Property Insurance Reform: Let s Leverage Our Good Fortune by Christian Cámara Over the past nine years, Florida saw its real estate market collapse, its unemployment rate soar and its state government revenues plummet. In 2009, Florida s population actually decreased for the first time since World War II due to the economic recession, which hit the Sunshine State especially hard. Indeed, things have improved, but the recovery has been long and arduous. Even still, Florida is not where it was nine years ago by several measures. Nevertheless, Florida has been extremely lucky historically lucky, in fact. Most in the policy world are aware of the challenges that Florida s property insurance system has faced over the past several years. As a peninsula jutting right out into the heart of hurricane alley, Florida s unique geography, topography and demographics make it a perennial disaster in the making during the annual June 1 to November 30 hurricane season. Florida s population and economic growth has resulted in an explosion of high-end coastal property. More than $96 billion in wealth has migrated to Florida over the past 20 years enticed by, among other things, the desire to awaken each morning to an Atlantic sunrise or enjoy a Gulf sunset from one s own back porch. [32] Spring 2015
Much like Billy Ray Cyrus, the Macarena and Vanilla Ice they can carry a tune, but don t have much staying power. That explosion created a dynamic where Florida now has $3 trillion in property risk exposure more than all other hurricane alley states combined. And the system for providing property insurance in Florida has undergone a roller coaster of changes, challenges and corrections that continues into this legislative session. Citizens Property Insurance Corp. (Citizens), Florida s state-run property insurer, originally was designed to offer coverage to Floridians who legitimately could not obtain it from the private market. In 2007, Citizens role was greatly expanded to offer policies to any homeowner who received a quote for coverage from a private insurer more than 15 percent greater than Citizens rates. 1 Additionally, the 2007 legislation required Citizens to roll back all rate increases approved in the year prior to the bill s passage and to freeze them at that 2006 level, thus imposing a de facto price control on Florida s property insurance market. 2 These changes transformed Citizens from an insurer of last resort into an active competitor with an unfair advantage. Within a few years, Citizens became the state s largest property insurer, and among the nation s 25 largest, with almost 1.5 million policies in force and a total exposure of more than $510 billion. 3 The Florida Hurricane Catastrophe Fund (Cat Fund), which the state s property insurers (including Citizens) are legally required to rely on for back-up coverage, was also woefully over-extended. As a result of the 2007 reforms, politicians arbitrarily increased the amount of coverage the Cat Fund was required to sell to the state s insurers without regard for its ability to actually raise the cash necessary to make good on that coverage. The result of that irresponsible decision was that for several years, the Cat Fund would be faced with a shortfall if a major hurricane or series of storms tapped it to full capacity. In short, Florida law required the Cat Fund to sell more coverage than it knew it could conceivably cover. Any private insurer or reinsurer doing the same would have been shut down or run out of the state. Over the past several years, new leadership in Florida has taken politically risky, albeit essential steps, to reverse the ill-conceived insurance reforms enacted in 2007 that concentrated much of Florida s enormous hurricane risk onto the state, and by extension, its taxpayers. Reforms such as unfreezing Citizens artificially-suppressed rates, depopulation programs and a clearinghouse to enforce eligibility standards have transferred hundreds of thousands of policies and billions of dollars in hurricane risk from taxpayer-backed Citizens to the Spring 2015 [33]
private insurance market. Today, the Cat Fund is able to meet its $17 billion obligation thanks to the almost $11 billion in surplus it has amassed over the unprecedented nine hurricane-free years, $2 billion in pre-event bonds and the $4 billion worth of debt it is estimated the Fund would be able to issue in the current bond market (which would ultimately be paid back through assessments that would fall on Florida taxpayers in a variety of ways). Likewise, Citizens is in the most favorable financial position it has been in years. Just over the past year, more than 300,000 individual policies and $100 billion in risk have been transferred from Citizens to private insurers. In addition, the surplus it has amassed over nine years, coupled with the private reinsurance coverage it has purchased has placed the state-run insurer in a position to cover a 1-in-100 year hurricane without levying post-hurricane assessments on Floridians to cover any deficits. A great deal of credit needs to be laid right at the feet of the executives and staff at Citizens, the Cat Fund, and the Office of Insurance Regulation who have done tremendous work at executing policies such as the depopulation effort and private risk transfer, which have served the citizens of Florida well. These organizations have made incredible efforts to put Florida on the right track toward a more diverse, fair and actuarially sound property insurance system. However, these fine men and women have had a helper along the way and it s called sheer luck. For more than 3,400 days, Florida has escaped the wrath of a landfall. Since Hurricane Wilma hit the Florida coast on October 24, 2005, Florida has gone more than nine years without a hurricane striking our shores. This represents the longest such drought for the state since tropical cyclones began to be recorded in 1851. This streak has been an incredible blessing, and it provides us with a window a once in a generation opportunity to leverage our current atmosphere for sound policy reforms that can benefit us and our future generations. So, after nine years of fair-weather hoarding, both Citizens and the Cat Fund have finally reached a point where they can declare themselves able to cover a major hurricane. But what happens after? How would these state-run entities be left financially after a catastrophic hurricane season? How prepared are they to deal with even a moderately bad season thereafter? While we have used this welcome stretch of storm-free years to move our insurance system in the right direction, and we have made substantial improvements, we need to be realistic, open and frank about where Florida stands in order to continue the forward progress. We are now at the place where we can effectively call Citizens and the Cat Fund both one-hit-wonders. Much like Billy Ray Cyrus, the Macarena and Vanilla Ice, they can carry a tune, but don t have much staying power. Our sound decisions, [34] Spring 2015
