The Fort Meade Leader, a smallish Florida Newspaper, has a bang up editorial today about Citizens Property Insurance Corp.’s continuing woes. Despite significant improvements in its management, and despite its successful placement of the largest-ever catastrophe bond, Citizens still poses a massive (and unacceptable) risk for the people of Florida. The meat of the editorial has Citizens CEO Tom Grady telling some hard truths to the people of the state:

In a visit with our company’s editorial board, Grady spelled out why a Citizen’s policy is a bargain with a bite. While policyholders pay a state-wide average of only $2,300 for coverage, the premium is essentially a “downpayment” on the actual cost of the policy….Property and casualty insurance customers, including automobile policy holders, already pay two such surcharges as a result of past storms, but they would pale in comparison to the amount the state would have to charge should a Hurricane Charley-type storm hit a major metropolitan area like Tampa Bay, Miami or Jacksonville. A combination of smaller storms hitting less-populous areas would have the same effect of depleting the $6 billion Citizens has to pay claims. Every dollar over and above that figure would be borrowed and paid back with those hurricane taxes, because lawmakers have capped the company’s ability to charge actuarially sound premiums, meaning a rate at which it could pay expected claims without having to tap its taxing power.

That’s all correct and, although it’s always been the case, most Floridians, many Florida legislators and more than a few newspaper editorial boards in the state still don’t understand it. Citizens doesn’t really save anybody any money; it is just a way of hiding the real risk from large parts of the state while saddling the future with massive contingent liabilities.  So yes, it’s a mess and now, at last, everyone who matters admits that.

But the solution to Citizens’ problems, I’m increasingly convinced, isn’t to abolish the state-run insurer,  as some (including me) have proposed in the past. It’s simply to move its rates to actuarial adequacy. Grady and the other top managers at Citizens are skilled insurance professionals who understand the business. Although its heavy reliance on outside contractors probably means that it wouldn’t have the world’s greatest claims service following a major storm, the recent reports I’ve heard from Floridians with Citizens coverage indicate that the company is doing a decent job these days.

So Citizens, whatever its ills, is well-run.  Like it or not, the enormous risks of living in Florida probably mean that the state is going to have a decent-sized residual market, whatever happens. It’s important that it be well run and transparent.

In other words, proposals to wind down Citizens probably don’t make sense at this point. Louisiana, under commissioner James Donelon has made huge steps in the right direction on its residual market and has done so while keeping n structure that’s very much like Florida’s–it even has the same name.  Florida can and should begin to move in the same direction and raise the reisdual market’s rates to risk-based levels while, simultaneously, keeping its fundamental structure intact.

The solution to Florida’s insurance problems isn’t restructuring: it’s risk-based insurance rates.

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