Florida can and should fix its own insurance problems
You have to hand it to the Palm Beach Post. First, the paper sends out a reporter to a press conference with Gov. Rick Scott to ask his opinion of a “national windstorm pool,” and builds an entire story (no longer available on their website; here’s the cached version) out of his off-hand, non-committal, single sentence response that “It would make a lot of sense.”
We subsequently asked Scott’s staff to clarify the governor’s response, and found that, in fact, he has not endorsed any particular piece of legislation and was simply expressing that his mind was open to options.
Having ginned up the story that, not only is Scott on board with some sort of federal intervention in property insurance, but that he is specifically backing the beach house bailout idea proposed by former U.S. Rep. Ron Klein, the Post’s Randy Schultz can now editorialize about news the paper more or less invented in the first place. This is the news cycle’s version of a perpetual motion machine.
Among the more ludicrous notions put forward in Schultz’s piece is the idea that Floridians are owed some sort of federal backstop to their broken and dangerously overexposed state-run insurance and reinsurance programs, more or less as payback for their participation in the National Flood Insurance Program, which he attempts to characterize as a sop to the Midwest.
Floridians each year pay more into the program than they get back. Most benefit goes to the flood-prone Midwest, whose lawmakers in Congress like to scold Floridians for living in their own danger zone.
It’s true that Floridians comprise a large percentage, about 40%, of NFIP policyholders. But they also draw a disproportionate amount of the subsidized coverage the NFIP provides. According to a just-released report from CoreLogic, Florida tops the nation with 1.4 million homes at risk of storm surge impact and with more than $188 billion of total potential exposure to surge damage.
Moreover, according to the Congressional Research Service, as of Jan. 1, 2011, there were 16,475 repetitive loss properties in Florida, 10.5% of the nation’s total, that have collected $1.35 billion in payments, or 12.2% of the nation’s total. Only Louisiana and Texas have more RLPs or have drawn more in repetitive claims.
If Mr. Schultz would consult a map, he might see that Florida, Louisiana and Texas are not in the Midwest. In fact, among the top 15 flood losses in NFIP history, only one – a June 1993 flood that cost $272.8 million – was in the Midwest. It ranks as the 13th costliest flood of all time. By contrast, Florida storms account for three of the top 11: the $1.58 billion Ivan in 2004, the $405.5 million Opal in 1995 and the $363.8 million Wilma in 2005.
Contrary to the assertion that the state perpetually pays more than it gets back from the program, in 2004, the NFIP collected $2.04 billion from all states, but paid out more than that total, $2.23 billion, almost entirely for claims from that year’s four Florida hurricanes. In fact, the $19.9 billion paid out for the 2004 and 2005 Florida and Gulf Coast storms represent just over half the claims paid out in the entire history of the flood program. Add in the $3.45 billion paid out largely for Texas’ Hurricane Ike in 2008, and the total rises to 60.5%. So much for “most benefit” going to the Midwest.
But Schultz doesn’t stop at drawing comparisons to the NFIP — a program that is $18 billion in debt, with no possible way to pay that back, and that has subsidized development in the riskiest and most environmentally sensitive coastal and wetlands regions, all on the taxpayers’ dime. He goes on to note that the federal government created a terrorism reinsurance program in response to withdrawal of carriers from that market following the September 11 attacks, and to identify various “uninsurable risks” that exist around the country, some of which might really be uninsurable.
Certainly, some potential loss scenarios (asteroid strikes, super-volcanos) are so large that they would deplete all human wealth, much less the capacity of the property and casualty insurance industry. Others, like terrorism, are so unpredictable that it is difficult to imagine any way they could be modeled. Unlike hurricanes and earthquakes, people possess creativity and the ability to respond to efforts to mitigate risk.
But the fact that uninsurable risks exist doesn’t mean either that we must subsidize them or that Florida windstorm risk, the issue at-hand here, is itself uninsurable. In fact, at this point, we have a pretty good idea of the risks the State of Florida faces. They are large and the coverage is appropriately costly, but they appear to be eminently insurable.
What Schultz really means when he suggests Florida’s risks are uninsurable is that to insure them might cost more than Florida property owners are willing or, in some cases, able to pay. But left to function as it should, markets have built-in correctives to such problems. If the full-risk cost of building in Florida is too high, then fewer developers will do it. If the full-risk cost of living in Florida is too high, then fewer people will demand homes there and home prices will fall. Fewer properties and less costly properties mean less demand for property insurance and reinsurance. Eventually, that drop in demand, that reduction in the concentration of insured value, would mean less costly insurance, as well.
What Floridians want from the rest of the country, then, isn’t a helping hand out of their vexing problem of uninsurable properties. Rather, it’s a way to continue to enjoy all the benefits of the Sunshine State – the beaches, the warm winters, the lack of state income tax, the proximity to Mickey Mouse and, most of all, the perennial dream of appreciating property values – while sloughing off onto the other 49 states that nasty little business about hurricane risk.
Which is why, his spokesman’s protestations to the contrary, it wouldn’t be the most shocking thing in the world if Rick Scott does, ultimately, heed the siren call of the Randy Schultzes of the world and become just the latest Florida politician to turn to the federal government for a preemptive bailout. The idea remains a popular one in Florida, if not in the rest of the country, and it is understandable that Scott would want to do something about his dreadful approval ratings. That there is little-to-no political appetite in Congress for creating such a program could actually be part of the appeal, as it would help shift the blame for Florida’s problems onto the feds.
While we wouldn’t be that surprised to see Scott follow his predecessors, we would be disappointed. It would mark an abrogation of leadership and an abandonment of the principles he has pledged guide his decisions. The problems of Florida’s property insurance market are entirely of the state’s own making. Likewise, the solutions, starting with real risk-based rates, are also in the state’s own hands, and those of its leaders.