Trusted Solutions for a Better Florida
g
Backgrounder
www.jamesmadison.org
Number 64
|March 2010
Property Insurance Solutions to Protect
Homeowners, Taxpayers, and Florida Government
from Financial Devastation
By Eli Lehrer
Senior Fellow, The Heartland Institute Adjunct Scholar, The James Madison Institute
Introduction
As the United States deals with a global financial
crisis, Florida stands at the maw of a deep fiscal abyss
of its own making. Despite a series of regulatory
changes made during 2009 served to improve and
stabilize Florida’s property insurance system, the
environment in which Floridians buy insurance for
their homes remains one of
the nation’s most politicized
and financially threatening.
Political decisions made over
the course of several decades
have artificially lowered
property insurance rates for
homeowners in high-risk
areas while simultaneously
exposing the state’s
taxpay-ers to massive liabilities if a
single major hurricane were
to hit one of the state’s
heav-ily populated areas.
Although much work remains to be done, many of
limit it. Two major bills that overwhelmingly passed
the Legislature during the during the 2009 session
— one of which Governor Crist vetoed – represented
efforts to move the state in the right direction and
allow rational economics to play a larger role in the
provision of property insurance.
1Political leaders
outside of the Legislature, including Florida’s Chief
Financial Officer Alex Sink,
have also taken up the
man-tle of market-based reform
and have called for stable,
sustainable public policies
related to insurance.
During its 2010 session,
the Florida Legislature could
build on the progress it made
during 2009 by continuing
efforts to revise the state’s
laws and reduce the state’s
fiscal peril. This paper aims
to explain why and how the Legislature and the state’s
other elected leaders might go about doing this.
The James Madison Institute
Trusted Solutions for a Better Florida
The James Madison Institute is a non-partisan policy center dedicated to the free-market principles of limited government, individual liberty, and personal responsibility.
President and Chief Executive Officer: J. Robert McClure III
B
oardofd
irectorsChairman: Allan Bense, Panama City Vice Chairman: J. Stanley Marshall, Tallahassee
MeMBersofthe Boardof directors
Glen Blauch, Naples; Tommy Bronson, Brooksville; Jacob F. Bryan, Jacksonville; Charles E. Cobb, Coral Gables; Rebecca Dunn, Palm Beach; K. Earl Durden, Panama City Beach;
George W. Gibbs III, Jacksonville; L. Charles Hilton, Panama City; John Hrabusa, Lakeland; John F. Kirtley, Tampa; Fred Leonhardt, Orlando; J. Robert McClure III, Tallahassee;
Bill McCollum, Tallahassee; Susan Story, Pensacola; Jeffrey V. Swain, Tallahassee the JaMes Madison institute staff
Tanja Clendinen, Communications Director; Francisco Gonzalez, Development Director; Keri Gordon, Administrative Assistant to the President; Becky Liner, Operations Director;
William R. Mattox, Jr., Resident Fellow; Thomas Perrin, Public Affairs Director; Robert F. Sanchez, Policy Director; Laura Ward, Manager of Finance and Human Resources
to contact us
By Mail:
2017 Delta Boulevard, Suite 102 Tallahassee, FL 32303
Our Website:
www.jamesmadison.org
About JMI’s Research: Our Pledge to You
Research topics are selected by JMI’s Committee on Public Policy, with input when appropriate from members of our Research Advisory Council. Published research focuses on topics relevant to Florida and the Institute’s mission of promoting free-market principles and robust debate concerning Florida’s current problems and future challenges.
The findings and conclusions in JMI’s publications are those of the authors and do not necessarily reflect the views of JMI’s members, staff, or directors. JMI does not conduct sponsored research at the behest of donors, nor do the providers of research grants exercise control over the methodology, findings or conclusions of the research. When a peer review of an author’s methodology or conclusions is appropriate, a draft version of the publication may be submitted to a member or members of the Research Advisory Council.
the research advisory councilof the JaMes Madison institute
Dr. Susan Aud, Senior Fellow, Milton and Rose Friedman Foundation; Dr. Michael Bond, Senior Lecturer, Eller College of Management, University of Arizona;
Dr. Marshall DeRosa, Professor of Political Science, Florida Atlantic University; Dr. Thomas V. DiBacco, Professor Emeritus of History, American University;
Dr. James Gwartney, Professor of Economics, Florida State University; Wynton Hall, Professor of Speech Communication, Bainbridge (Ga.) College; Dr. Bradley Hobbs, BB&T Professor of Finance, Florida Gulf Coast University;
Dr. Randall Holcombe, Professor of Economics, Florida State University; Dr. Barry Poulson, Professor of Economics, the University of Colorado; and
J.B. Ruhl, J.D., Professor of Law, Florida State University College of Law. By Phone:
In the Tallahassee Area: 850-386-3131 Toll-Free From Anywhere: 866-340-3131 Via e-mail:
Property Insurance Solutions to Protect Homeowners,
Taxpayers, and Florida Government from Financial Devastation
(Continued from Front Cover)
The paper consists of four sections. The first outlines the risks that Florida faces as a result of its location. The next describes Florida’s cumbersome three-part regulatory system. The third section reviews the major problems the current system faces and their likely consequences. The final section offers a five point plan for improving Florida’s insurance environment.
The bottom line is simple: Although the state has made some progress, its current course remains unsustainable. If they want to make things better, the Legislature and Governor must embrace sweeping, sometimes painful reforms. Necessary reforms would increase insurance choice for consumers, shrink the size of the Florida Hurricane Catastrophe Fund, reduce the number of Floridians who purchase coverage from the Florida Citizens Property Insurance Corporation, give more rate flex-ibility to insurers, and make the state safer against storms. These reforms, although not without their own costs, will promote Florida’s economic well-being, better preserve its natural environment, and create a better, freer environment for Floridians to live their lives.
The Risks
Florida cannot escape hurricanes, and just about every indicator shows that the
current lull in hurricane activity will not last. As a low-lying peninsula jutting out into the Atlantic Ocean, Florida easily ranks among the most hurricane-prone locations on Earth. Florida’s coastal areas have more than $2 trillion in insured property, the most of any state.2 Florida, indeed, has more
property at risk than the other “hurricane alley” states (Louisiana, Virginia, Texas, North Carolina, South Carolina, Georgia, Alabama, and Mississippi) combined.3
Florida has also grown and spread out; although population growth slowed in 2009, the state’s population has roughly tripled since 1970, increasing to almost 19 million now from 7 million then.4 Furthermore,
during this period of rapid growth, Florid-ians have moved into larger and larger single-family homes. Indeed, metropolitan Miami and Tampa-St. Petersburg both saw their stock of single family homes grow faster than population.5 This means that
Floridians also cover more land and, thus, live in more places likely to suffer from storms. Since 1995, major storms have hit Miami-Ft. Lauderdale, the Tampa Bay Area, and Orlando. Only one major Florida city, Jacksonville, has avoided a direct hit.
