Lasting reforms for Florida’s property insurance market
With the 2014 Hurricane Season having drawn to an unremarkable close, Florida has now gone nine years without a hurricane making landfall. This represents the longest such “drought” on record for the state.
However, little has changed to explain Florida’s unprecedented streak of good luck. For example, the state’s position as a low-lying tropical peninsula jutting 500 miles into the most hurricane-active waters in the world is the same as it was 10 years ago, and 100 years ago. Indeed, many scientists believe climate change could magnify the perils facing that peninsula, with increases in the severity and incidence of storms.
That’s bad news for Florida, given that it’s been struck by the most hurricanes of any U.S. state. That includes the most powerful hurricane on record, and seven of the 10 costliest hurricanes to have affected the United States (six of these within an 18-month stretch from 2004 to 2005). Therefore, a nearly decade-long respite should not be considered the norm, but rather a fortuitous anomaly. In short, it only means the state is long overdue for another strike.
Moreover, Florida’s population, its built environment and, therefore, the lives and property exposed to hurricanes also have grown dramatically. Although the state’s population shrank slightly during the recession, it has almost tripled since 1970, growing to more than 19.9 million residents. Florida recently surpassed New York to become the third most-populous state in the country.
This growth has increased Florida’s total coastal exposure to more than $2.9 trillion. Indeed, it has more property at risk than the other “hurricane alley” states (Louisiana, Virginia, Texas, North Carolina, South Carolina, Georgia and Mississippi) combined.
Nevertheless, instead of taking steps to reinforce its shaky insurance system, Florida has used this period of population and economic growth, coupled with tropical calm, to continue its politically expedient policy of artificially suppressing insurance rates.
It’s true that the current hurricane-free stretch has allowed Florida’s state-sponsored insurance entities to slowly shore up their claims-paying capacity. For instance, Citizens Property Insurance Corp. boasted a healthy $7.6 billion in combined policyholder surplus in 2014. The state-run insurer simultaneously lowered its overall exposure due both to organic migration of policies to the private market as well as depopulation initiatives to transfer policies to private companies directly. The Florida Hurricane Catastrophe Fund has likewise shored up its reserves to a projected $10.95 billion at year-end 2014.
Despite these encouraging figures, the misplaced public policy goal of insurance rate suppression pursued by the Legislature and past governors has led to a dysfunctional property insurance system. The current system works only in the absence of hurricanes. Only after nine years of fair-weather hoarding can the instrumentalities of Florida’s government-run insurance system—Citizens and the Cat Fund —finally declare themselves sufficiently sound to cover a large storm.
But what happens when that storm finally arrives? What happens once a major storm or series of smaller storms wipes out the surplus built over this unprecedented period of calm?
This paper looks to offer background on how Florida has chosen to finance its enormous hurricane risk largely through post-event assessment mechanisms that would be levied on almost every Floridian. It also will establish how Citizens and the Cat Fund are essentially “one-hit wonders,” designed to cover just one adverse hurricane season with no practical means to cover a second or third season without economically devastating consequences.
Finally, the paper explores solutions that could reasonably be implemented during the 2015 legislative session, while Citizens, the Cat Fund and the state’s private insurance sector are all in ideal financial positions to absorb reforms without undue adverse impacts on taxpayers, ratepayers or the state’s economy.
Ultimately, Florida’s insurance system must be structured to cover multiple hurricane strikes without posing a risk to taxpayers or the state’s economy.