Florida can't seem to catch a break. The Democratic Party cuts our delegates to half a vote at the convention, and now a massive all-states study gives us an "F" in insurance.

The authors of the report stressed that an "F" was not an attack on a state's insurance department. Conversely, a grade of "A" should not be considered an endorsement. Readers were to regard both grades as reflections of the laws under which the states operate.

But it's hard not to take the dismal score personally.

Not only did Florida earn the lowest grade possible — along with California, Maryland, North Carolina, and Massachusetts — the statisticians dropped the Sunshine state from its scoring methodology altogether, claiming that Florida, along with Massachusetts and North Carolina, were messing up the grading curve. An excerpt from the report explains the logic:

"In all three states, insurance rates are determined entirely through the political process. We penalized those states heavily, and doing so distorted the standard deviation upward a great deal. Removing those three states from the standard deviation calculation resulted in a more normal curve."

The study, a collaboration of the Competitive Enterprise Institute and the Heartland Institute, focused on the regulatory environments of homeowners' and automobile insurance. Contributors included Matthew Glans, a legislative specialist for Heartland; Drew Thornley, economic freedom policy analyst for the Texas Public Policy Foundation; Ned Andrews, a Virginia attorney; and Dan Sutter, a professor at Texas Pan-American University. CEI Policy Analyst Michelle Minton assisted in developing the ranking system.

A state's ranking was predicated on two key considerations: how free consumers are to decide what insurance products will meet their needs and how free insurers are to provide products that meet consumers' real or perceived needs.

The report used numerous variables, such as residual automobile and homeowners insurance Markets, market volatility, market concentration, form regulation, rate regulation, credit scoring and territorial rating to make the judgments. Data was almost exclusively derived from 2006 and the resultant assessments refer to that calendar year.

The excerpts provided below were reprinted directly from the report with permission and encapsulate the reasoning for Florida's failing grade. The entire report can be viewed at www.cei.org.

The Underachiever

Florida comes in near the very bottom of our ratings, almost entirely because of its unusually intrusive homeowners' insurance system. Since Massachusetts announced it would stop dictating the rates that insurance companies charge beginning this year, Florida has emerged as the only state that directly dictates insurance rates through state action. To a large extent, Florida's regulatory over-stretch remains limited to its homeowners' insurance market.

Although Florida possesses a highly competitive automobile insurance market, a series of government efforts over the past 15 years has crippled the ability of the state's private insurers to provide effective homeowners insurance. Already burdened with a heavily concentrated homeowners' insurance market and some of the nation's highest homeowners' insurance rates, Florida consumers saw the state assume massive new liabilities. The situation resulted in large-scale retreat of private insurers and a declining state bond rating, with the very real prospect of higher taxes for all Floridians. For most Floridians, premiums continued to rise.

Hurricane Andrew

The path that leads to Florida's current insurance system begins with the aftermath of Hurricane Andrew in 1992. In the wake of the storm and several brushes with insurer insolvency, the Florida legislature convened three separate special sessions in 1992 and 1993. Those sessions resulted in the creation of the Joint Underwriting Association and the Hurricane Catastrophe Fund and an expansion of the Florida Windstorm Underwriting Association.

The Joint Underwriting Association theoretically served as a short-term market "safety valve," while the Windstorm Underwriting Association provided ongoing coverage to Floridians who couldn't get coverage elsewhere. The so-called "Cat Fund" made it easier for private companies to offer reasonable insurance rates by selling them discounted re-insurance. These three mechanisms — the first two now merged into the Florida Citizens Property Insurance Corporation — still comprise the essentials of government intervention in Florida's system for providing property insurance.

Homeowners Demand Rises

As hurricanes continued to batter the state in early 2000, the legislature, in 2002, combined the two to create the Citizens Property Insurance Corporation. Although it continued to write some wind-only coverage, Citizens was, by design, a full-line homeowners insurer that replaced all homeowners coverage in certain cases and contracted out little business. Still, homeowners insurance rates continued to rise throughout the state.

The Catastrophe Fund grew in 2004 when Gov. Jeb Bush signed the first of several capacity expansion bills, raising its limit to $15 billion.

As homeowners faced continual battering from hurricanes and rising premiums, Bush requested more reforms to the system and, in 2005, he got them. Senate Bill 1486 shrunk the Cat Fund, created a hurricane loss mitigation program, required insurers to offer higher deductibles to consumers who wanted them, mandated discounts for mitigation, and, perhaps most importantly, allowed Citizens to compete freely with the private market in Monroe County.

This package of reforms would stand, more or less intact, until early 2007. However, rates continued to soar, doubling in 2006 alone for many in South Florida.

Sweeping Reforms in 2007

Those quickly rising rates, coupled with record insurance company profits, led to populist outrage. On the campaign trail, gubernatorial candidate Charlie Crist called for insurance reforms. After taking office, he almost immediately called a special session of the legislature to consider them.

The Insurance Industry Accountability and Consumer Protection Act, (Bill 1A), significantly changed the system by which Floridians purchase insurance. Provisions include:

?A rollback of January 2007 rate increases for Citizens Property Insurance Corporation and a prohibition on rate increases by Citizens until 2009.

?A major change in the laws covering Citizens. Once only a "carrier of last resort" that required an applicant to provide evidence of being rejected several times before it would write a policy, Citizens must now write policies to anybody who receives one insurance quote more than 15 percent above its rates.