Several years of calm hurricane activity may have lulled some Floridians into a sense of complacency. Indeed, 2009 saw America’s most placid hurricane season in over a decade.6 In fact, as of the end of 2009,
“As a low-lying
peninsula
jutting out into
the Atlantic
Ocean,
Florida easily
ranks among
the most
hurricane-prone locations
on Earth.”
not a single full strength hurricane had hit anywhere on the East Coast of the United States in more than four years.
While Gov. Charlie Crist may believe that prayer has played a role in the current period of low hurricane activity in Florida, scientists do not necessarily share this view.7 Instead,
scientists believe that the United States is in a period of generally heavier hurricane activity: The National Oceanic and Atmospheric Ad-ministration finds that the period of heavier hurricane activity began in 1995 and will last into the 2020s.8 Experts believe that two
major factors, both of them entirely beyond human control, largely determine the preva-lence of storms: a “tropical multi-decadal signal” and “El Niño/La Niña” southern oscillations. The tropical multi-decadal signal involves three interrelated factors: “1) warmer than average waters across the tropical Atlantic, 2) a stronger monsoon in the region of West Africa, and 3) a weaker monsoon in the Amazon Basin region.”9 El
Niño/La Niña, likewise, involves warming
and cooling of waters in the South Pacific. In general, hurricane intensity increases as the world’s waters warm.
Other, less understood factors may also impact the frequency and severity of hur-ricanes. Two commonly cited candidates are human-caused global climate change and changes in solar activity.10 Climate
scientists have not reached a consensus on the actual impact of either factor on hur-ricanes striking Florida. While both, neither, or a combination of the two may explain the difference between projections and actual hurricane intensity and frequency, even an extreme change in either factor would not have a significant impact on the frequency or intensity of hurricanes in Florida in the near future. Nothing, except perhaps the
passage of time, will change the frequency with which hurricanes strike Florida.
In short, even if 2010 turns out to be a similarly placid hurricane season, Florida can still expect to have to cope with many severe storms in the future. And this risk ex-plains why property insurance is expensive in Florida. The typical Florida homeowner pays about $1,400 for property insurance — the highest or second highest amount in the country, depending on how one counts.11 A
look at average premiums, however, reveals only part of the story. Under the current
system, inland Floridians pay more than they should for insurance while those who live near the coast pay less than they should if their rates were determined by weighing the risks. Moreover, because of the way
the state has chosen to manage the risks and because of the subsidies and taxes it imposes, everyone in the state may end up having to pay far more than before.
The System
While some states have managed to maintain excellent insurance markets with very little regulation, Florida’s state govern-ment intervenes in the property insurance marketplace more than any other state does. These interventions come through three major government instrumentalities: the Office of Insurance Regulation, the Florida Hurricane Catastrophe Fund, and the Florida Citizens Property Insurance Corporation. Each one of these interventions carries significant consequences for the private market. The next few pages describe what each component does.
The Office of Insurance Regulation
As its name suggests, the Office of
“The typical
Florida
homeowner
pays about
$1,400 for
property
insurance —
the highest or
second highest
amount in
the country,
depending
on how one
counts.”
Insurance Regulation (OIR) oversees the insurance industry. It licenses agents and brokers, runs programs intended to protect consumers, and oversees the rates, forms, market conduct, and market entry of companies that want to sell insurance.12
The office has a great deal of power for two reasons. First, it simply has a good deal of discretionary regulatory authority. The language of Florida’s insurance statutes is pretty similar to that in other states: The state is required to maintain rates that are “adequate” (high enough to pay likely claims), “not excessive,” and “not unfairly discriminatory.” Nonetheless, the OIR has a great deal of discretionary authority to determine what these terms mean.13 This
gives the OIR very broad authority. It may decide how insurers price their products, determine whether or not they can sell them at all, and impose fines if they violate laws requiring various types of disclosures to consumers and government officials.
The OIR also has a great deal of insula-tion from any elected official. Although administratively housed in the Department of Financial Services, it reports directly to the Financial Services Commission, which is composed of the Governor, the Chief Finan-cial Officer and the Attorney General. In this structure, the state CFO and Governor must agree on nearly any substantive oversight, including any decision to hire or fire the insurance commissioner.14 This means, for
all intents and purposes, the office operates almost autonomously.
Florida Citizens Property
Insurance Corporation
The Florida Citizens Property Insurance Corporation is a government agency that
sells more Florida property insurance than any private company in Florida. In so doing, Citizens imposes an additional level of de
facto price control on the insurance policies
that Floridians purchase.
Although it maintains a private sector façade, Citizens is an unusually powerful government agency. Citizens enjoys an exemption from most state purchasing and hiring rules and has a corporate-style structure that puts a CEO at its head. Its web page, at a glance, looks like that of a mid-sized private insurer, and it pays salaries comparable to those available in the private sector.15 In many ways, it does
operate as a business, albeit a not-for-profit one. Although it faces a few legal constraints on its operations (more about those below), it has many of the freedoms typically ac-corded to private businesses. Florida’s own statutes, however, make it clear that Citizens is a government agency in every way:
Because it is essential for this government entity to have the maximum financial resources to pay claims following a cata-strophic hurricane, it is the intent of the Legislature that Citizens Property Insurance Corporation continue to be an integral part of the state and that the income of the corporation be exempt from federal income taxation and that interest on the debt obligations is-sued by the corporation be exempt from federal income taxation.16
Citizens, in fact, not only serves as part of Florida’s government but has authority to impose taxes on every insurance policy issued anywhere in the state of Florida.
“The language
of Florida’s
insurance
statutes is
pretty similar
to that in other
states: The
state is required
to maintain
rates that are
‘adequate’
(high enough
to pay likely
claims), ‘not
excessive,’ and
‘not unfairly
discriminatory.’”
