Policy Studies Insurance

Ten reforms to fix Florida’s property insurance marketplace — without raising rates

Florida’s property insurance system remains broken and need of significant changes. Past studies from the James Madison Institute have demonstrated the challenges that Florida’s unstable property insurance market poses to the state government’s fiscal situation and to the state’s overall economy. The market is plagued by uncertainty, government intrusion, and regulatory overreach. Moreover, the ongoing risk that multiple government agencies might levy assessments on property insurance policies after a major storm or a series of lesser storms poses a meaningful risk to the state’s post-disaster economic recovery.

Over the past few years, legislative action and private sector innovation have somewhat diminished these risks, but more remains to be done. Some of the remaining reforms may be somewhat painful to those who benefit from the status quo, but a failure to act could exacerbate the kinds of pain that would occur following a major storm.

It is not news that Florida has been struck by more hurricanes than any other state. The state is a low-lying tropical peninsula jutting 500 miles into the most hurricane-active waters in the world, just as it was 20 years ago and 100 years ago. It has also experienced some of the most powerful and damaging storms. Indeed, the strongest hurricane to make landfall in the United States was the “Labor Day Hurricane” that struck Florida in 1935.

As of this writing, Florida had enjoyed eight years in which no hurricane made landfall. That was the longest such “drought” on record, but it is no cause for complacency.

Despite its storm risks, Florida has seen its population and its built environment grow dramatically. Indeed, the state’s population has almost tripled since 1970, growing from 6.7 million residents to more than 18 million. Even during the new century’s first decade, when many perceived a slump in Florida, the state still added more than three million residents and grew 17.6 percent.

This growth has increased Florida’s total coastal exposure to $2.9 trillion, the most of any state. Indeed, Florida has more property at risk than all of the other “hurricane alley” states (Virginia, North Carolina, South Carolina, Georgia, Alabama, Mississippi, Louisiana, and Texas) combined. Florida’s geographic location and the concentration of property in the state’s riskiest coastal areas are fundamental realities that can’t be changed. But they also have relatively little to do with the decisions by many major property insurers not to expand their business in Florida, and nothing to do with the instability of the state’s property insurance market. What makes Florida truly unique is not the meteorological risk it faces, but its political, regulatory, tort, and judicial environment.

According to the New York-based Insurance Information Institute, non-catastrophe claims in Florida have increased roughly 17 percent per year over the past decade. The cost passed on to consumers to cover these claims is exacerbated by legal loopholes that have led to unscrupulous claims practices, increased litigation, and fraud.

Moreover, the deliberate, interconnected policies pursued by the Legislature, previous governors, and the Office of Insurance Regulation (OIR) have led to a dysfunctional property insurance system that has distorted pricing, undermined competition, and placed a heavy burden on the state’s taxpayers. This has been accomplished through Florida’s two property insurance mechanisms: the Citizens Property Insurance Corp. and the Florida Hurricane Catastrophe Fund (Cat Fund).

For too long, Florida has bet its public safety and fiscal health on the weather, but the state’s ongoing statistically implausible winning streak cannot continue indefinitely. The risk of collapse is simply too great to put off fundamental changes any longer. This study, published jointly by R Street and the James Madison Institute, outlines pragmatic reforms that would have a meaningful effect on stabilizing the Florida property insurance market without requiring big hikes in primary insurance rates.

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