They Say,Hearsay
We have a state-run insurer in Florida that has the largest sliceof the property insurance pie. While some think that's a bigproblem, I know it's the best deal in town, so what's the fuss allabout? Other states probably have something just like CitizensProperty Insurance Corp., and since it works here, it must work inthe other states that get hit by hurricanes.

We Say
With apologies to the fine folks who work at Citizens, their largepiece of the pie may one day hit us all in the face with a platefull of assessments. Citizens' premiums are inadequate to coverlosses from a major storm, which makes nearly everyone with aproperty and casualty insurance policy vulnerable to “hurricanetaxes” that last for years. Other states may have recognized thedangers of that earlier because no other state has anything likethe behemoth Citizens. Leaders from neighboring coastal states callit Florida's folly to grow what is, essentially, socializedproperty insurance.

At a recent meeting, insurance commissioners from several otherSouthern states participated in a panel discussion on their stateinitiatives. The consensus was that no state needs to be in theinsurance business. Florida, however, is into it deeply — up to itseyeballs with both Citizens and the Florida Hurricane CatastropheFund — and absent measures to curb the growth of what was intendedto be the “insurer of last resort” and a less-costly reinsurancefacility, we may wind up submerged.

Some may say we shouldn't care that insuranceregulators in other states use Florida as an example of what not todo. Yes, Florida is different, with a coastline that is unmatchedby any other state. Creative minds have originated some innovativeideas that other states have unabashedly copied, and that iscertainly worth noting. However, creativity sometimes makes thingsmutate into forms that are counter to rational practices, which isthe best way I can think of to explain how we find ourselves with agreat idea gone wild.

Take a look at how the residual markets stack up to one another.Florida's residual market, aka Citizens, has about three-and-a-halftimes more exposure to loss than the combined residual markets inseven other hurricane-prone states. It is a combination ofpolitical pressure and geography. Of Florida's 67 counties, 61 areconsidered coastal, according to the National Oceanic andAtmospheric Administration (NOAA). These are defined as countieswith at least 15 percent of total land area located within acoastal watershed or a portion of the county that is at least 15percent of NOAA's coastal cataloging unit. In other words, theseare the most desirable places to build and live, which residualmarkets make it easier to do. Maybe too easy.

Residual market plans include beach/windstorm plans, Fair Accessto Insurance Requirements (FAIR) plans, and hybrids of the two,such as what we have with Citizens. They exist to insure againstthe windstorm peril for people unable to buy coverage in thevoluntary market. Granted, residual markets are rarelyself-sufficient, which is why states make every effort to shrinkthem. Yet residual markets nationally have surged from a totalexposure to loss of $54.7 billion in 1990 to $693 billion in 2009.The number of policies in force over this 20-year time period wentfrom 931,550 in 1990, to almost 2.5 million in 2009. These figuresare down slightly from 2008, as states strive to reduce theirpotential losses by encouraging the private sector to take on morecoastal polices. However, this reversal is not occurring inFlorida. 

A way to appreciate the differences betweenFlorida and other Southern states is to compare exposure ofresidual market plans as a percentage of a state's total exposure.In Florida, Citizens' exposure represents 15.5 percent of the totalstate exposure to risk. That puts us in first place. Second placegoes to Louisiana, with less than 7 percent of the state's totalexposure in the residual property market.

North Carolina's beach plan is not run by the state government,although it is subject to a review by the state insurancecommissioner. It offers homeowners' policies only forowner-occupied primary residences. If the property is a secondhome, coverage is less comprehensive. The state also cappedinsurers' financial liability for residual market claims at $1billion, providing private insurers will some degree of certaintyabout what their financial obligation would be if a major stormhit. Insurers pay the $1 billion in addition to their own claims,of course, and a surcharge kicks in after that to handle any windpool deficit.

South Carolina created a “catastrophe savings account” forhomeowners to set aside money, free from state income tax, to paystorm-related expenses such as insurance deductibles or otheruninsured risk. The state also requires wind pool policyholders topurchase flood insurance as a way to solve dilemmas over windversus water damage. Without flood coverage, policyholders mayreceive coverage at actual cash value rather than full replacementcost. In Mississippi, the wind pool offers discounts of up to 25percent to policyholders who make their homes more hurricaneresistant. This is one way the state encourages coastal developmentwhile lessening economic damages.

Clearly, there are some new ideas being tried in coastal states.We are learning what works and what doesn't — and there is hopethat all the lessons do not have to be learned the hard way.