effective management and good fortune have brought the system to the place where we could withstand one bad storm, and maybe even a season with a couple of bad storms, but that would effectively bring us right back to where we were at the end of 2005, and possibly further back. Over the past two years, a partnership between The James Madison Institute and R Street Institute has produced two major research studies focusing on long-term, viable solutions for Florida s property insurance system to protect consumers, taxpayers and the state s economy. In the most recent release, our recommendations account for the unique position Florida finds itself in with regard to the hurricane-free stretch and the financial conditions of both Citizens and the Cat Fund. Specific policy recommendations include: Citizens Reduction and Reform, coverage limits, removal of non-primary residences, eligibility reform, surplus lines voluntary take-outs, and; stricter notification requirements for future depopulation initiatives. Cat Fund Reduction and Reform, gradual reduction of the Cat Fund s capacity with emergency override, gradual increase in the deductible, surplus protection to cover secondyear claims, authorization to negotiate purchase of private risk transfer; insurer flexibility in years when the Fund is projected to experience a shortfall, and; other taxpayer protection initiatives. Claims-paying Estimate and Conflict-of-Interest Reform, annual report on the combined post-storm bonding capacity of all state-run insurance entities, assuming that they may attempt to issue bonds simultaneously following a significant hurricane event, and; conflict-of-interest rules to preclude financial advisors from deriving financial gain through the issuance of bonds. The 2015 legislative session offers Florida lawmakers an enormous opportunity. Although nine hurricane-free years coupled with modest reforms have allowed the state to largely stabilize its property insurance market, it continues to pose a risk to taxpayers and the economy. This is especially magnified if a severe storm or hurricane season were to follow another. Although no set of reforms can make Florida entirely immune to all of the problems that it could face Read the full study here: http://bit.ly/propertyinsurancebackgrounder2015. For more information on the R Street Institute, please visit www.rstreet.org. Spring 2015 [35]
if disaster were to strike, some can significantly reduce many of them. A sensible approach that recognizes the state s role in Florida s property insurance system, but trusts the market to solve many problems, will work best and bring the greatest stability. In particular, the Legislature should continue to further shrink the Florida Citizens Property Insurance Corporation, reduce the size of the Hurricane Catastrophe Fund, and promote reforms that would result in a surge of capital to the state after a storm to help it quickly recover both physically and economically, rather than saddle it with debt. Recent history has shown that multiple hurricanes can strike within a short period of time. Florida must take steps to be prepared for this very real possibility. We must use this time wisely and not squander our good fortune. Now is the time to think long term and leverage our past efforts in conjunction with the good fortune of the past 3,400 days to make a difference for future generations of property owners and Floridians. e Christian Cámara is Director of R Street Florida. ENDNOTES 1 Ch. 2007-1, Laws of Florida, allowed any Floridian receiving a quote 25 percent above Citizens rates to be eligible for coverage with Citizens; subsequent legislation lowered the threshold to 15 percent (Ch. 2007-90, Laws of Florida). 2 Ch. 2007-1, Laws of Florida. 3 Barry Gilway, CEO of Citizens Property Insurance Corporation. Cabinet Presentation, August 19, 2014 (www.citizensfla.com/shared/press/legislation/86/08.19.2014.pdf). PENSIONS from page 25 istration and Policy at FSU and now an assistant professor at the Rockefeller College of Public Affairs and Policy at the University of Albany. 3 The grades were generated for plans using the Entry Age Normal (EAN) and Projected Unit Credit (PUC) funding methods. While many plans utilize the Aggregate (AGG) and Frozen Initial Liability (FIL) methods, those methods are biased toward reporting a fully funded liability. The grades in our 2014 report were generated for the 1,688 records from 2005 to 2012 for plans sponsored by 151 municipalities. While our decision to focus on EAN and PUC plans reduces the number in our sample, it is not advisable to grade AGG and FIL plans on the same criteria as EAN and PUC plans. 4 Doing It Right: Recognizing Best Practices in Florida s Municipal Pensions. LeRoy Collins Institute. August 2013. http://collinsinstitute.fsu.edu/sites/ collinsinstitute.fsu.edu/files/lci%20booklet%20 -%20Best%20Practices%20FINAL%20web%20 report%208-5-13.pdf. 5 Looking at Florida s Municipal Pensions: How Some Florida Cities Are Dealing with Pension Funding Issues. A Joint Report from Florida TaxWatch and the LeRoy Collins Institute. February 2013. http:// collinsinstitute.fsu.edu/sites/collinsinstitute.fsu. edu/files/taxwatch-lcimunipensionsfinal. pdf. 6 OPEBs can also include subsidies for retiree vision and dental care, life insurance and other nonpension benefits but health insurance subsidies constitute most of a government s OPEB liability. LABOR from page 31 is best for their members. Public sector labor unions represent some of Florida s most highly respected and honored professions teachers, police, firefighters, nurses, and so on. They deserve the right to choose to associate with their union and have a right to hold their unions accountable in every aspect of influence. e Travis Keels is the Director of Public Affairs at The James Madison Institute. [36] Spring 2015