ORLANDO, Fla. (Jan. 27, 2015) – The Florida Legislature should consider steps to make the state’s insurance market more solvent and competitive, according to a new paper released jointly by the R Street Institute and the James Madison Institute.
The paper, “Lasting Reforms for Florida’s Property Insurance Market,” written by R Street Senior Fellow R.J. Lehmann, was presented at an insurance conference hosted by the Florida Chamber of Commerce today.

In the paper, Lehmann outlines problems with the current state-backed Citizens Property Insurance Corp. and the Florida Hurricane Catastrophe Fund, which have only now shored up their claims-paying capacity after a nine-year stretch without a major storm.

“The current system works only in the absences of hurricanes,” Lehmann wrote. “Only after nine years of fair-weather hoarding can the instrumentalities of Florida’s government-run insurance system finally declare themselves sufficiently sound to cover a large storm.”

To address these concerns, and prepare for the 1-in-100 year storm that scientists say is coming only in a matter of time, Lehmann suggests steps that should be taken by the Legislature to ensure that the market is able to weather significant storm damages without placing additional burdens on taxpayers.

In the case of Citizens, it is important to return the company to its intended role of insurer of last resort. This can be done by further reducing coverage limits, making more properties ineligible for Citizens policies and including surplus and excess lines carriers in the current depopulation program. Any reforms of this nature keep an eye toward consumer protection, with all changes to requirements and policies clearly spelled out to customers.

“Ultimately, consumer protection should remain a top priority,” Lehmann wrote.

Also in need of reform is the Cat Fund, structured to provide Florida’s primary insurers with underpriced reinsurance coverage.  The Cat Fund does not collect sufficient premiums to break even over the long run and must therefore depend on its ability to sell bonds to make up the difference between the cash it has collected and the claims it must pay.

Reforming the Cat Fund should include reducing the amount of coverage it is required to sell to insurers, increasing the retention rate to decrease potential liabilities and setting aside some of the Cat Fund’s $10.95 billion surplus.

Additionally, the Legislature should explicitly authorize, but not require, the Cat Fund to negotiate the purchase of private reinsurance and other risk-transfer mechanisms.

“Reinsurance coverage represents money that does not have to be borrowed or repaid by taxpayers when the wind blows,” said Lehmann. “It allows Florida to be flooded with outside capital in the immediate aftermath of a storm rather than be saddled with debt.”

The Legislature should also take steps to eliminate the prohibition against insurers recouping the cost of reinsurance coverage purchased to cover obligations the Cat Fund might not be able to cover.

Lehmann also proposes the state should receive annual reports outlining the claims-paying capacity of all the state-run entities, including analysis of how bond markets would respond should Citizens, the Cat Fund and the Florida Insurance Guaranty Association all need to borrow funds simultaneously in the wake of a major storm.

“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,” said Lehmann.



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