Jacksonville Panel Debates the Future of Florida’s Property Insurance Market; State Representative Proctor To File 2011 Rate, Assessment Legislation

Aug 4, 2010


During a Florida property insurance market panel discussion entitled “First Coast Forum:  Florida’s Property Insurance Crisis” held on July 29, 2010 by Jacksonville public broadcasting affiliate WJCT-TV, State Representative Bill Proctor indicated his intention to file property insurance rate deregulation legislation in 2011 that would allow insurers maintaining a certain level of solvency to have their upper-tier rates “released.” 

Another proposal would allow policyholders to pay an up-front “estimated event cost” in exchange for being removed from Florida’s hurricane assessment pools.   Representative Proctor explained that, while this action would reduce the State’s assessment pool, it also would help to depopulate Citizens Property Insurance Corporation (“Citizens”) and assist in retaining major insurers’ surplus within the Florida market.

Representative Proctor was joined during the hour-long forum by State Representatives Charles McBurney, Ronald “Doc” Renuart and former State Representative Don Brown, who also is an insurance agent.  Other participating industry representatives included Citizens Chief Administration Officer Susanne Murphy; Matt Carlucci, an insurance agent and former Jacksonville City Councilman; University of North Florida Economics Professor Paul Mason and Florida Times-Union Business Columnist Abel Harding.  Melissa Ross of WJCT-TV moderated the forum.

After introducing the panelists, Ms. Ross cited the recent U.S. Government Accountability Office report, which indicated that with 1,800 miles of coastline, Florida has more property insurance risk than any other state and would have to sell $7 billion in catastrophe bonds to pay for claims from a major hurricane.  Given these factors, she reminded that national analysts have called Florida’s property insurance market a “potential disaster.”  

Professor Mason remarked that Florida government has collected the highest amounts of revenue during years in which catastrophes have occurred, since, among other factors, rebuilding leads to more property taxes and various construction-related fees.  

The panel discussed the concept of inland property owners “subsidizing” the insurance rates of those on the coastline, many of whom are not paying actuarially sound rates.  Professor Mason said that, economically, this cannot be considered  a subsidy, since inland dwellers enjoy ancillary benefit from coastal properties in the form of economic drivers such as higher property values and the corresponding payment of higher property taxes by coastal property owners.

Calling the problem “simple math,” Mr. Carlucci said that, from 1992 to 2005, Florida insurance companies paid out $62 billion in claims and only $22.4 billion in premiums.  Insurers have had the difficult challenge of trying to raise rates to an actuarially sound level in a politically difficult environment where people are already paying insurance-related surcharges.

He reiterated that Florida has more exposed coastline and corresponding higher critical mass than any other place in the nation. 

Mr. Harding pointed out that the business community is watching Florida’s insurance industry developments to see what the next move will be.  Meanwhile, the Property Casualty Insurers Association of America has been “sounding the alarm bell” that Florida is at risk.

He added that Florida Governor Charlie Crist campaigned on a pledge to reduce property insurance premiums by 40 percent, which has led to property insurance becoming an overly politicized issue.   Mr. Carlucci agreed that when politicians campaign on lowering property insurance premiums, they’re “meddling” in business.

Representative Proctor said that elected officials must strive to create a balance between affordable insurance premiums and adequate coverage of risk.  If risks are not covered actuarially, assessments will be higher.  Insurance companies have not yet fully recovered financially from the impact of Hurricane Andrew in 1992, he explained, and it will be at least 18 more months until they can reach the point of once again having adequate surplus.   With each passing hurricane season (subsequent to the large claims payouts of the previous years), he described, ” . . . it’s like skating across a pond on thin ice over the next 18 months.  If we can just get to the other side, it will make a big difference to insurance companies.”

The panelists discussed a recent article that compared Florida and Louisiana’s differing approaches to insurance market solvency.  Through deregulation, Louisiana has handled a similar situation to that of Florida’s by ” . . . allowing the private sector to solve the problem on its own.”

Representative Proctor reminded that, because of Florida’s “red tape and bureaucracy,” State Farm and Allstate Insurance companies have wanted to leave the State for good.

Panelists agreed that part of what is facilitating insurers’ ability to raise rates is the proliferation and manner in which people get information about weather events versus 15 or 20 years ago. 

Citing an example of a church that paid a $2,000 catastrophe assessment one year, Mr. Carlucci said that Florida is not big enough to fund inevitable large catastrophe claims in the future.

In creating Citizens, Ms. Murphy related, the logic was to find a solution to Florida’s exposure by spreading the loss over a large population that benefits from the amenities of Florida’s unique coastline (such as the beaches, tourism), as well as to provide a mechanism for lower cost, guaranteed reinsurance that would not ebb and flow based on market conditions.   She reminded that currently, between Citizens and the Florida Hurricane Catastrophe Fund, claims-paying capacity is over $18 billion.  Assessments are only made after all loss payouts and recoveries are completed.

According to the federal GAO report, Florida’s exposure has increased up to $2.45 trillion.  To provide a conception of what that amount represents,  Ms. Murphy explained that, by today’s inflation equivalencies, Hurricane Andrew would have created $42 billion in claims.

A news segment was shown in which a coastal homeowner lamented over the near impossibility of securing excess flood insurance, or even a policy that would afford the full replacement value on her home.  While her home is covered for the replacement cost of $250,000, she said it cost even more than that 14 years ago to simply build the home. 

