Policy Studies Insurance

Florida’s four walls of insurance reform

The attached policy study originally was published by the James Madison Institute.

For many years, Floridians struggled to purchase insurance coverage—whether it be for their properties, vehicles or employees—in ways that sometimes became a drag on the state’s economy.

In the early 2000s, Florida’s business community reeled from rising workers’ compensation insurance rates, due in no small part to a cottage industry of fraudsters and unscrupulous individuals who exploited the state’s rules. The cost of workers’ compensation threatened job growth during what was otherwise a period of economic growth nationally. The issue became the subject of a 2003 special session of the Legislature, during which lawmakers approved and then-Governor Jeb Bush signed a reform package that successfully curtailed litigation and fraud. By 2008, Florida’s workers’ compensation insurance rates had dropped by 60 percent.

Just as the workers’ comp market began to stabilize, the state’s property insurance market was thrown into a tailspin when Florida was battered by seven back-to-back major hurricanes in 2004 and 2005. By 2006, the rising cost to insure property in Florida became the top political issue in that year’s gubernatorial and legislative elections.

Knee-jerk insurance reforms undertaken by the Legislature and newly-elected Gov. Charlie Crist in 2007 sought to suppress the rate increases artificially. In fact, these changes only exacerbated the state’s shaky property insurance market, as major property insurers scaled back or even exited the state market altogether. The state-backed Citizens Property Insurance Corp. ballooned to become the largest homeowners insurer in the state and the Florida Hurricane Catastrophe Fund extended reinsurance promises that advisers warned it might not be able to keep.

By the time Rick Scott was elected governor in 2010, the Legislature had come to accept that their 2007 reforms were unsustainable. They ushered in positive, market-freeing reforms to liberalize insurance rates and shrink both Citizens and the Cat Fund. Combined with a hurricane-free decade, these changes helped to restore health to the state’s property insurance environment.

The state’s unprecedented hurricane drought came to an end Sept. 2, 2016, when Hurricane Hermine made landfall in St. Marks, just south of Tallahassee. The following month, Hurricane Matthew skirted much of Florida’s eastern shoreline and eventually made landfall in South Carolina. These two storms combined to cause approximately $950 million in insured damages and 135,000 claims statewide. Things could have been far more damaging for the Sunshine State. Had Matthew tracked just 20 or more miles to the west, the full force of a Category 4 hurricane would have raked the region’s most densely populated shoreline. Instead, losses were relatively small and Florida insurers and their reinsurers are fully expected to absorb and cover existing claims without much impact to the state’s property insurance market.

In addition, Florida has in recent years caught another lucky break via the global capital markets. Given that hurricanes, earthquakes and other catastrophes strike at random, uncorrelated with the ups and downs of the rest of the economy, capital has flooded into the reinsurance and catastrophe bond markets ever since the 2008 global economic crisis. This has resulted in new and innovative risk-transfer products and competition among traditional reinsurers, which has helped produce historically-low reinsurance rates. Despite major losses in Japan and elsewhere in recent years, experts believe global reinsurance pricing will continue to soften. Indeed, reinsurance prices fell an additional 3.7 percent in January 2017.

Florida has benefited handsomely from this buyers’ market. New insurers have entered the state to write policies. The government-run insurer of last resort, Citizens Property Insurance Corp. (Citizens), has shed more than 1 million policies since 2012 and lowered its overall exposure by more than 60 percent over the past four years. This is due both to the organic migration of policies to private companies and to active depopulation efforts. Between 2014 and 2016, more than 758,000 Citizens policies were transferred to private companies. Today, Citizens holds just slightly more than 472,000 policies down from a high of 1.5 million in 2012. Additionally, Citizens itself has taken advantage of low reinsurance rates to transfer some of its enormous hurricane risk to the private market, allowing it to purchase more coverage for less and eliminating its once-ominous threat of assessments on state taxpayers.

Yet despite a remarkable streak of combined luck, including: a decade free of hurricane activity, two unremarkable storms last year and the lowest reinsurance rates in recent memory, average property-insurance premiums are still on the rise in many parts of Florida. Consumers and their representatives in Tallahassee both have legitimate concerns when they ask why this is the case, given the favorable weather and reinsurance market conditions in recent years.

Human behavior, encouraged by Florida law, appears to be the culprit. The New York-based Insurance Information Institute reports that noncatastrophe claims have increased roughly 17 percent per year over the past decade in Florida and are growing rapidly both in frequency and in severity. Separately, after more than a decade of rate reductions, workers’ compensation insurance premiums are also on the rise, due to Florida Supreme Court rulings that reversed some key provisions of the 2003 reforms.

High insurance rates are appropriate when they reflect actual risks. Costs inherent to a particular industry or regional market may be impossible to remedy. However, it is apparent that the rate increases Floridians are being faced with in both the property and workers’ compensation insurance realms stem from practices, behaviors and even cottage industries born out of vulnerabilities in the law exploited by bad actors. In short, the cost drivers stem from the very laws that govern those insurance products.

This should concern state lawmakers, as property insurance and workers’ compensation insurance are both regulated at the state level. Nearly every Floridian is affected by the cost of property insurance, since mortgage lenders require property owners to carry coverage, the cost of which is also usually passed on to renters. Florida law also requires all employers to carry workers’ compensation coverage, but for very few exceptions.

The following paper describes how the Florida Legislature could address vulnerabilities in the law to curtail cost drivers that needlessly and artificially inflate rates for these insurance products. Additionally, it will identify ways to harness the benefits of a favorable global reinsurance market to further strengthen the state’s property insurance market ahead of less sunny days. Throughout, the focus is on reforms that could reasonably be implemented during the 2017 regular legislative session that would make a meaningful difference shortly thereafter.

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