You remember in January, when the Florida Legislature was debating that big package of insurance reforms? At the time, many said the state’s "insurance crisis" — rapidly rising homeowners rates — was actually a reinsurance crisis. In other words, the high price reinsurers were charging in the wake of Hurricane Katrina was supposed to be the biggest factor. So the state went into the reinsurance business and promised rate reductions of 24 percent or more. Not only have rates not declined much, insurers are now asking for rate increases. And the state’s reinsurance isn’t selling with some insurance companies, in part because companies don’t actually believe the money will be there in the fund. I thought it worth passing along this excerpt from a recent editorial in a Florida newspaper:
The solution hinged on the state nearly doubling the Catastrophe Fund from $16 billion to $28 billion. That was supposed to allow insurers to buy reinsurance (or extra coverage for insurance companies) at a cheaper rate from the state than that charged by private firms and pass along the savings to policyholders.
Instead, state regulators maintain that the companies, which did buy from the state, are using the savings to buy backup coverage beyond what they need from private providers they also happen to own. Thus, if the state avoids a major catastrophe or multiple storms, they can pocket all the cash.
You see what happens when people get confused? This is what happens when people get confused. Florida doesn’t face a reinsurance crisis, it faces a risk crisis where it’s got a very highly regulated market, lots of risky coastal development that has long been subsidized and a complete unwillingness to recognize that there are limits to how well governors and legislators can predict the future or make economic actors do their bidding. The complaint evidenced in the excerpt above makes absolutely no sense. First, if you create a product and people don’t like it, are they to blame or are you to blame? Second, by the argument’s own internal logic, no one should have a complaint against insurers who buy reinsurance from their own companies — if the state avoids a major catastrophe, "they can pocket all the cash," but of course, if the state doesn’t avoid a major catastrophe, they pay out all of the cash. Third, this is all happening because Florida officials don’t want to pay the price for removal of coastal subsidies, and they want insurers to play along with their game so they themselves don’t feel the heat. That’s where all the table-pounding by Gov. Crist comes from — frustration that, for some reason, companies insist on acting in their self-interest instead of in his interest.