HomeHome InsuranceWant a permanent solution to Florida’s homeowners insurance crisis?

Want a permanent solution to Florida’s homeowners insurance crisis?

My daughter is a reporter. She won an Emmy for her in-depth follow-up story on Fort Myers Beach: “Paradise Lost, Six Months After Hurricane Ian.” We all knew about the devastating destruction people suffered, but six months later many had a second gut-wrenching blow when they found out their insurance company wasn’t coming through.

Carl Zimmermann
Carl Zimmermann [ Courtesy of Carl Zimmermann ]

I mention this because Florida has three versions of the property insurance crisis. The one that most people are disturbingly aware of is the high cost to have insurance. It averages $6,000 per home in Florida. The second is what most decision-makers in Florida see as the main problem: It’s difficult to get insurance companies to do business in this state. And the third is the inability of the companies we have to properly pay out in the case of a devastating loss.

In solving the problem, Tallahassee tends to allow more tolerance of weak, unstable companies in hopes of keeping enough companies in the state. I don’t believe they think real cost reduction is even possible. Yet, to the property owner, cutting the high cost by at least half is the only problem they want solved. Solve that and then make sure the companies can and will pay out.

There is a solution that solves all three problems, and everything needed to implement it is already in place — a solution that brings major national companies back and either forces the get-rich-quick startup companies out or changes the way they do business. But first, a brief history to understand what happened, and why there is only one way to fix it.

The crisis began with hurricane Andrew in 1992. Andrew was a Category 5 storm with 155 mph sustained winds. It caused $26.5 billion in property damage and was considered a 100-year storm. Thirty insurance companies were doing business in Florida at that time. Eleven went bankrupt. Others stopped writing new policies or renewing existing ones, leaving almost 1 million coastal homeowners with no way to get insurance. In November 1992, the Legislature responded quickly, setting up three entities: a Residential Property and Casualty Underwriting Association, a Windstorm Underwriting Association and The Florida Hurricane Catastrophe Fund. Ten years later, the first two were joined together to create Citizens Insurance. The latter, the Hurricane Catastrophe Fund, still exists and is funded by assessments to every property insurance premium in the state. (Keep that in mind.) It currently will pay up to $17 billion in losses and has a balance of more than $4.3 billion. How much the insurer company is covered depends on the level the company is paying for.

To make the original crisis even worse, in 1998, Florida, in an effort to keep the major national companies from fleeing, allowed them to create subsidiary, “pup” companies. These companies are strictly Florida entities and therefore share the risk only across their Florida policies. A smaller base pool results in a higher premium. Our neighbor, New Orleans, a city that is below sea level and should have sky-high insurance rates, is covered by nationwide companies. The average policy there is $2,800.

Florida’s perils will continue to increase, the storms will get worse, and insurance companies will continue to cut their losses and leave. Florida by itself is not a good business model for traditional “for profit” insurance companies. The major companies left years ago. The small startups are allowed to exist often with insufficient cash reserves and a tendency to skim their surplus money into affiliated businesses.

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Recently approved “surplus line” companies are an even more desperate attempt to find any insurance company to take on Florida policies. They don’t have to follow state regulations concerning how much they can charge or what risks they can or cannot cover, and there is no guaranty fund to pay a claim should they go bankrupt.

The solution

To get back larger, solvent national companies we need to expand the role of the Florida Hurricane Catastrophe fund. The fund needs to grow to $30 billion to cover the fund’s share of a 100-year storm. Florida, in effect, would help reduce risk for the insurers gradually so that they can write policies in Florida that won’t bankrupt them. If Florida has reduced the companies’ risk to a level comparable to the national risk, the price should also be reduced respectively. We can do this over a five-year period (or sooner) by gradually assuming a percentage of the risk of storm damage for storms labeled over Cat 2. The companies are responsible for everything up to Cat 2. How much the Florida Hurricane Catastrophe Fund assumes and how quickly should be determined by the state’s actuaries, but it should slide in on a graduating scale with the more they pay, the more risk the fund assumes.

We build the fund the same way it is already being funded under statute. We assess a percentage of every property policy sold. This comes from the current policy price. It does not get added on to the current policy price. Currently there are 5 million private homes in Florida. The average policy cost is $6,000. If one-sixth of the policy cost went to reduce wind risk that would raise $5 billion the first year. Factor in multiple family residences and businesses and we may be able to double that. As it already does, the state spreads the risk by purchasing reinsurance. The fund already has $4.3 billion. Other sources could come by combining Citizens, which has successfully maintained a reserve hovering around $5 billion and has proved to be well run, or by shifting a percentage of growing state income every year. Since 2010, the state budget has grown from $66 billion to $117.5 billion. Surely solving the insurance crisis deserves a percentage of that.

Or we can shrug this off and continue to keep the populace angry over rates that are exceedingly out of control, legislators and leaders unable to find sound insurance companies, and an insurance industry that we can’t be sure will provide what’s due to you, the property owner.

Carl Zimmermann, a retired teacher, is a former state legislator who represented North Pinellas County from 2012 to 2014.

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