Thursday, April 26, 2007

WSJ weighs in on Florida insurance situation

It isn't easy to put one of the more well governed states on the path to fiscal ruin in a mere three months, but it seems Florida Governor Charlie Crist is exceptional. His campaign to socialize Florida's insurance market has placed the Sunshine State one big hurricane away from financial disaster.

Not that you'd know this from Mr. Crist's approval ratings, which remain in the stratosphere thanks in part to his populist turn bashing insurance companies. The Republican campaigned last year on promises to do something about his state's property-insurance premiums, which have climbed in the wake of some recent nasty hurricanes. Economists know that these rising costs are necessary, and in time beneficial, because insurers must build reserves against the more frequent storms hitting ever-more-populated coastal areas.

But Mr. Crist is a man on a poll-driven mission and his line has been that greedy insurers are ripping off his constituents. In January he convinced the Republican legislature to pass a "reform" designed to lower the price of insurance by making the state a larger player in the market and undercutting private insurers. The new law allows state-run Citizen's Property Insurance -- intended to be an insurer of last resort -- to compete directly with private companies.

This exercise in Cuban economics is already gutting Florida's once-competitive insurance market. Private insurers know the law will artificially depress rates, forcing some to operate at a loss. Many have responded by cancelling policies, prompting Governor Crist to issue an "emergency" order freezing premiums and barring cancellations. Yet even this hasn't stopped the bleeding.

USAA last week became the latest to significantly restrict the number of new policies it issues in the state, and to drop 27,000 second-home policies. This follows pullbacks from AllState, State Farm, Nationwide and others. The storms and new regulation have also forced some insurers out of business, leaving thousands of policyholders with no coverage and fewer options for getting it.

Large numbers of homeowners are now turning to Citizen's, which itself is only able to offer lower premiums because of its implicit taxpayer guarantee, and because its actuarial assumptions reside in la-la land. Citizen's likes to say it will have $8 billion with which to pay claims, but it rarely notes that much of this is a line of credit. Between such credit and its bonding authority, what Citizen's really has is the potential to rack up huge liabilities that will have to be paid by someone when the next storm surge comes ashore.

Most likely, that someone will be all Florida homeowners, who, in the event of a Citizen's collapse, will be on the hook for large assessments. This tax is likely to be levied on every homeowner, including those who don't live in areas at high risk for storm damage. Another option would be for the state to provide a bailout, putting all taxpayers on the hook. The risk of a taxpayer bailout is also high for the state's hurricane fund: The new law doubled its risk-bearing capacity to $32 billion in business, thus allowing insurers to purchase reinsurance at cheaper rates than on the open market. However, the fund has only $1 billion in cash on hand, and thus no way to cover its new business if disaster strikes -- short of dunning taxpayers.

In sum, what Mr. Crist has done is concentrate the risk of future hurricane losses within his own state government, rather than spreading it around the world through the insurance industry. This is astonishing, given that the Sunshine State accounts for 27% of all hurricane-exposed property in the U.S., worth some $2 trillion. After Katrina, private insurers paid more than $40 billion to 1.7 million policyholders in Florida. But the state government and its taxpayers may end up paying for the next big one largely by themselves.

At least other states are learning from the Florida meltdown. Rather than create state competitors to the private market, Mississippi and South Carolina have taken steps to expand their markets of last resort. Louisiana's Governor and insurance regulator have talked openly of the need to rebuild the private insurance market, rather than transfer risk to taxpayers. Even the liberal Atlantic Coast states, usually the first to turn to new regulations, have largely rejected attempts to socialize their storm risk.

For now, many Floridians are thrilled that their rates are falling and so the Governor is popular. He recently asked for new legislation to give Citizen's even more power to compete with private underwriters. However, Mr. Crist and his fellow Republicans had better hope that predictions of more frequent hurricanes are wrong. Because when they hit, and taxpayers discover there's no such thing as free insurance, what could get blown away is their governing majority.


ALD said...

In the interest of equal time, the blathering populist response from Gov. Crist:

Insurance Monolith Threatened Florida

In response to your April 20 editorial "Florida's Folly": Like Theodore Roosevelt, I believe an elected chief executive, as a servant of the people, must and should responsibly wield the power of office to further the common good and improve the lives of all citizens. So it follows, my response as Florida's governor to our state's insurance crisis places people before profits.

