Insurance Models And The Cost Of Insurance

I’ve read a number of stories about the Florida legislature’s insurance package last month, which was designed to bring down rapidly rising homeowners insurance rates.  The January 30 A.M. Best podcast with Steve Geller, minority leader of the Florida Senate, is a very good presentation of the issue.  One of the most significant facts Geller discussed is that Citizens Property, the state-run entity that was formerly the insurer-of-last resort, now has by far the largest market share in the homeowners policy market — 33 percent of homeowners, compared to the next highest, State Farm’s 18 percent.  The long-term implications of that are not good, especially when you consider, as this story says, that the legislature has blocked a 75 percent rate increase Citizens was to have made. Citizens’ rates are now lower than most private insurers. 

As Geller said, the governor and the legislature believed they had to do something or the people were ready to rise and come for them with torches and pitchforks.   That may be, but when the precedent has been set that the state will set an artificially low price on an expensive product, is demand for that subsidy ever going to lessen?

Another part of the legislature’s fix is this: the reinsurance market was, in part, driving up the cost of insurance, as reinsurers were charging up to 50 to 60 percent annually for a given dollar of reinsurance, while Geller says the actual cost is 2.5 percent.  So Florida will now have private insurers handle the first $6 billion in hurricane losses, but serve itself as the reinsurer for them for the next $16 billion, with a super-catastrophe fund up to $32 billion (Florida currently does not have the money and will not for some time, and so better hope no major hurricanes hit).  Since Florida will now charge much lower rates for reinsurance money, the theory goes homeowners insurance should fall.  Sure they will, but they won’t erase all of the huge increases where many people saw their rates double and triple. You know why? Because actuarially, Florida is a pretty bad risk for homeowners insurance.  Here is a Miami Herald story on the catastrophe fund. 

It is interesting to contrast Florida’s approach with that of Louisiana governor Blanco, who is, among other things, encouraging free competition in the state’s insurance market.  Here is a very good and detailed story in the New Orleans Times-Picayune on Blanco’s efforts.  One thing Blanco and Florida governor Crist have in common, though, they both are trying to change the newer hurricane loss models based on five-year projections, which affect actuarial calculations.  I have no idea which model is right, but here’s a thought: what if the reinsurance market and the new hurricane models are right, and Florida is wrong? How badly is that going to hurt the taxpayers of Florida in the end?  

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