When Citizens has a deficit of more than 10 percent, it has the unilateral power to im-pose taxes (called “assessments”) sufficient that “the entire deficit shall be recovered through regular assessments of. . . insurers [and] insureds.”17 Citizens first imposes
a “surcharge” on its own policyholders and then, in theory, can impose taxes on everyone in the state. Citizens was originally created to offer insurance only for people legitimately unable to find any policies in the private market, but Governor Crist’s 2007 insurance reforms allowed Florida Citizens to write a policy for any Floridian who gets a single insurance quote more than 15 percent above Citizens’ rates.18
This anti-competitive behavior would be illegal in the private sector and explains why Citizens writes more policies than any other insurer that writes conventional property insurance in Florida. At the end of 2009, Citizens controlled about 24 percent of the state’s property insurance market (measured by revenue) and wrote policies for about 17 percent of homes. In 2009 (as in the previ-ous years) Citizens shrank slightly as private companies began writing more policies and doing “takeouts” of Citizens policies. It still remains — by a large margin — the largest insurer of its type in the country.
The Florida Hurricane
Catastrophe Fund
The Florida Hurricane Catastrophe Fund (Cat Fund) is a state-run reinsurance corporation and the largest provider of reinsurance in the state of Florida. Like private reinsurers, the Cat Fund, as it is popularly called, provides insurance for insurers. Since its creation in 1993, the Cat Fund has grown from a tiny facility
that provided additional reinsurance at the margins to a full-service operation that imposes enormous, probably impos-sible to pay, liabilities on the state and its taxpayers. (More on this below.) When insurers’ total losses exceed certain levels, the Cat Fund, like private reinsurance, promises to pay them given amounts of money. In return for these promises, the Cat Fund collects premiums from insur-ers. The Cat Fund, however, is different from private reinsurers in four major ways: participation is mandatory, it sells an identical product to all insurers that participate, it covers risks only in Florida, and it has the power to tax. It also differs fundamentally from private reinsurance as it concentrates all of a hurricane’s financial risk in Florida’s financial markets rather than spreading the risk across global financial reinsurance markets.
All insurers selling residential prop-erty insurance in Florida must buy some coverage from the Cat Fund.19 (Certain
other types of coverage are optional.) If an
insurer believes it can find reinsurance that better fits its business plan elsewhere, it still cannot opt out of the Cat Fund — even if doing so would allow it to cover more people at lower rates.
Cat Fund coverage is also standardized in a way that private reinsurance is not. While almost all private reinsurance sales involve “bespoke” (custom made) agreements, every insurer gets treated the same under the hurricane Cat Fund. The structure also has a number of differences from most private reinsurance policies. For example, it only covers damage from “named storms” (major hurricanes) while many reinsurance policies simply set a damage threshold and offer to pay damages above that threshold
“The Florida
Hurricane
Catastrophe
Fund (Cat
Fund) is a
state-run
reinsurance
corporation
and the largest
provider of
reinsurance
in the state of
Florida.”
from any (or almost any) peril.
In addition, the Cat Fund writes busi-ness only in the State of Florida while all sizeable private reinsurers are international in scope. While a private insurer can pool the risk of hurricanes in Florida with, for example, the unlikely risk of simultane-ous earthquakes in Japan, the Hurricane Catastrophe Fund cannot do this since it covers risks only in Florida.
Finally, the Cat Fund has the power to tax. If it runs short of money, it can impose special taxes called “assessments” intended to pay off any bonds it decides to issue. All Floridians currently pay taxes that add about 1 percent to their insurance policies to pay off the Cat Fund’s debts from the 2004 and 2005 hurricane seasons. Ironically, the state’s fiscal solvency laws make it illegal for a private insurer to charge premiums without the capital to pay claims. But because the Cat Fund is run by the state and has the power to assess additional taxes if it is unable to pay its claims, it conducts an insurance business that a private company could not legally do without its being con-sidered a Ponzi scheme.
Florida’s Regulatory Problems
Florida’s regulatory system poses enor-mous problems for the state, subjecting it to great current and potential costs. It is inher-ently unstable and discourages free choice and free enterprise. The system as a whole has failed to attract a sufficient number of financially sound new companies to write property insurance, the Hurricane Catastro-phe Fund is also inherently unstable, and Citizens has grown too large. Any better system will have to confront these problems in one manner or another.
Problem One:
Far more insurers have cut back in Florida than have entered it; most of the new entrants are not in very good shape and do not write much private coverage.
Since Gov. Crist led an effort to reform property insurance in the state during his first weeks in office, the situation has grown increasingly desperate for private market players, and consumers have become increasingly unable to buy insur-ance. The problems persist to this day. Established companies continue to cut back on issuing policies, little new capital flows into the market to write the types of insurance policies that most Floridians need, and the industry as a whole faces a financial crisis.
Indeed, several large national insurers simply do not want to do business in Florida. Major national insurers — State Farm, Allstate, Nationwide, USAA, and the Hartford, to name just a few large players — have essentially stopped writ-ing new property insurance policies in coastal areas of Florida.20 While it agreed
not to withdraw from the state entirely, as it previously had planned to do, State Farm, Florida’s largest private insurer by a large margin, agreed to remain in return for rate changes that may hike some homeowners’ premiums by as much as 40 percent, and State Farm is also reducing its exposure by declining to renew 125,000 of its current policies.21
Many of these policies will likely end up with small companies. Furthermore, having made a “deal” with State Farm, the Office of Insurance Regulation will likely have to grant similar concessions to any other company that feels it needs
“Finally, the
Cat Fund has
the power to
tax.”
them. Because none of these companies want to expand their Florida homeowners’ insurance portfolios, this will result in even more capacity departing the state.
Meanwhile, many of the new companies that have entered the state simply do not have the ability to write a significant
amount of new coverage. The charts below illustrate the problem.
As Figure 1 shows, only four companies that operated throughout 2009 were new to Florida and brought bona fide new capacity to the Florida market in a manner that helps typical homeowners. (Two other “new”
Figure 1: Characteristics of Real Property Insurers “New” To the Florida Market
Status
Companies
Number of
Comments
Says it plans to write homeowners Insurance but has not yet written any.
8 One company that has not yet written any policies is also a subsidiary of a company already in Florida and is counted only here. Three companies do not appear to be operating at all.
Writes property insurance, but not HO-3 policies for typical homes.
4 One company counted in
this category does write HO-3 policies but only for homes costing more than $1 million. One company currently offering only condominium insurance says it plans to offer property insurance. Ordered to stop writing
policies and placed under administrative supervision.
2 One company has since
resumed writing policies.
Liquidated. 1 Two additional companies
that operated before 2007 was also liquidated during 2009
Subsidiary of company already operating in Florida.
2 Wrote HO-3 policies
throughout 2009. 4
companies were actually subsidiaries of a company already doing business in Florida and, thus, did not obviously bring the Florida market additional capital.)
