Whirl of trouble for Florida's insurance
Florida froze insurance rates in 2007 to extend the life of its building boom. But it could mean financial ruin if a hurricane were to hit the Sunshine State. Dan Grech reports.
Florida Governor Charlie Crist is surrounded by lawmakers as he signs an insurance bill during a ceremony on the front porch of a private home in North Palm Beach, Fla. (Joe Raedle/Getty Images)
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Kai Ryssdal: We have our first hurricane of the 2009 season. Hurricane Andres is expected to reach Mexico's west coast later today. In prime U.S. hurricane territory, that is, mostly, the state of Florida, there are still fresh memories of the devastating storms they have had there the past several years.
Strangely though, insurance rates haven't kept pace with public worries. Florida froze insurance premiums two years ago. That let builders keep building in the face of a saturated real-estate market. And it could mean everybody gets soaked if the weather gets really bad. From Miami, Marketplace's Dan Grech reports.
DAN GRECH: Florida keeps insurance rates low by doing something no other state has tried: it subsidizes the cost of reinsurance. Reinsurance is basically insurance for insurance companies. An insurer agrees to cover, say, the first $10 billion in damage after a storm. Reinsurance kicks in to cover the rest.
Private firms charge around 25 cents for each dollar of reinsurance protection. The state-run Hurricane Catastrophe Fund, or Cat Fund, charges two cents for each dollar of protection. So homeowners pay lower premiums. There's one big problem: the Cat Fund can't cover its commitments.
JIM MASSIE: Our current strategy in Florida is prayer.
That's Jim Massie with the Reinsurance Association of America.
MASSIE: We're praying that we don't have a hurricane. And prayer is good, but I don't know that we can count on it to pay insurance claims.
The Florida Cat Fund relies on its ability to borrow money to pay claims. But last fall, the credit markets seized. The Cat Fund was suddenly short $17 billion. Massie says Florida's experiment in state-subsidized reinsurance could end in disaster.
MASSIE: The Cat Fund violates one of the cardinal principles of insurance, which is spreading the risk. The Cat Fund concentrates the risk within the state of Florida. Private reinsurers sell that risk around the world. To Bermuda, Japan, London.
Florida created its Cat Fund after Hurricane Andrew in 1992. The fund has since grown to sell $27 billion in storm protection, making it the state's dominant reinsurer. By keeping premiums low, the Cat Fund made property in Florida more affordable. That helped pave the way for Florida's building boom.
Robert Hartwig is president of the Insurance Information Institute. He says cut-rate insurance allowed Florida developers to overbuild and Florida homeowners to overbuy.
ROBERT HARTWIG: There's no question that the state's policy of providing subsidized insurance has led and contributed to the state's real-estate disaster.
Hartwig says the only way for the Cat Fund to have enough money to cover its obligations would be for it to hike the premiums it charges. That would reflect the true cost of re-insurance.
Ron Klein is a Democratic Congressman from South Florida. He says Florida needs to rely more heavily on private reinsurance. But the government must take a role in keeping those companies in check.
RON KLEIN: Unfortunately there's sort of a failure of the market. It's a handful of companies charging whatever they can charge. A lot of people would say that's whatever the market will bear. But people can't afford it. You're pricing them out of their home. That's not a good thing.
Klein wants to create a national pool for catastrophic risk that could sell bonds to the private market. Others suggest the federal government should float mega-catastrophe bonds after a major disaster. But those solutions are far off.
Despite new state legislation, the Florida Cat Fund is still short billions of dollars this hurricane season. In the event of a big one, the state may not have the money to pay claims.
In Miami, I'm Dan Grech for Marketplace.
Comments
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From South Florida, FL, 06/25/2009
Insurance companies were making HUGE profits for years, then there's a weather event -- imagine that in Florida? -- and all of a sudden there's no money to pay the claims. Give me a break. Everyone acts like Florida is the only state with homeowner claims. How about the CA fires, the floods and tornadoes in the midwest?
From FL, 06/25/2009
The government should not be in the business of providing property insurance unless they are going to make people pay the right amount for coverage. Plain and simple.
From FL, 06/25/2009
Where's Washington when we need them the most. Obama is handing out money left and right, why not give Florida some. We gave him the presidency, he should give us some help. Reassure Floridians that in the time of need we will not be ignored like the residents of New Orleans were by Bush. Bail us out Obama. Give us some funding so we know we can continue on with our lives if we have to go through a disaster. Florida's economy cannot fail. If we don;t get some assistance it could very well do so. Crist's agenda matches Obama's, regulate, regulate, regulate. They'll be pals for sure if Crist becomes a Senator.
From Charleston, SC, 06/25/2009
Hurricane Hugo was quite the storm when it moved through SC. We were able to rebuild, but government began to get in the way. Fortunately I don't think we're as bad off as Florida. They seem to be in the lurch as far as insurance goes. I hope they don't get another Andrew or a Hugo sized storm. What a disaster that would be. Hopefullt Florida's leaders can step up and figure out a solution. It seems like its only a matter of time before the big one comes through Florida or South Carolina. Hopefully we'll all be prepared. I learned my lessin last time. :)
From St. Petersburg, FL, 06/24/2009
NPR, thanks for hitting on this subject. As always you talk to real players who are parties to the topic at hand. I love to be informed about issues that affect me. Thanks.
