No more gambling on luck with state-run insurance programs
There is good luck and dumb luck—and both don’t seem to last. Calls to shrink Florida’s state-run property insurance mechanisms—Citizens Property Insurance and the Florida Hurricane Catastrophe Fund—are coming from smart, practical people who know that luck runs out, and that reality is getting attention.
Running on luck is not what the Florida Hurricane Catastrophe Fund wants to do. If and when a major hurricane strikes, all the good fortune in the world (a.k.a. capital) will bring in no more than $7 billion in bonds to meet the Cat Fund’s current obligation of $18.4 billion. By the end of this year, lucky Florida’s Cat Fund will have $8.4 billion in cash, but there’s no way the state will be lucky enough to find investors willing to buy $10+ billion in bonds to close the gap between the cash on hand and the money needed to pay claims after a storm. Shrinking the Fund would mean that insurers would seek reinsurance in the private market, which costs more and those costs will be passed on to consumers.
Obviously, the thought of property insurance rate increases is not popular. An understatement, I know. But there is something worse looming if rates don’t correlate with anticipated losses that come with a hurricane. Debt is the dirty word here. You are still paying for state losses from storms that hit six years ago through assessments (taxes) and will keep on paying for those 2005 storms through 2016. Thinking about how the debt of the state insurance programs will bloom with another storm is driving change to pay it forward.
Pay it forward is what the private market is required to do via regulation and legislation; pay it backward is the way the state insurance programs run, by design—and a redesign appears to be on the horizon. Insurance claims drive premiums, and if enough money isn’t available the year it is needed, the state-run programs collect it on the backend as long as necessary. In a hurricane-prone state like ours, insurers make small profits in most years and take huge losses after major storms. Take a look at the return on net worth chart to see the negative -183% drop experienced in 2004 after four storms that year.
The Office of Insurance regulation issued a report on the bonding and borrowing capacity of Citizens and the Cat Fund early this year, concluding that “strategic methods for encouraging the movement of capital and property insurance policies to the private market should be employed as quickly as possible.” And, that is now a work in progress.