Together, as Figure 2 shows, the four “new” companies write a total of about 110,000 policies and supply $84 million
in capital. Two other companies — one currently under administrative supervision because of concerns about its finances and the other under supervision for the same reason during most of 2009 — write another 175,000 policies and back them with roughly $30 million in capital. These numbers alone
Figure 2: All New Real Real Property Insurers Since January 2007
Companies writing new HO-3 policies for typical homeowners throughout 2009 are listed in bold.
Name Entry Date
Does it bring new capacity to write HO-3 policies for typical homeowners? Capital Committed to Florida Market Policies in Force (August 2009) Comments Privilege Underwriters Reciprocal Exchange 1/23/2007 No $50 million 2,275 Writes coverage only for homes costing more than $1 million. American Keystone Insurance 2/1/2007 NA NA NA Liquidated in October of 2009. Homeowners’
Choice 5/10/2007 Yes $15 million 65,949
Modern USA Insurance 5/31/2007 No $14 million 18,557 Writes mobile home insurance only. Olympus Insurance Company 5/31/2007 Yes $50 million 28,495 American Coastal Insurance Company
6/21/2007 No, but says it will in the near future.
$50 million 1,447 Writes only condo and homeowners’ insurance, says it will write HO-3 policies in the future.
Main Street America Protection
10/9/2007 No $10 million 0 Says it will write only “surplus lines” coverage. Northern Capital Select Insurance 10/19/2007 Yes $9 million 10,414
Ark Royal 11/9/2007 No $10 million 2,684 A subsidiary of ASI, a company operating in Florida before 2007 People’s Trust Insurance Company
3/6/2008 Currently, but not for six months of
2009. $10 million 20,539 Suspended from writing new business in March of 2009, resumed writing in October. Avatar Property and Casualty 4/14/2008 Yes $10 million 7,856
ASI Preferred 4/14/2008 No $10 million 10,120 Also a subsidiary of ASI.
Magnolia Insurance Company
4/28/2008 Not currently, but did for almost all
of 2009. $20 million 100,275 Currently under OIR administrative supervision and not allowed to write new policies. Ace Insurance Company of the Midwest
7/10/2008 No $50 million 0 Only writes commercial coverage for larger companies. American Platinum Insurance Company
12/2/2008 Unknown $10 million 0 No evidence of active operations, unable to contact company.
Name Entry Date
Does it bring new capacity to write HO-3 policies for typical homeowners? Capital Committed to Florida Market Policies in Force (August 2009) Comments
North American Elite Insurance Company
2/6/2009 Unknown $34 million 0 No evidence of active operations, unable to contact company. Sawgrass Mutual Insurance Company
4/7/2009 Yes, when and if it begins
operating.
$10 million 0 Says they offer homeowners’ insurance but no policies written. Star and Shield
Insurance 4/7/2009 No $10 million 0 No policies yet written. Will write coverage only for public safety workers. Montgomery
Mutual Insurance Company
5/29/2009 Unknown $42 million 0 No evidence of active operations, unable to contact company. Lakeview Insurance Company 6/10/2009 No $10 million 0 An affiliate of Florida Family Insurance, a company already operating in the state. Ameriuse
Partners 8/17/2009 No $11 million 0 Only writes commercial coverage. Prepared
Insurance Company
9/18/2009 Yes, when and if it begins operating.
$10 million 0 Plans to focus on pre-2002 homes that do not meet modern building codes. Has not yet written any insurance policies.
Name Entry Date
Does it bring new capacity to write HO-3 policies for typical homeowners? Capital Committed to Florida Market Policies in Force (August 2009) Comments
Source: Office of Insurance Regulation, company data and web pages compiled by Heartland.
Companies listed as “no evidence of active operations” are companies for which we could not locate either a web page or a telephone number in Florida and were unable to reach by other means.
give a strong clue that the companies under administrative supervision are inadequately capitalized since they write more policies than the other companies but back them with less capital. Figure 3 illustrates the Florida insurance market.
Established companies are also en-countering problems writing insurance in
the Florida market. Even during 2009’s hurricane-free season, nearly half of Florida’s property insurers (102 out of 201) lost money writing insurance in the state.22 Tower Hill, one of the largest and
most respected Florida-only (“domestic” in industry parlance) insurers in the state saw the most influential rating agency in the
$197 million: Belongs to companies that do not write homeowners’ ‘insurance at all.
$84 million: Belongs to companies that wrote new homeowners’ insurance policies for single family homes throughout 2009.
$51 million: Belongs to a company that writes homeowners’ insurance only for homes costing more than $1 million.
$64 million: Belongs to companies that write property insurance, but not for single family homes.
$30 million: Belongs to companies that write property insurance for single family homes but were placed under administrative supervision by OIR during 2009 and banned from writing policies.
$20 million Belongs to wholly owned subsidiaries of a company that was operating in Florida before January 2007.
$197 million
$84 million
$51 million
$64 million
$30 million
$20 million
Figure 3: Florida’s Insurance Market
OIR Says that $446 million in new capital has been committed to the Florida market since January 2007
state downgrade it, thus raising its borrow-ing costs and limitborrow-ing its expansion.23 Three
other insurers — Coral, American Keystone, and First Commercial — saw themselves liquidated by state regulators.24 Another
insurer, People’s Trust, agreed, voluntarily, to stop writing new policies for a period of almost six months and pay fines because of irregularities the OIR found in its practices.25
At least a half dozen other small insurers have faced significant problems, and further insolvencies seem likely in 2010. The Florida Insurance Guarantee Association—which assures at least partial payment of claims from insolvent insurers —seems to agree. In October, it imposed special taxes (assess-ments) that add nearly 1 percent to the aver-age insurance premium in the state. Without these taxes, the association itself predicted it would have cash flow problems.26 In short,
the Florida insurance market is in serious trouble, and capital has not flowed into it to write new insurance policies.
Problem Two:
The Cat Fund cannot work, and it imposes excessive liabilities.
Florida’s Cat Fund has enormous and crippling disadvantages relative to private reinsurance. Quite simply, the founding premise of a state government operating its own Cat Fund violates basic principles of risk and insurance principles, and it has limited ability to pay its likely liabilities.
Some background can help explain why the Cat Fund’s founding premise is flawed. Insurance works best when an insurer manages to spread risks across a large and diverse pool. If the pool is large enough, the insurer can earn a return on its
invested capital by making profits off one type of risk while losing money on another type of risk. An international reinsurer, for example, might write coverage for earthquakes in Japan, floods in the United Kingdom, and hurricanes in Florida. Since these events are very unlikely to happen at exactly the same time, the insurer could make money off of one type of coverage even when it lost money on others. But the Cat Fund, by definition, focuses all of its risk in one place.
