Lawmakers jittery about risk rethinking storm insurance ‘fix’

Feb 25, 2008

Daytona Beach News-Journal–Feb. 25, 2008
Tallahassee Bureau Chief

TALLAHASSEE — With homeowners getting hammered last year by costly property-insurance bills, Gov. Charlie Crist and Florida lawmakers took a gamble.

They froze rates for customers of the state-backed Citizens Property Insurance Corp. and expanded another state program to help reduce rates for customers of private insurance companies.

The gamble: To get the rate savings, lawmakers had to take on billions of dollars in potential financial risks should a major hurricane hit the state.

The strategy paid off in 2007, as Florida escaped hurricane damage. But with this year’s legislative session starting March 4, lawmakers are considering steps to reduce the state’s risks — possibly leading to future rate increases for residents.

It’s too early to know what lawmakers will do during the session. But some are clearly worried about the amount of financial risk the state has taken on.

“We are basically one hurricane away from the largest tax increase in Florida’s history,” said House Speaker Marco Rubio, R-West Miami.

Property insurance has been one of the state’s biggest issues since eight hurricanes pounded Florida in 2004 and 2005. After those hurricanes, insurance companies sought large rate increases and dropped hundreds of thousands of policies, causing lawmakers to scramble to try to patch the system.

The insurance debate during the coming session will involve a tricky political balancing act, as lawmakers deal with Citizens and the Florida Hurricane Catastrophe Fund. That fund sells “reinsurance,” a crucial form of backup coverage that insurers use to pay hurricane claims.

While lawmakers want to hold down consumers’ rates, they face the possibility of Citizens and the catastrophe fund not having enough money if a major hurricane hits.

In such a case, insurance policyholders throughout the state would have to pay extra charges, sometimes likened to taxes, to cover the deficits.

Lawmakers last year froze Citizens’ rates through 2008 as a way to provide relief to customers. But with that freeze set to expire, rates in coastal areas could soar in 2009 unless lawmakers make changes.

Citizens was created by the state as an insurer of last resort and has a large concentration of policies in South Florida and other coastal areas that are vulnerable to hurricanes.

State and industry officials say Citizens does not charge high enough rates to cover its potential risks, a concept known as being “actuarially sound.” By law, Citizens is supposed to charge such rates in 2009.

Christine Turner, director of legislative affairs for Citizens, said one preliminary estimate indicated windstorm rates in specially designated high-risk areas could increase by a statewide average of 56.5 percent. Increases in other areas would be far lower.

Turner said a possible approach might be to spread rate increases over a number of years and also place caps on how much rates could rise annually in any particular area.

Similarly, Senate President Ken Pruitt, R-Port St. Lucie, said lawmakers might look at making gradual increases — in his words, using a “glide path” — to avoid a rate shock for customers.

“I believe it (the law requiring actuarially sound rates) is the right public-policy direction for Florida,” Pruitt said. “However, we may need to consider changing the law to create a glide path to prevent rates from becoming unaffordable.”

Meanwhile, lawmakers also are considering a proposal to reduce the size of the catastrophe fund.

Lawmakers last year expanded the amount of cheap reinsurance the fund sold to insurance companies, which otherwise would have faced buying coverage on the more-expensive private market.

Insurers were expected to pass on the resulting savings to homeowners through lower rates.

But with the fund now providing nearly $28 billion in coverage, state Chief Financial Officer Alex Sink and some lawmakers are worried it could have a hard time meeting its obligations if a major storm hits. They want to reduce that amount by about $3 billion.

Reducing the size of the catastrophe fund, however, could lead to at least modest rate increases for homeowners. Sink’s office estimates the increase could be 2 percent or less.

But the possibility of increased rates concerns lawmakers such as Senate Minority Leader Steve Geller, who thinks the hikes could be larger.

“There is absolutely no question but that what (Sink) wants to do will result in higher costs,” said Geller, a Cooper City Democrat who is co-chairman of a special Senate committee on property insurance.