A second panel was introduced that included Representative Proctor, former State Representative Brown and Jacksonville Business Journal editor John Burr.

Florida’s reality, explained Representative Brown, is being a hurricane-prone state with the nation’s largest concentration of coastal population buildup.  Because the cost of reinsurance can’t be controlled, he said it is impracticable to even believe that Floridians could ever have cheap, quality property insurance.

“If we don’t have the surplus within the state to cover ourselves,” Representative Proctor added, “then it behooves us to keep as many major companies here as we can, because when they leave, they take their surplus with them.  They won’t stay if they have to charge a rate that’s below the risk they’re insuring.”

Mr. Brown related that he was a member of the 2007 Legislature that passed HB 1A, which he felt has taken the insurance industry in the wrong direction.

“We tend to focus on the symptoms and not the disease,” he said in reference to the 2007 legislation.  “Until we admit that the problem is not the insurance, but one that’s a hurricane and human behavior crisis, we are not going to solve it.  Until we affect the actual cost, we’re not going to change the price.  Until we drive the cost down by affecting human behavior, all we’ve done is trick the people.”

Mr. Brown said he feels it is always better to finance something with capital than with debt.  While he agreed that hurricane years prompt a post-event tax revenue boost, Florida’s three-tiered assessment structure could cost a single policyholder as much as $14,000 over a 30-year time period.   People don’t realize the assessment potential for multiple events, he explained.

The panel discussed the politicizing of insurance rates and the opposition to SB 2044 by Florida’s real estate industry, which contended that higher insurance rates would make it tougher to buy and sell homes in a depressed real estate market. 

While panelists admitted it is painful to discuss increasing insurance premiums, it is nevertheless imperative to be honest with consumers about their risk.   “The Governor should be honest with people about where he has put us,” Mr. Brown said.

Representative Proctor related that he knew of one private insurer that wrote nine percent of its policies in Florida, of which yield 12 percent of its overall collected premium, but that these policies represent  45 percent of the company’s risk.

When Florida is compared to other similarly situated states, its total percentage of risk is 80 percent.  “No other state even comes close,” Mr. Brown said, adding that Florida’s risk portfolio is “completely out of balance” and that the notion of higher property tax revenue from coastal properties being a reason to subsidize their insurance rates doesn’t make sense.

Representatives McBurney and Renuart joined the panel for the third segment of the program, which once again included Mr. Harding.

Both legislators agreed that the veto of SB 2044 was a mistake.  “It didn’t fail,” said Representative Renuart, “it passed both houses by significant margins.”  The veto  ” . . . came down to the ideology of whether the free market should set prices, or whether we should hold them down and create a false situation where we keep a market at risk.”

Whether the Legislature regards taking up the issue of insurance rates again in 2011 to be critical was discussed.  Factors in that consideration include economic impact and contingent liabilities, such as the impact of potential assessments on investment capital.

Mr. Harding echoed the sentiment that Citizens is not sustainable and that Florida must determine how to lure back more private insurers to the state.

Unfettered coastline development, lax building codes, the critical mass of population below Florida’s I-4 corridor and “the politics of the past three years” have resulted in Florida’s risk and rates not being equal, and an acknowledged disparity between north and south Florida insurance rates.  

Representative Renuart explained that, if Florida’s insurance issues could be depoliticized, rates would initially increase.  However, healthy competition then would ensue and rates would begin to once again come down.

The panel answered the following questions from listeners:

Question:  Why can’t companies like State Farm spread the risk nationwide?

Answer (Representative Renuart):  When State Farm gets hit with a storm such as Hurricane Andrew, it doesn’t have enough reserves, so the mother company steps in to help, after which it must increase its own reserves.  Because that money would have to be replenished by increasing premiums from other states, State Farm would have to deal with regulators in those states that don’t want to allow State Farm to essentially subsidize Florida’s losses through their states’ policyholders.   Part of the answer is a national catastrophic fund to pay for damages from floods and tornadoes.   In reality, the pain of everyone’s disaster has to be shared.  We could be looking at that type of catastrophic funding soon.

Question:  If you’re not in a flood zone and don’t have flood insurance, do you have coverage if a hurricane hits?

Answer (Representative Renuart):  A high percentage of flood claims actually come from low-risk flood zones.  If wind-blown water gets into a residence, yes, you have coverage.  However, rising water must be covered by flood insurance.  

Question:  Does citizens carry reinsurance for current active policies?

Answer:   Yes.

In closing, Ms. Ross asked the panel members to remark on their predictions for the resolution of Florida’s property insurance market crisis.

Representative Renuart said that he expects the same legislation (as SB 2044) to be reintroduced as Representative Proctor had suggested.   The purpose of this would be to infuse the marketplace with capital, which would eventually have the impact of reducing insurance premiums and attracting new business investment.   Most importantly, Florida needs to end the fiscal risk and encourage people to harden their homes.

Saying that his wish is that people begin to look at the property insurance crisis as a business issue and not a political one, Mr. Harding closed the forum by cautioning people “don’t vote for the guy who promises to lower your insurance.”

To listen to the complete archived program, go to:  http://www.wjct.org/mp3/fcf/propertyinsurance.mp3



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