Granted, because it is a Florida gov-ernment entity, it might be argued that Florida residents shouldn’t automatically be on the hook for disasters in far-away places, but this undermines the premise of a Florida-only Cat policy. Both because it is reasonably small by the standards of reinsurance entities – giant reinsurers such as Munich Re and Swiss Re take in yearly revenues 12 times larger than the Cat Fund’s total worth — and because it knows it will often have to tap its capital, the Cat Fund simply does not have access to the same sort of investment opportunities as the private sector. Most insurers and reinsurers make far more on investments than they do writ-ing insurance policies; this avenue is closed to the Cat Fund because, in the event of a major disaster, it would need rapid access to its invested funds.
These liabilities are significant. The Cat Fund already charges all Florida policy holders a 1 percent “emergency” assessment intended to build up its capital reserves. Worse, the Cat Fund also imposes a theoreti-cal liability of about $36 billion on Florida taxpayers, but its own actuaries have found that it has only about $4.5 billion in hard assets, plus the ability to sell about $12 bil-lion in bonds. This amounts to a total claims
“Most insurers
and reinsurers
make far more
on investments
than they
do writing
insurance
policies; this
avenue is
closed to the
Cat Fund
because, in
the event of a
major disaster,
it would need
rapid access
to its invested
funds.”
payment capacity of around $16 billion.27
However, the Cat Fund may be overly optimistic concerning its bonding capacity inasmuch as no state has ever engaged in a bond sale as large as the one the Cat Fund proposes to make. In late 2009, in fact, the Fund announced that it still needed somewhere between $300 million and $600 million in additional funds just to finish up its payments from the 2004-05 hurricane seasons.
The Cat Fund’s liabilities have moved onto a downward track, but the fund is still far from stable. In its 2009 session, the Legislature voted to phase down the Cat Fund’s $12 billion Temporary Increase in Coverage (TICL) component by $2 billion dollars a year over a period of six years. Even if implemented in full, however, this cutback seems unlikely to close the entire gap between the Cat Fund’s liabilities and its actual ability to pay.
Problem Three:
The Florida Citizens Property Insurance Corporation is too large.
The Florida Citizens Property Insurance Corporation, formerly Florida’s “insurer of last resort,” has grown to an enormous size. It is bigger than any other entity of its type in any other state, it discourages private companies from entering the market, it has not shrunk itself despite numerous “takeout” plans, it imposes significant potential liabilities on Florida taxpayers, and it has an intrinsically flawed structure. It needs to change.
Florida Citizens, indeed, ranks among the 25 largest property insurers in the United States. It writes about 1 million policies; in
contrast, the state’s largest private insurer, State Farm, is currently in the process of reducing its policy count from a little over 900,000 to about 775,000.28 Furthermore,
ac-cording to data from the Property Insurance Plans Service Office, Citizens writes more business than all other similar “markets of last resort” in other states combined.29
While Citizens has shrunk by nearly 30 percent since 2007, when it wrote policies for about a quarter of the state’s homes, it still remains an excessively large distortion in the state’s insurance market.
Florida Citizens, de facto¸ also discour-ages many private companies from entering Florida’s insurance market since it serves as a price control mechanism. While nearly all other comparable plans in other states require homeowners to use them only as a true “insurer of last resort,” Florida Citizens not only writes more business than any other insurer in the state, but also offers coverage to anyone who gets a single quote more than 15 percent above its rates. This means that Citizens’ rates plus 15 percent represent a de facto price cap on all rates in the state because any consumer who receives a quote more than 15 percent above Citizens’ rates can get the same coverage for less money from Citizens. This makes it very unattractive for private insurers to come to Florida.
Furthermore, although Citizens has shed some policies, its rate of decline has actu-ally slowed, and many efforts to “depopu-late” Citizens have proven unsuccessful. In 2008, Citizens turned over almost 365,000 policies to the private sector. In 2009, this number declined to around 135,000.30
Many of the people that Citizens “sheds” from its books likely come back on. While Citizens still writes roughly 1 million
poli-“The Cat
Fund’s
liabilities have
moved onto
a downward
track, but the
fund is still far
from stable.”
cies in Florida, its own statistics show that it has shed 1.1 million policies since 2003. Even so, it had 17 percent of the market in 2003 and has 17 percent of the market today.31 In other words, Citizens, despite
promises and statements to the contrary, has not managed to shrink itself. Many people who “leave” Citizens later return. In fact, Citizens is currently larger than it was at its creation in 2003.
In addition, Citizens exposes Florida taxpayers to massive liabilities because it relies heavily on the Cat Fund and has the power to tax policy holders in the state should it run into problems. Aside from its own surplus, Citizens relies on the Hurricane Catastrophe Fund to bail it out. Citizens accounts for about 25 percent of the Catastrophe Fund’s liability and is by far the largest purchaser of the fund’s optional (TICL) coverage. If Florida Citizens shrank significantly — or if it purchased private reinsurance — the Cat Fund could shrink by an equally large margin. If Citizens did not exist, and if the companies that replaced it did not rely on taxpayer support, the potential taxpayer liabilities imposed by the Cat Fund would also shrink by roughly a quarter ($9 billion). Like the Cat Fund, furthermore, Citizens has unlimited power to tax the state’s residents should it run into trouble. These taxes require no additional approval from the Legislature and, in theory, could equal all of Citizens nearly $400 billion in exposure.32 Granted,
no conceivable covered event or even series of events in Florida could cause that much damage. Nonetheless, the contingent liabilities that Citizens forces on taxpayers remain at an alarming level. Furthermore, anyone who owns any type of property or casualty insurance policy — including
auto insurance — would be required to pay these assessments.
If Citizens somehow provided better coverage than the private sector, perhaps some might argue that taxpayers had a coverage obligation to their fellow state residents but, in fact, Citizens’ service standards and structure are vastly inferior to those of the private sector. To begin with, Citizens has had numerous problems ser-vicing policies. This is not surprising since it doesn’t have the large claims workforce or the years of experience that most private insurers have. During the last active storm season in 2005, Florida residents filed more complaints about Citizens than any other insurer.33 Furthermore, Citizens inability to
spread the risk within its own portfolio or through reinsurance makes it impossible for the company to follow sound insur-ance principles while also competing on price. Unlike nationally focused insurers, Citizens cannot manage risk by simultane-ously writing coverage for damage from earthquakes in California, car crashes in Illinois, and hurricanes in Florida, thereby making money off one type of business when it loses money on another. Instead, it has only high-risk Florida policies sup-ported by whatever bonds it can sell on the open market. Other single-state insurers can manage this type of concentrated risk by spreading their risk around the world through private reinsurance and certain types of complex investments. But Citizens does not buy private reinsurance and, as a reasonably small company, cannot make highly sophisticated investments.