When I took office this January, Florida faced a daunting challenge: Either confront head on the monolithic insurance industry, or stand by and watch her citizens and her economy buckle under the oppressive weight of a deepening crisis. For many years prior to my inauguration, insurance companies claimed the risks were too great and the rates simply too low in Florida. But during that same time, those companies had been raising rates at unprecedented levels (some, by 50%, others, by more than 500%) and shedding the higher-risk (and more abundant) coastal properties.

Indeed, contrary to recent reports, the plans of Allstate, Nationwide and others to abandon Florida policyholders were set in motion well prior to my arrival. Those policyholders landed in the state-run Citizens Property Insurance Corporation, which by last December ballooned to more than 1.3 million policies and $400 billion in exposure. Yet even while the private market risk profile improved at taxpayer expense, private market rates (and corresponding profits) continued to soar. In the past two years alone, the insurance industry has banked more than $100 billion in profits.
Left unchecked, the insurance industry would have set Florida on a collision course with fiscal ruin. Moreover, they would have deprived many Floridians of the American dream of home ownership and the hope of a secure, affordable quality of life. Recognizing the industry was unwilling to self-police and that inaction was not an option, I worked with Florida's leaders in a bipartisan way to enact reforms that use government's fiscal and regulatory stimulus to induce a more competitive free market.

Under the new law, Florida expanded its Catastrophic Fund to provide lower cost reinsurance to the insurance industry, allowing them to lower the rates they charge to policyholders. Far from an abandonment of the free market, this responsible solution both lowers rates and induces free-market competition. Consumers get immediate reductions in premiums -- albeit differential reductions, depending on the company and the property location -- and consumers get more choices once reinsurance savings are reflected in the rate structure.

Citizens Property Insurance Corporation was also reformed to address both the availability and affordability of insurance. The Citizens' reforms will likewise result in lower rates and more competitive choices. Indeed, Floridians are already starting to see lower rates as well as new entrants to the market. Of course if the ill wind blows, there will be costs. Nevertheless, had responsible action not been taken, Florida would have been forced to bear both those costs, along with the staggering costs of economic decline that would have come with inaction.

While I applaud and welcome the motivation of business to profit, I will not abide profiteering on the backs of the people. Perhaps in time, the insurance industry will return to competitive free-market behavior without the need for government intervention or stimulus. In the interim, this responsible, bipartisan approach to a crisis threatening both personal quality of life and continued economic expansion was and is the only right thing to do. The "Trust Buster" would have done no less.

Charlie Crist
Governor, State of Florida
Tallahassee, FL

ALD said...

Comments from DVD:

I'm glad that I'm not the only one who sees this populist in conservative's sheep's clothing.

Also note that Crist's emergency order was "clarified" (i.e. altered) after the Florida Insurance Counsel filed suit stating that the context method of Crist's use of the emergency order was not provided for in law and various other things.

Rather than let a judge rule on the validity of the original request (Which prohibited companies from non-renewing risks for any reason) and potentially take an embarrassing loss, Chist altered the order in a way that allowed insurance companies to non-renew their book if they refilled their rates. The FIC, in turn, dropped their suit.

Also, by the way, every Florida homeowners policy has to pay a fee to cover the Citizen's fiscal shortcomings. In addition, every P&C policy in florida (includes auto and liability policies) has to pay a 1% fee to the Florida Hurricane Catastrophe fund.

It makes me almost regret not voting for Gallagher (ugh).

ALD said...

Further comments from DVD:

Also check out the FIC's 2/13 petition:

The Legal Smackdown begins on page 6.

What's interesting to note here is Crist's emergency order is an attempt to strong arm the industry into doing his bidding. He wanted to regulate via emergency order. This is not the way to attract new insurance companies into the state.

If the original rule was declared invalid, you probably would have seen massive non-renewals by the larger insurance companies to try to reduce their exposure.

If I ran an insurance company, I wouldn't want to write in a state that that a quasi-governmental insurance company (Citizen's) with competitive rates and a governor that wants to dictate that I cannot reduce my exposure or set actuarially sounds rates.

Arrgh! Are there any real conservatives left? What happened to deregulation and smaller government?