The Florida legislature earlier this month began considering several alternatives to what one critic called the "three unsteady legs" of the current system for providing the Sunshine State's citizens with property insurance coverage.

Based on comments at hearings on the issue, the legislature is acting in apparent alarm at the potential damage a major hurricane or group of windstorms could have on the state's already fragile fiscal condition. Their concern is based on evidence that a 100-year event--or even a group of smaller storms--could spell triple jeopardy for the state's residents.

Specifically, in the event of a one-in-100-year event, one of the state's "unsteady legs"--Citizens Property Insurance Corp., the homeowners' insurance safety net created by the legislature in 2002--would be facing a liability of roughly $24 billion, far exceeding its current ability to pay, according to a presentation recently given to state lawmakers.

After exhausting its surplus of just over $4 billion and reimbursements of nearly $12 billion from the state's second "unsteady leg"--the Florida Hurricane Catastrophe Fund, created in 1993 in response to Hurricane Andrew--Citizens would make up the difference through a system of assessments levied on its policyholders and other insurers.

If more is needed to pay the cost, the state would have to impose an "emergency assessment" that would be levied on the third "unsteady leg"--the private insurance market--with every property-casualty policy in the state chipping in except for medical malpractice and workers' comp.

"In short, Florida's insurance market offers the worst of all worlds--high rates, little consumer choice, extensive government intervention and severe risks to the states' taxpayers," said Eli Lehrer, a senior fellow at the Competitive Enterprise Institute in Washington, in a paper released on March 18 by Florida's James Madison Institute. Mr. Lehrer has written extensively on this issue over the last year.

These issues are prevalent at a time of growing economic problems. Florida's sales tax revenue--on which it depends heavily, since there is no state income tax--has dropped for two straight fiscal years.

Much of that problem is being caused by a collapse in the state's housing market, which means homeowners are spending less, according to industry observers.

The picture for the private insurance market is mixed. Mr. Lehrer said that aside from a few, tiny in-state carriers, private companies have essentially stopped writing new policies in coastal areas.

According to Mr. Lehrer, over the past year, Travelers, Nationwide, USAA, The Hartford, State Farm and Allstate--which collectively write over 70 percent of all personal lines property-casualty insurance policies in the country--have all cut back or eliminated p-c operations in Florida.

But Scott Johnson, executive vice president of the Florida Association of Insurance Agents, said that under a new directive from the state's Department of Insurance Regulation, the market is "really opening up," with companies writing more coverage at lower rates.

Citizens' policy count, he added, is down from 1.4 million to roughly 1.25 million. "Some of that could be linked to the legislature allowing it to compete as a 'competitive alternative to the private admitted market,'" Mr. Johnson noted.

At the same time, he added, Florida agents "do not approve" of the legislature's decision to allow Citizens to compete with the private market, rather than as an insurer of last resort. "All Citizens is doing is offering cheap insurance that is funded by back-end assessments," Mr. Johnson said. "That 'buy now/pay later' mentality merely betrays the public trust."

Voicing equal concern in response to a recent hearing on the issue by the Florida legislature, David Sampson, president and chief executive officer of the Property Casualty Insurers Association of America, said that "it is important public policymakers, insurers and consumers come together to talk about ideas for how we will move forward together and strengthen Florida's property insurance market."

Mr. Sampson said that according to a recent statewide poll, "Floridians do not want immediate rate reductions if it means continued pain later, if and when a storm does strike Florida."

He added that "we need to focus on solutions that do not place the state's hurricane risk on the backs--and wallets--of taxpayers." Mr. Sampson said Floridians "need predictability and control when it comes to their property insurance bill, and the threat of future assessments only adds uncertainty."

"The state and federal governments can and should play important roles, but government cannot solve the problem on its own," said Mr. Sampson. "The private market must be a part of any realistic long-term solution."

To deal with the issue, the legislature is considering several plans as alternatives to the current system.

The proposal with the greatest momentum came from Florida's chief financial officer, Alex Sink. It would reduce the state's risk for hurricane damage by shrinking the size of the catastrophe fund. The proposal would cut the scope of the coverage offered by the cat fund by as much as $3 billion immediately and limit the reimbursement rate, as a result reducing the potential size of special assessments.

It has momentum because it unanimously passed the legislature's Jobs and Entrepreneurship Council, as well as the Senate Banking and Insurance Committee, and "appears to be on the fast track for passage," according to Mr. Lehrer.

"Although nobody, including CFO Sink herself, sells the plan as an all-purpose fix for Florida's insurance woes, it takes a good first step toward removing the enormous burden that the Cat Fund places on Florida taxpayers in its current state," he added.

Another plan would reduce the role that the state Department of Insurance Regulation plays in setting rates.

That plan--called the "Florida Windstorm Insurance Consumer Empowerment Program"--is being proposed by state Rep. Dennis Ross, R-Lakeland, who has voiced continued opposition to the current system.

In an analysis released March 18, Mr. Lehrer said that for "all intents and purposes," the plan would abolish both Citizens and the Cat Fund as they currently exist, and replace them with a state-run Windstorm Insurance Program and a "pure" private market.

"The Ross plan would create a bifurcated market: a state-controlled market quite similar to what Floridians have today for all insurance and a regulated--but not explicitly price-controlled--market for other policies," Mr. Lehrer explained.

If enacted, he said, the Ross plan would "almost certainly encourage private insurers to write more homeowners' insurance, improve policy service for Floridians and reduce the fiscal liabilities associated with the current insurance system."

At the same time, he added, it would probably result in what he described as "modest" rate decreases in the state-controlled market coupled with higher rates, without assessment risk, in the "pure" private market.

Mr. Lehrer said that based on what some experts have told him, the "Ross plan will probably decrease rates in the state-controlled market because it would be more efficient," noting that is what has happened in Hawaii.

A third plan being pushed by the Florida Chamber of Commerce proposes legal changes that would end assessments on commercial properties as a means of paying off the debts of Citizens and the Cat Fund.

"[I]t meets any number of tests of common sense and fairness. However, exempting commercial properties from special assessments will make sense only in the context of broader systemic reforms to Florida's insurance environment," according to Mr. Lehrer.

Meanwhile, Florida homeowners may be more likely to opt out of Citizens under a directive from state Insurance Commissioner Kevin McCarty and the state's Office of Insurance Regulation.

The directive would change the process of notification for so-called "take-out" companies looking to take business away from the state-run insurer as of May 1.

Currently, any insurer looking to take a policy off the state-run carrier's books is required to notify the agent, who can go along with the transfer, or inform the company that they will not service the policy under the new carrier.

Under this system, take-out companies were steered away from policies with agents that were known to oppose "take-outs" and, according to Mr. McCarty, led to instances where the homeowner may not have ever known of the private company's potentially less-expensive offer.

Under Mr. McCarty's directive, companies will be sent policies that can be taken from Citizens without any mention of the preference of the agent involved--and in situations where the agent opposes the move, the policyholder will be directly notified of the offer and provided with contact information for the carrier.

"Thousands of Citizens' policyholders who may have been kept in the dark under the old process now will have the opportunity to decide for themselves if they wish to be removed from Citizens and placed with a private insurer," according to Mr. McCarty.

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Fla. Lawmakers Look To Fortify State's Three 'Unsteady Legs' For Wind Claims

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