In politics, perception plays a large role in dictating policy. And there is no greater example than the debate over the property market that has taken center stage since the election of Gov. Charlie Crist and the aggressive posture of both the legislature and Insurance Commissioner Kevin McCarty. Since then, the industry trade groups and the industry as a whole have been primarily playing defense in the public arena as they have seen one critical story after another dominate the media coverage.
Now the industry is engaged in a debate about how to at least bring balance to the media war or perhaps even gain some sort of advantage. But even those in the industry admit it will be a difficult task, with many saying the only event that would really reverse the current environment is a hurricane.
Is the Tide Turning?
Florida Association of Insurance Agents Vice President Scott Johnson said there are signs that policymakers may be reevaluating their positions when it comes to the homeowners' market. Compared to the heated rhetoric Crist ushered in when he was elected as well as the subsequent anti-industry public statements uttered by lawmakers during the following legislative sessions, elected officials have toned down the rancor of their comments. "You're not hearing many politicians defending it, especially when it comes to assessments," said Johnson.
Johnson said the association has no formal strategy to try and turn public opinion. That doesn't mean, however, that FAIA sits back and merely watches what happens. It encourages agents to write letters to the editors of newspapers and make presentations to local business groups like the Chamber of Commerce. The most effective -- albeit highly complex -- step to change the climate in Tallahassee is to infiltrate the legislature itself. "We keep encouraging agents to run for office," he said.
Mark Delegal, with the Tallahassee law firm of Pennington and Moore, said trying to change the political environment has no simple solution. Insurance, he said, with its complex financial structure, requires an educated public that may be simply too hard to create. "It's an awareness problem about the nature of risk," he said. "It takes a complex understanding of how the price of insurance today affects the potential of assessments tomorrow."
Delegal says that is why the burden of changing the political climate eventually rests on policymakers and regulators. For example, he said, instead of rejecting a 30 percent immediate rate increase, they could allow rates to increase by 10 percent for three years. This would avoid the sticker shock effect, while still allowing a carrier to at least have rates approaching an adequate level.
Crist's Veto
One sign that maybe even Crist is prepared to moderate his views on the issue is his decision to veto a $250 million appropriation that would be used to fund the Insurance Capital Buildup Incentive Program. The program was inserted in the 2006 property bill and offered new domestic companies with matching surplus loans of up to $25 million if the investors could raise a similar amount of money. The loan was spread over 20 years to give investors time to repay the grant. By all accounts, the program has been successful. Thirteen companies took advantage of the program, bringing an additional half a billion dollars in new capital and funneling 1.7 million policyholders into the domestic market.
Initially, the program was funding from the state's general revenue fund, which is raised primarily from the state's six percent sales tax. This year, however, lawmakers decided to fund the program using Citizens' Property Insurance Corporation surplus. However, Crist understood the program could possibly increase policyholder assessments in the event of a major storm. Citizens has a combined loss exposure in Florida of about $233 billion and approximately 1.3 million policyholders.
"The citizens of Florida are already feeling the heavy weight of property insurance and property tax burdens," said Crist in his veto letter. "I will not support risking an additional financial hardship on Floridians."
Industry experts also point to Chief Financial Officer Alex Sink's proposal to reduce the Florida Hurricane Catastrophe Fund's potential assessments and its ability to issue bonds. Sink's proposal has its genesis in the legislature's decision in 2007 to dramatically increase the capacity of the Cat Fund from $16 billion to $28 billion. Although it immediately helped many companies reconfigure their financial structures, lawmakers presented policyholders with the risk of substantial assessments, or, as the CFO's office referred to it, as a "tax."
Sink proposed that the legislature reduce the so-called Temporary Increase in Coverage Limits program from its current level of $12 billion to $9 billion. It was a modest proposal, but it drew attention to the fact that if the Cat Fund has to fully fund a potential $56 billion liability for the 2008 and 2009 storm season, it would have to assess its maximum assessment rate annually for 30 years.
The Department of Financial Services calculated that the reduction could potentially save Floridians between $111 million and $217 million in annual assessments. On a 30-year bond issuance, this could result in a savings ranging from $3.3 billion to $6.5 billion. However, the proposal would have increased homeowners' premiums ranging from between 1.5 percent to 3.2 percent, on average. That proved to be a deal breaker, but industry groups say the issue has a good chance of passing next year.
Waiting on a Hurricane
Politicians, more than anyone, understand the impact of bad news. While concerns about the potential assessment burden on policyholders are starting to make its way into the public consciousness, historically it has taken some event to swing the pendulum and make lawmakers change course. For many in the industry that means one thing - the financial impact on the industry because of a major storm. It is an unpalatable position because it is supporting a negative instead of a positive change in the market. Nevertheless, it is a real sentiment.
Tom Enright, president of the surplus lines brokerage Enright & Wilson in Hollywood, sees some rationale in the thought even though he hopes public policymakers make the political shift on their own. Right now, he said, surplus lines brokers are playing defense to make sure their businesses and policyholders are adequately taken care of. "The strategy is to protect yourself as best as you can," he said. "What we may have to wait for is a hurricane, hopefully not an Andrew, but maybe a Wilma, before politicians believe the insurance industry is not out of its mind."
Johnson echoed that thought. "It may take a well-placed storm to do the trick," he said, but he was also quick to add that he hoped the public and policymakers would change their attitude without having to deal with a natural disaster.
Dr. Philip Klozbach and Dr. William Gray, of the Colorado State University Department of Atmospheric Science, are predicting the 2008 hurricane season will be more active than the average seasons between 1950 through 2000. The experts predict that there will be 15 named storms, eight hurricanes and between four and five intense hurricanes ranging from categories three through five.
The probabilities of at least one major hurricane making landfall in the coastal areas for the entire U.S. coastline is 69 percent, which is higher than the 52 percent average over the last 100 years. The east coast, including Florida, has a 45 percent chance of being struck by a major storm as compared to the 31 percent average during the same time period. The Gulf Coast region extending from the Florida Panhandle westward to Brownsville, Texas, has a 44 percent average of experiencing a major storm as opposed to the 30 percent average over the last 100 years. It should be remembered though that although these figures are based on detailed scientific studies, hurricane forecasting remains an inexact science.
