Florida’s Insurance Gamble

The magnitude of the insurance problem in Florida is so big that no blog post or newspaper story, or even a series of newspaper stories, can adequately explore the whole thing.  You’re talking about some extra-long piece in The New Yorker or The Atlantic just to try to do justice to all the ins and outs. But this story by Peter Whoriskey in the Washington Post does a very good job of addressing the two principal problems with the recent Florida insurance "fix."

First, Florida has promised to provide a reinsurance pool of up to $32 billion in its state catastrophe fund, but it has less than $1 billion of that on hand.  Last night, I re-listened to a January 30 A.M. Best podcast with Steve Geller, minority leader of the Florida Senate, and he acknowledged that the fund may not be built up to the desired levels for five to 10 years.  In the meantime, Geller said, if Florida is hit hard by hurricanes, the state will be able to raise revenues to cope without collapsing.  Perhaps, but if the catastrophe fund had to pay out tomorrow, each of Florida’s 17 million residents would have to come up with nearly $2,000 each to make up the shortfall.  Add a $5000 to $6000 bill per household to the high insurance premiums people are paying and you’re looking at people forming a posse to go after Gov. Crist and the Legislature, not to mention some serious economic problems.

Second, Citizens Property, the state-run insurance company, already was broke before legislators forced it to rollback a premium increase.  If it is charging artificially low rates, how is it going to pay out without state taxpayers forming a bucket brigade from their savings accounts to state government?  In all of this, there is an air of unreality, because there is a hidden substory: like any other place, in the event of a massive disaster, Florida is counting on insurance through USIC — the Uncle Sam Insurance Co. — and expects a federal bailout.  I doubt any legislator really expects that the country is going to sit back and let Floridians bear these costs by themselves.

1 Comment

Filed under First Party Insurance, Industry Developments

One Response to Florida’s Insurance Gamble

  1. Seth Chandler

    Here’s the problem as I see it. The problem with insuring in the traditional fashion against a mega-catastrophe such as the 100 year hurricane (Choice 1) is that the level of reserves the insurer needs to accumulate and the associated premiums can become politically problematic. Moreover, absent detailed premium regulation, “irresponsible” insurers win business by undercutting “responsible” insurers that accumulate the proper levels of reserves. On the other hand, with Choice 1, one gets the considerable benefit of risk-rating, which in the Florida case, might include making people living near the coast pay much more or build sturdier properties. And one equalizes wealth over time, transferring money from rich times to lean times.
    An agreement such as that created by Florida to accept retrospective assessment based on criteria other than riskiness (Choice 2) avoids the “problems” with excessive reserves and premiums but (a) exacerbates the inequality of wealth between good (non-hurricane) and bad (hurricane) times and (b) likely exacerbates the loss that will ultimately be suffered because for years the market will not have been sending the correct signals with respect to risk mitigation measures. The problem is that the choice between these two options is distorted by the fact that the main beneficiaries of Choice 1, today’s 10 year olds, don’t vote and that it is harder for people who do vote to see the issues associated with Choice 2 than the issues associated with Choice 1, particularly when politicians selectively sugar coat the consequences of global warming and demand, in at least the insurance arena, that recent data be ignored.
    The sad truth, I think, is that it is harder to insure against mega-catastrophes than we have realized and that even our modern economy is subject to risk that proves very hard to diversify away.