06/24/2009
They should've raised rates before the economy went south on us. Then a rate increase wouldn't seem so bad. Poor planning if you ask me.
06/24/2009
Jim Massie's comment about praying scares the heck out of me. Why are we praying not to get hit again? Besides the obvious that no one wants to be hit a hurricane, if we are hit by one of any size we're all going to go broke. That's a shame. The politicians put us in this mess. The private market is not helping, but how can they with the mighty Christ and his sidekick Lil McCarty stepping in to save the day???
We need real rates in Florida.
06/24/2009
Government run insurance is the WORST possible idea to curbing disaster risks in Florida. Citizen's is becoming so bloated with high-risk policies it's trying to transfer them to private insurers. Frozen rates and poor business practices are prompting State Farm of Florida (the largest private policy holder in the state) to pull everything but auto coverage out. Overbuilding in high risk areas and artificial premiums have made Florida extremely vulnerable and unless they work to reduce risk, we're going to see their economy wash out to sea and the rest of the nation will be paying for it.
From Ft. Lauderdale, 06/24/2009
Look out for the hurricane tax. One storm and we're paying it. Where is the federal government when we need them the most? That Obama won't do nothing for us when the big one hit. Car companies got all the money and for what?
From Daytona Beach, 06/24/2009
Citizens was there when we needed them the most. When no one else would insure us they did. We had a fire in our home and they took care of us. Despite the bad press they've received lately, I'm glad they were there for us. I hope they will continue to be.
06/24/2009
What a mess. I love how the guy in this article is saying we need a prayer. That makes it real comforting being a Florida resident. Those idiots in Tallahassee have no clue what's going on. It looks like its time to go without or "self insure." What a joke this is.
From Islamorada, FL, 06/24/2009
This whole situation is a mess due to politicians interrupting the free market. Free enterprise sets the best price and produces the best product. It has for years. Adam Smith's "invisible hand" is being slapped by Charlie Christ. Why would that be? Oh yeah, he wanted to get elected to he took up a populist cause and ran with it. Charlie better hope that the roulette wheel doesn't fail him this hurricane season. He has put all of Florida's chips on red. He better hope that the ball does not land on black, especially more than once.
It's funny that public officials who make bad investments and lose taxpayer money usually face a penalty. Will Charlie face a penalty for gambling with Florida's economy and all the taxpayer dollars that will be needed to bailout the CAT fund if a major storm rocks Florida? Doubtful.
From Miami, FL, 06/24/2009
Rates in our area outrageous. The only one that will give us any coverage is Citizens or some no name company that nobody knows about. The big names in the business won't touch us. I just hope that Citizens will provide us coverage when we need it. If not, where else can we go? Who can we turn to? I lived here during Andrew and it was crazy. People lost everything and had to rely on insurance to help out. I sure hope this catastrophe fund and Citizens can provide us what we paid for. Otherwise, Charlie will not get a vote from us in his senate run.
From Ft. Myers, FL, 06/24/2009
I think the rates being charged are ridicolously high for most of us. Someone needed to step in and wrangle these overpaid insurance lobbyists and executives. That's what Gov. Christ did. I wish he would stick around and represent guys like me for another term.
However, he has higher aspirations. Maybe he can wrangle some of those lobbysists in DC and get a national insurance program that can lend us a hand down here when we need it the most. I'd hate to see another Andrew and not be protected. I'm just glad the government is trying to help out for once.
From Jacksonville, FL, 06/24/2009
I pay a relatively low annual premium for my homeowners policy, $850. This is through a large, well known insurance carrier. I think the rate is adequate for the risk. Jacksonville has been spared from major hurricane damage for over 40 years and my home is stucco on block. It's a sturdy home that will not blow over easily like all these new frame built communities that go up in a week.
The real problem is subsidization of insurance for property is South Florida by Citizens Property Insurance Corporation. Citizens definitely creates a moral hazard by providing insurance at unsound rates to property in the highest risk areas. Why should everyone else in the state suffer as result? If you can't afford to live where hurricanes and sinkholes are prevalent, then don't buy a house there and expect to be bailed out by low insurance rates provided by the government. Citizens can assess everyone policyholder (auto and homeowners)in the state for losses that create a deficit. If the big one hits Miami, Tampa, the Keys, etc. we all have to pay. I could understand paying an assessment for this deifict, IF Citizens charged actuarially sound rates, but they don't.
This system leaves responsible taxpayers carrying the burden of bad decisions made by others, like rebuilding a home on the coast because Citizens will insure it.
From Jaclsonville, FL, 06/23/2009
I wish we paid a lower rate. Our ins prem per year for a one story brick house under 2000 Sq Ft is about $2000 per year for the last 6 years and no claims have been presented. Our $12,ooo has not benefited us.
State Farm asked for premium rate increase and the FL said no so, they are leaving the state. Its no wonder we have such little choice of carriers in FL and why we pay so much, not so little.
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