CFO Alex Sink and Governor Charlie Crist are still new to their elected jobs; this was obvious from statements made by Sink in her interview with the Miami Herald. In one statement, she astonishingly relates that it wasn’t until last month, while driving along Ft. Lauderdale’s Condo Canyons, that she realized how vulnerable Citizens Property Insurance Corporation and its insureds are in the event of a significant hurricane. She and Crist, among others, are clearly annoyed that the hopes for lower insurance rates have not materialized and are calling for an explanation and investigation.
The important issue to note here is that if the chief guru of finance did not appreciate how a major hurricane could impact every taxpayer in Florida and the Governor does not trust the insurance industry, then how can they advise and educate their constituents about our insurance crisis; it appears that they are as much in the dark as we are.
What is the Country’s fourth largest property insurance carrier? Citizens Property Insurance Corporation. In Florida, it is the largest. It now collects over $3 billion in premiums each year. It insures more properties which have the highest probability of damage than any other insurer. It issues over 1.3 million policies. Citizens has over $400 billion of insured exposure. If a major hurricane, like Katrina hit Florida, Citizens could owe an estimated $15 to $30 billion dollars. So what’s wrong with that picture? Citizens Property Insurance Corporation has only a fraction of this money in its coffers. If it were a private insurer, it would be in bankruptcy. Even more importantly, if that major hurricane should hit, Citizens can seek money from virtually every policyholder (not just Citizens policyholders) and taxpayer in Florida to make up for this shortfall. Each Floridian could be a Hurricane Katrina away from annual payments of $1000 or more for atleast five years to pay for the shortfall.
Dennis Ross, a Lakeland legislator who is very experienced with insurance, refused to vote for the S.B 2498, which expanded Citizens potential customer base, for fear of increased financial exposure to all Floridians. He claimed that the relatively small and uncertain premium reductions compared to the very real gamble that a major hurricane would not hit, did not justify passage of legislation. So far, he is right about the premium reduction. Pray that he is not proven completely correct. What caused this mess?
First, Citizens is not really an insurance company, it is a government behemoth. When rates have to go up to reflect the expected amount of losses, people complain to elected officials who turn around and write laws to force Citizens to knowingly charge less premiums than it should to pay claims. This happened in the 2007 legislative session, Citizens policyholders have below market and actuarial rates because the legislature passed a law allowing this. Why did the rates go up and why were people complaining so vehemently to their elected officials?
Two main reasons exist for this: 1. Approximately two thirds of the rate increases between 2003 and 2006 were the result of property value increases and rising construction costs. Property values and construction costs increased mostly as a result of the real estate boom and historically low interest rates and so the value to be insured had to be raised to accommodate increased costs to repair or replace damaged property.
For example, if you owned a car valued at $5000 in 2003, it may only cost $250 to insure. But, if in 2006, that same car were worth $12,500 and the body shops doing repairs to it increased their costs by 50 per cent, the cost to insure that car would certainly more than double. As property values increased during that time, so did property taxes.Property owners were upset because they did nothing to their properties but the "overhead" costs of owning the property significantly increased. They complained to the government to do something.
2. Extraordinary catastrophes in 2004 and 2005 rocked the insurance markets and reinsurance capacity. Florida had unprecedented losses. Those losses have an actuarial impact. The experience history of payments mandated a rise in premiums. While there is much debate about the proper rate, nobody disputes that the loss data from the hurricanes supported a need for some increase in rates. The problem was further exacerbated by the fact that many carriers could not find affordable reinsurance or enough reinsurance to offset the risk of a future catastrophe. Recently there has been a flood of investors into the reinsurance market following the very profitable 2006 year and reports are that reinsurance rates are falling, but the failure to find reinsurance at rates anywhere close to pre- 2004 premiums caused many insurers to cancel policies or leave the market entirely.
Floridians were mad as hell about not only having rates raised, but many did not have insurance at all. They complained to their legislators who did something. Unfortunately, if a major hurricane hits, those same complaining Floridians will learn that what our legislators did was wrong. They took a huge gamble at the expense of the citizens. Everyone living in Florida, or insuring property here, is going to be outraged at the bills they are going to receive and have to pay. As our elected officials are realizing the losing bet they’ve placed, they are scratching their heads wondering if they should fold, let it ride, or double down. It looks like there is no need to hit the casino, Floridians are gambling right now with hurricane season in full swing. You can gauge how you are doing by watching The Weather Channel.