In short, the fact that Citizens under-prices the private market in many cases occurs because it does not charge adequate rates and instead shifts the liability to
“Citizens
inability to
spread the
risk within its
own portfolio
or through
reinsurance
makes it
impossible
for the
company to
follow sound
insurance
principles
while also
competing on
price.”
state taxpayers. A place exists, perhaps, for a small residual market for long-term Florida residents of modest means genuinely unable to find coverage in the ordinary market. But Citizens has grown far, far too large. A typical market-of-last resort or residual insurance market should be populated by only one or two percent of the market.
Potential Solutions for Florida’s
Regulatory Problems
Creating a better, safer, more stable insurance environment for Florida will take a good deal of work and will involve some tradeoffs for almost all Floridians. A sustained effort to confront the problems facing Florida, however, appears to be the only way — and the best way — to give Florida an insurance environment that works. A good insurance environment should promote choice, end fiscal risks to the state’s taxpayers, and make the state safer. Five steps seem particularly worthy as moves in this direction.
Step One:
Increase choice by allowing Floridians to buy any insurance product they want.
Current laws in Florida make it nearly impossible for many consumers to buy insurance products they want, even when they are willing to pay more for them. Whatever purpose rate regulation serves in keeping insurance affordable, it’s difficult to understand why consumers should be unable to buy policies whose rates are not regulated if they freely choose to do so.
Given the instability of many rate regulated companies — at least two came under
administrative supervision during 2009 and two others were declared insolvent and liquidated — many consumers have a legitimate reason to fear that a rate regulated company may have a difficult time paying claims. With these problems in mind, in 2009 both House and Senate passed a bill (HB 1171, also known as the Consumer Choice Bill) that would have allowed consumers who wanted to stick with a more expensive insurer to do so — although only from the very largest insurers. Governor Crist, however, vetoed the bill on June 24, 2009.34
While Governor Crist’s veto was the wrong decision, the bill had room for improvement; a better, truer version of consumer choice legislation would drop some of the restrictions contained in the 2009 bill. That vetoed 2009 bill, as both Insurance Consumer Advocate Sean Shaw and Governor Crist himself pointed out, gave consumers the choice of “only to a select group of property insurance com-panies” (to quote Crist’s veto message) — specifically those with at least $500 million in capital.35 Although this provision was
well intentioned, since very small startup companies are inherently less stable than well-established ones, this provision served very little useful purpose. After all, some large insurance companies have needed government bailouts to stay afloat. Many small insurers, on the other hand, operate successfully without problems. Big compa-nies may have some advantages, but there is no reason why size alone should determine a given company’s freedom to sell products that consumers want.
Legislation filed in early December 2009 would change this regulation and allow all insurers to offer policies that are subject
“A good
insurance
environment
should
promote
choice, end
fiscal risks
to the state’s
taxpayers, and
make the state
safer.”
to less rate regulation and to sell them to consumers who want to buy them. The proposed legislation retains most of the other regulations currently imposed on insurers and, in addition, proposes new restrictions on Florida Citizens — particu-larly on its ability to impose special taxes on the state as a whole. The proposed legislation also requires new disclosures to state residents to make sure they are given an opportunity to fully understand the policies they are buying.
While the bill does not provide full-scale regulatory relief — the existence of Florida Citizens would continue to impose implicit price controls on the market, and rate regulated policies would still exist — the Consumer Choice Bill would indeed live up to its name by expanding Floridians’ choices.
Step Two:
Reform the Hurricane Catastrophe Fund and limit its reach in the short term; improve its transparency; encourage it to buy reinsurance.
The Florida Hurricane Catastrophe Fund represents an enormous source of fiscal peril to the state. Over time, the state should work to abolish the current Cat Fund entirely. However, because a short-term abolition of the Cat Fund would likely cause rapid, politically unacceptable price increases for primary insurance, the Legislature should instead aim to phase it down. The six-year phase out of the TICL layer — which will be reduced in $2 billion increments from $12 billion in 2009 to zero in 2014 — has started this process. But work remains. To reduce the
Cat Fund’s liabilities, the state should aim to accelerate reductions in the Cat Fund’s size, improve its transparency, reduce the risk it imposes on people it does not benefit, and transfer as much as possible of the Cat Fund’s risk to the private sector.
The Cat Fund’s size alone represents the bulk of the fiscal risk that Florida has as-sumed in its vain effort to shield itself from hurricanes. However, if the state wants to protect itself from a true disaster, it should further reduce the Cat Fund by accelerating the currently planned reduction in the TICL and reducing the size of the mandatory layers as well. In fact, 2010’s market condi-tions present the Legislature with a unique opportunity to do this.
An accelerated phase-out of the TICL appears the most obvious step since the Legislature, Governor, and private insurance industry have all agreed in principle that the TICL should be phased out. The Legislature could do this by immediately cutting the TICL to $6 billion. This would likely not impact premiums because, in 2009, insurers left roughly half of the TICL coverage “on the table” and purchased only $5.557 billion in coverage.36 Cutting an additional $4
bil-lion in coverage (in addition to the $2 bilbil-lion already planned) would have almost no impact on premiums or insurance company costs but would reduce the state’s maximum contingent liabilities significantly.
In addition to reducing the maximum liabilities, the state should require reduc-tions in $17 billion worth of “mandatory” liability that the Cat Fund imposes on the state and the risk of assessments that this coverage poses to taxpayers. (Since TICL coverage only kicks in after mandatory coverage gets exhausted, reduction in the
“The proposed
legislation also
requires new
disclosures to
state residents
to make sure
they are given
an opportunity
to fully
understand
the policies
they are
buying.”
size of the TICL does not decrease the chances of assessments, only the ultimate size of their assessments.) These reforms to the mandatory layers should focus on shrinking them by raising the point at which insurers can tap the Cat Fund. Because of the risk of price shocks and other market dislocations, the Legislature would do best to proceed deliberately in this venture. In 2010, the Legislature might do best to focus on plans to reduce the mandatory layers by $1 billion and to require at least $1 billion in additional industry-wide losses before the Cat Fund has to pay out (“attaches”). Rather than micro-managing the precise way in which this gets accomplished — the com-plex structure of the Cat Fund makes this difficult — the Legislature should instead simply order the Cat Fund’s management to accomplish the goals and make the changes it thinks necessary.