?An elimination of the requirement that Citizens have sufficient reserves to survive a "100-year" hurricane.

?An anti-cherry-picking provision that requires all insurers selling auto insurance in the state to write homeowners insurance as well if they offer it anywhere in the country.

?Taxes on "excess profits."

?A de facto repeal of the mandate that Citizens buy private re-insurance. Note that Citizens did not purchase any such re-insurance in 2007.

?A massive expansion of the Hurricane Catastrophe Fund.

Bill 2498, An Act Relating to Insurance, which passed later in 2007, continued in the same vein, with a number of tweaks to the fundamental system. Among other things, it contained provisions to:

?Expand the Cat Fund and allow very small insurance companies to buy into it.

?Allow consumers to receive coverage from Citizens immediately after their applications are accepted.

?Make it easier for those who leave Citizens for other companies to go back to Citizens.

?Require insurers to pay or deny a claim within 90 days of receiving it.

?Make it more difficult for insurers to exclude contents coverage when writing homeowners insurance policies.

Citizens Property Insurance Corporation

Since 2002, Citizens has existed, in theory, to write insurance for Floridians living "in high-risk areas and for others that cannot find coverage in the open, private insurance market." Although it maintains a private-sector fa?ade, Citizens is, in fact, an unusually powerful government agency.

Citizens has been given the authority to impose taxes on every insurance policy issued anywhere in the state of Florida. State law places no limits on these taxes and applies them to everybody in the state, including people who have never done business with Citizens.

Not surprisingly, given the low premiums it charges homeowners, Citizens has grown very large. As of the end of August 2007, it had issued more than 1.36 million policies representing more than one-third of Florida's homeowners insurance market. It does the most business in Broward, Palm Beach, Dade, and Monroe counties. Together, these four counties represent about one-third of the state's population, but they account for two-thirds of Citizens' business.

Because Citizens specializes in writing policies in high-wind areas, the quiet hurricane seasons of 2006 and early 2007 allowed it to build up a surplus of nearly $2 billion as of early August 2007. Although barred by statute from operating for the benefit of "any private person," Citizens faces few hard-and-fast restrictions on how it spends or invests this surplus.

The Catastrophe Fund

Like Citizens, the Cat Fund is a government agency. It serves as the largest re-insurer in Florida. Until the 2007 special session, the Cat Fund remained a reasonably minor entity that re-insured smaller companies and the then-small Citizens. Today, the fund has become the largest and most important re-insurer in Florida. Since it underwrites the great bulk of Citizens' risk, its existence provides a prop for Citizens. By providing re-insurance at below-market rates, the Cat Fund theoretically allows insurance companies, including Citizens, to write insurance policies at lower rates.

In fact, it appears the Cat Fund may actually increase costs. Current Florida law requires that all insurers doing business in the state purchase reinsurance through the fund. This reinsurance costs less than similar coverage in the private market and, in theory, would allow insurers to cut rates. Unlike traditional reinsurers, however, the Cat Fund does not carry out a serious investment strategy or attempt to grow its business. Instead, like Citizens, it has the authority to impose new taxes — in the form of assessments — to pay off whatever bonds it might issue. Earlier this year, the fund issued more than $5 billion in debt to build up its cash reserves, the state's largest-ever single debt issue.

Rate Regulation

Although 49 states regulate insurance rates in some way, the 2007 insurance reforms made Florida's rate regulations particularly burdensome. Florida not only requires that state bureaucrats sign off on all rates — something about half of all states require — but it also mandates that the insurance commissioner and insurance companies attend public hearings on just about every major request for a modification in rates.

Not only do insurance companies have to go through the burden of hearings, but the state has eliminated appeals panels that quickly decided cases when a dispute existed. Today, insurance companies who dislike the state's decisions have little choice but to launch expensive court proceedings.

The Future

Although they have failed to deliver the lower private-market rates that many Floridians expected and Crist promised, the 2007 insurance reforms appear to be reasonably popular. Citizens has continued to grow and saw its market share near 40 percent by the end of 2007.

If Florida remains storm-free, then the state could either reform the system painlessly, by selling Citizens to a private company and removing its power to tax, or build up a large-enough reserve for Citizens to pay any claims that might come along.

By all accounts, however, that rosy outlook appears unlikely. Florida has more miles of coastline than any other state; it continues to build significant numbers of structures along its coast; and it will almost certainly continue to experience hurricanes. Florida's taxpayers remain on the hook for enormous liabilities.

Making the situation better will require significant, ongoing changes to Florida's system for dealing with hurricanes. Three realistic reform alternatives exist: tweaks to the existing system, establishment of a stable state-run wind insurance mechanism, and a phase-out of Citizens.

In short, there's no quick or easy solution to Florida's insurance problems. Ultimately, Citizens will require significant reform and Florida will need to move towards a freer market for homeowners insurance throughout the state.

Eli Lehrer is a senior fellow of the Competitive Enterprise Institute and Heartland Institute. CEI is a non-profit public policy organization dedicated to advancing the principles of free enterprise and limited government. Heartland Institute is a national non-profit research and education organization whose mission is to promote free-market solutions to social and economic problems. He may be reached at 202-331-2283 or via e-mail at ELehrer@cei.org.

Special Reports /

Over-Regulated and Overpriced Florida Insurance Earns an "F"

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