The Magazine

Bankrupting Florida

A disastrous hurricane could trigger a disastrous insurance debacle.

Aug 20, 2007, Vol. 12, No. 46 • By ELI LEHRER
Widget tooltip
Single Page Print Larger Text Smaller Text Alerts

While some insurers have cut rates in the wake of the reform, others have proposed raising them or offered premium cuts much smaller than the 24 percent state actuaries predicted in January. Amidst accusations that the insurance industry has been "greedy, unfair, and has mistreated our fellow Floridians," insurance commissioner Kevin McCarty (who declined interview requests for this article) has made it clear that he will not approve the proposed rate increases.

Whatever problems the insurance companies may have with state regulators, the state of Florida faces an even worse situation. To pay back bonds issued by the Cat Fund and Citizens, Florida would place mandatory "special assessment" taxes on nearly all property and casualty insurance policies in the state including those owned by people totally uninvolved with Citizens or the Cat Fund. But even this could prove unworkable, because paying off nearly $30 billion in bonds with auto and homeowner premium taxes would almost certainly require an ongoing assessment larger than the state's $1,200 average auto insurance premium.

Many Floridians simply couldn't pay premiums that high and would likely find ways to evade it or stop driving. Even tapping general fund revenues to reassure bond buyers might not do the trick, because Florida faces constitutional limitations on property taxes and the imposition of an income tax.

Unstable as it sounds, the current system could survive several mid-sized hurricanes without a serious crisis. But if a Katrina-class storm comes, the state has little choice but to pray that it can raise enough money selling bonds.

Making things better won't be easy. State Representative Dennis Ross, one of only two legislators who voted against the governor's plan, describes the fundamental problem with the system. "There's no investment capital and no way for it to get in," he says. "It's only debt. . . . We've cut out the private sector." In the wake of Crist's insurance reforms, in fact, major companies including Allstate, USAA, Nationwide, Liberty Mutual, Travelers, and The Hartford have cut back on issuing policies in the state. State Farm has filed papers that appear to give it room for a wholesale pullout. And, if that happens, other pullouts are sure to follow.

Cutting back the Cat Fund, as both Crist and State Chief Financial Officer Alex Sink have suggested, probably won't extricate Florida from its current mess either. With Citizens still writing new policies, in fact, an immediate Cat Fund rollback might actually increase the state's direct liabilities, because several upstart Florida-only insurers will likely fold before they issue any policies. Meanwhile, big out-of-state carriers (although hardly enamored with the current Cat Fund) would probably cut back operations even further. In both cases, Citizens would then step in and write more policies at below-market rates.

This is a problem because Citizens, which Florida taxpayers have already bailed out twice, has next-to-no chance of remaining solvent in the wake of a big storm without the backing of the Cat Fund or an enormous bond issue. In fact, purely private companies find the Florida market tough sledding in the best of times: In all but four years since 1992's Hurricane Andrew kicked off the modern wave of big storms, the private insurance industry has lost money writing homeowners' insurance policies in Florida.

Because it cannot spread risk and issue policies for events like Montana car crashes and California wildfires that are unlikely to correlate with hurricanes, Citizens has a big disadvantage relative to major private insurers. In addition, Citizens--already banned from raising premiums until 2009--will have a hard time convincing politicians to raise premiums enough to keep its fiscal ship afloat. Thus, Citizens could easily come to pose a major liability and, like the Cat Fund, would have to rely on special assessment taxes to cover bonds that it would issue to pay claims.

A better system seems elusive. While a variety of proposals have appeared (Ross favors a plan that would have the state cover wind damage and leave everything else to the private sector), it's unlikely that Florida can find a political solution to the crisis. An immediate wholesale undoing of all the January mischief, even if coupled with the most market-friendly reforms imaginable, would send premiums soaring in the short term and might force some people out of their homes. In any case, it's almost inconceivable that the legislature would ever approve it. Whatever happens, the state will need some effort to smooth a gradual transition to a better, private system that avoids enormous fiscal risks.