The financial climate in early 2010, in fact, suggests that this year may prove an ideal time to make these cuts in the Cat Fund’s size. According to the major reinsurance broker Aon Benfield, international reinsur-ers currently have somewhere between $10 billion and $15 billion in capital that they cannot deploy to write reinsurance.37 At the
moment, the international reinsurers plan to use this capital to do share repurchases. If Florida instead cut back on the size of the Cat Fund, it could attract a significant amount of otherwise dormant capital to write reinsurance in its market. This increase in reinsurance competition would, in turn, reduce 2011 storm season reinsurance (and, thus, primary insurance) prices. If private reinsurers ever lacked the capital to write more coverage in Florida — some insurers and politicians say they did while reinsurers themselves say otherwise — the situation
has now changed. Private reinsurers clearly have the capital to fill in a cut back of the Cat Fund’s size. There is every reason to think that private investments enter the Florida market if the Legislature reduced the Cat Fund’s size.
To facilitate public understanding of the risks the Cat Fund poses, the Legislature should also commission a fully indepen-dent audit of the Fund. Since the Cat Fund has no stockholders, no market value, and would impose enormous liabilities on Florida taxpayers if it couldn’t pay losses, Florida deserves much more transparency than the fund currently provides. Although subject to most open government rules, the Cat Fund is not currently subject to requirements related to the independence of its auditors that apply to publicly traded private firms under the Sarbanes-Oxley law. The Legislature should endeavor to make sure that the fund undergoes an audit from a firm with no other business relationship with the Fund or with the state itself. The firm would also have to go through a “blackout” period in which it would be forbidden from beginning any new business with the state. Such an audit would provide a double check on the fund and make sure that it actually could make whatever payments it had promised. The audit, however, should provide more than a study that few will read; if it reveals that certain portions of the Cat Fund cannot be paid for under any circumstances, the Leg-islature should fast-track efforts to abolish those portions of the Cat Fund. Legislation requiring the audit, indeed, might contain provisions to make the auditor’s findings binding on the state.
While shrinking the Cat Fund and Citizens, the Legislature should also try to
“To facilitate
public
understanding
of the risks the
Cat Fund poses,
the Legislature
should also
commission
a fully
independent
audit of the
Fund.”
increase its fairness by limiting the reach of any assessments that do come. Cat Fund coverage indirectly lowers the rates only for policies written for residences and thus, only people who own homes and commercial residential real estate (apartment buildings) benefit from it. Assessments, however, would be placed on the insurance policies of everyone in the state who has insurance: vehicle owners, renters, charities, houses of worship, and businesses of all sizes would have to pay the assessments even though they receive no direct or indirect benefits from the Cat Fund or Citizens. This appears grossly unfair. To make sure that the people deriving benefit from Citizens and the Cat Fund also pay its costs, the state should move to eliminate some groups’ liability for assessments.
Finally, the state should try to transfer more Cat Fund risk to the private sector. Private reinsurers, unlike the Cat Fund, spread risk all over the world but impose no risk on the Florida taxpayers. If the Cat Fund issues bonds, Florida taxpayers will have to pay interest and principal on them following a major storm. If the Cat Fund buys reinsurance, Florida taxpayers will be liable only for the reinsurance premiums — nothing else. Because reinsurance has to be paid for (at least in part) up front, however, the Cat Fund’s own purchase of reinsurance would lead to higher costs and thus, higher premiums for Floridians.38 To achieve a
balance between risk minimization and premium increases while getting the Cat Fund into the habit of buying reinsurance, the Legislature should mandate that the Cat Fund’s overseers buy at least some reinsurance — perhaps $1 billion in the first year. This would further minimize the risk imposed on state taxpayers.
The Cat Fund poses an enormous fiscal risk to the state. Minimizing the risk without causing a disruptive rise in consumer premiums will take work. By cutting back the unfunded portions of the TICL layer, thereby reducing liability from the mandatory layers, and by purchasing a commensurate amount of reinsurance coverage, the Cat Fund’s overseers can reduce the Fund’s contingent liabilities by at least $8 billion with only a minimal one-year impact on premiums. Coupled with a reduction in the Cat Fund’s assessment base, these steps will improve Florida’s fiscal climate and protect many of its residents from the enormous risks the fund imposes on the state and its residents.
Step Three:
Attract more private insurers and shrink Citizens through increased price flex-ibility and new restrictions on Citizens Insurance.
Private insurers will not return to Florida until they at least can break even when writ-ing coverage in the state. Attractwrit-ing them in sizeable numbers will require something simple: pricing freedom. In theory the best way to accomplish this would be to move immediately to phase out pricing regulation, allowing marketplace competition and solid risk analysis to determine pricing. However, some critics have argued that making such an abrupt change during an economic downturn would not be politically palatable, despite evidence that it would benefit Florida consumers. Instead, they have suggested that a possible transitional step toward the goal of pricing freedom would be to allow for “flex rating” on top of the current
insur-“Private
insurers will
not return to
Florida until
they at least
can break even
when writing
coverage in the
state.”
ance regulatory system. Such a system, if adopted in addition to measures improving consumer choice — and in addition to new restrictions on Citizens — could encourage increased competition throughout the state and simultaneously shrink Citizens.
Advocates of this transitional step con-tend that under a properly constructed flex rating system, insurers would have signifi-cantly more flexibility than they do now to raise and lower rates within certain broad “bands” or ranges, which are expressed as percentages. These bands must be broad enough to offer a true degree of flexibility. In particular, Florida – where current rates are inadequate for many insurers to continue doing business in the state – must avoid the error of states such as Texas, where flex rating featured overly restrictive bands and insufficient flexibility. Under a prop-erly constructed flex rating system, unless regulators can show that a requested rate change would be “unfairly discriminatory” or would endanger an insurers’ solvency, they would be required to grant it — as long as it represented a one-year change of no more than the percentage permitted under the annual “band.” For all intents and purposes, such a band already applies to Citizens but not to private companies. Finally, during the transitional period lead-ing to a system of priclead-ing freedom governed by marketplace competition and solid risk analysis, rate increases or decreases outside of the “band” ranges would still be possible, but they would continue to go through the state’s current “prior approval” rate making process.39
As for Citizens, it would face a mandate to make use of any flex rating process until its rates reached a point that independent auditors certified them “adequate.” Because
Citizens charges below market rates and relies heavily on the Cat Fund, its current rates are obviously inadequate and endan-ger the state. Citizens’ own management has repeatedly requested rate increases but has had state regulators deny them and the Legislature freeze its rates. Citizens would have to continue what it’s doing now: avail itself of the flex rating mechanisms and raise its rates until they reached levels where independent auditors (hired under the same independence criteria as Cat Fund auditors) certified that it could reasonably expect to pay all of the claims it would receive.
