a fine dust cloud they are raising.

It is time for them to work with the free market, the 20,000-pound elephant, and get Florida taxpayers off the hook for $485 billion of high risk insurance exposure while we have a chance.