These increases in Citizens’ rates would create a “virtuous cycle.” As Citizens’ premium rates went up, more opportunities would exist for private companies to enter Florida’s insurance market. This would, in turn, attract more private companies and lead to increased competition for Citizens. Over a period of years, Citizens would see its policy count shrink while private insurers (attracted by the availability of a return on capital) would assume an increasingly large share of the overall state insurance market.
To encourage Citizens to shrink its size, the state should also impose some ad-ditional restrictions on who the state-run insurer serves. In particular, the Legislature should require Citizens to non-renew all policies that cover homes other than an insured’s’ primary residence. If Florida provides subsidies, it seems extremely un-fair that it would offer them to people who have the resources to own more than one house. In addition, the Legislature should also restrict Citizens’ coverage on the most expensive homes. Although people owning multi-million dollar homes will generally buy coverage in addition to Citizens (since Citizens’ policy maximums cover only
“These
increases in
Citizens’ rates
would create a
‘virtuous cycle.’
As Citizens’
premium rates
went up, more
opportunities
would exist
for private
companies to
enter Florida’s
insurance
market.”
a small percentage of potential claims), it’s neither just nor fair that they can buy Citizens coverage at all. Citizens should also drop all coverage of homes valued at more than $1 million.
Step Four:
Focus Office of Insurance Regulation on solvency regulation of new insurers that enter the state.
Many insurers that have entered Florida have encountered significant financial problems. During 2009 alone, two insurers (both relatively new to the state) became insolvent, and two more fell under the OIR’s administrative supervision and were suspended from writing new policies. This shows that OIR has fallen down on the fundamental task of making sure that insur-ers that enter the state actually have the resources to pay claims on the policies they write to Floridians. OIR needs to get serious about solvency, and the Legislature should give it the resources it needs to do this.
Understandably, given the intense politics that surround Florida’s system of insurance regulation, OIR has focused on things other than solvency. During much of 2009, for example, the office understandably focused much of its energy on trying to strike an agreement that would keep State Farm in the state. It also scrutinizes requests for rate increases very carefully and, under political pressure in part, denies them more often than not. This simply isn’t what an insurance regulator should do.
On the other hand, OIR may not have all the resources it needs to do its job. Despite increasing demands as a result of many new companies entering the market,
OIR has actually had its budget cut for three straight years. Its “new” requests — completion of a computer system upgrade and avoiding massive staff cuts — hardly appear extravagant or unwarranted. 40 If
Commissioner Kevin McCarty feels that his office does not have enough staff to adequately oversee company solvency, the Legislature should give utmost con-sideration to these requests. Any increase in appropriations or reallocation of funds from other purposes, however, should specify that additional staff work only on solvency and anti-fraud issues. A clearer focus and more resources for solvency regulation might bother some in the indus-try — particularly fly-by-night companies likely to have problems —but it would benefit the state and its residents.
Step Five:
Lower risks in coastal areas through a combination of structural strengthening and environmental measures such as wetlands preservation and mitigation.
Florida cannot deal with its catastrophic risk crisis entirely by reforming its insurance environment. Eventually, the state must take steps to reduce its risks. Risks will decline the most, in the medium and long-terms, when insurers can charge risk-based rates. If insurance rates reflect risks — which can be extreme in large parts of coastal Florida — residents will avoid building in dangerous areas and reinforce those properties already built there. In the long term, risk-based insurance rates provide the surest way to protect Floridians. An immediate switch to risk-based rates, however, would cause enormous dislocations and force many
Flo-“In the
long term,
risk-based
insurance
rates provide
the surest
way to protect
Floridians.”
ridians to leave their homes. When it comes to moving their place of residence, many people will not respond to conventional economic incentives; people attach values to their places of residence that cannot be quantified, and the law makes it difficult to force anyone to move. Thus, making some areas and structures safer offers a way of allowing insurers to charge risk-based rates without adopting politically unpalatable policies that would force Florida residents from their homes.
Two short-term policies, therefore, de-serve consideration: efforts to prede-serve and protect coastal wetlands, and a restoration of the My Safe Florida Home (or something like it) that Governor Crist and the Legisla-ture abolished in 2009.
My Safe Florida Home provided no-cost home inspections and helped residents of modest means reinforce their homes against storms. Similar programs have proven their effectiveness around the na-tion. In general, every dollar spent on My Safe Florida Home can be expected to save at least $3 in future insurance loss costs (and perhaps as much as $7.00).41 With no
funding, however, assertive governmental efforts to storm-proof individual houses have essentially ended in Florida. Simply allocating funds to resume My Safe Florida Home could do some good; former program administrator Tami Torres reports that the program’s staff and computer systems remain in “standby” mode. The state’s current budget woes, however, make this unlikely. Therefore, if the state is to reduce its exposure to hurricane damage, it must devise other incentives that encourage homeowners and insurers to make insured properties more storm-resistant. However, it would be unreasonable to force insurers
to offer premium discounts to policy hold-ers who fortify their homes against storm damage when the insurers’ current rates are insufficient to cover their risks.
In addition, Florida should consider increased efforts to preserve and protect the state’s coastal wetlands and dunes. Although no absolute rule appears possible to develop —the most powerful hurricanes will do great damage no matter how much a state does to protect coastal wetlands and dunes — the more the state preserves these areas, the better it will survive hurricanes.42 Wetlands
and dunes absorb storm surge and reduce the severity of storms inland. Current federal policies under the Coastal Barrier Resources Act (CBRA) severely restrict all federal subsidies for development in sensitive coastal areas. Nonetheless, Citizens Insurance writes some policies in areas where CBRA restricts federal funding. Florida should consider its own version of CBRA, restricting all state funding for development in sensitive coastal wetland areas.
The Legislature may also consider efforts to require “like kind and quality” replace-ment of whatever wetlands nonetheless get lost to development. Current state and federal policies promise “no net loss.” Very often, however, this only results in develop-ers destroying hurricane-absorbing coastal wetlands (often with state assistance) and then replacing them with inland marshes that provide good wildlife habitat but do nothing to protect the state and its residents from hurricanes. While Florida has modestly gained wetlands over the past 20 years, it has actually become less storm-resistant as a result of this policy. The current policy, it might be argued, puts wildlife habitat ahead of human interests. A “like kind and quality” policy might
