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

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

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

Not only did Florida earn the lowest grade possible — along withCalifornia, Maryland, North Carolina, and Massachusetts — thestatisticians dropped the Sunshine state from its scoringmethodology altogether, claiming that Florida, along withMassachusetts and North Carolina, were messing up the gradingcurve. An excerpt from the report explains the logic:

"In all three states, insurance rates are determined entirelythrough 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 calculationresulted in a more normal curve."

The study, a collaboration of the Competitive EnterpriseInstitute and the Heartland Institute, focused on the regulatoryenvironments of homeowners' and automobile insurance. Contributorsincluded Matthew Glans, a legislative specialist for Heartland;Drew Thornley, economic freedom policy analyst for the Texas PublicPolicy Foundation; Ned Andrews, a Virginia attorney; and DanSutter, a professor at Texas Pan-American University. CEI PolicyAnalyst Michelle Minton assisted in developing the rankingsystem.

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

The report used numerous variables, such as residual automobileand homeowners insurance Markets, market volatility, marketconcentration, form regulation, rate regulation, credit scoring andterritorial rating to make the judgments. Data was almostexclusively derived from 2006 and the resultant assessments referto that calendar year.

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

The Underachiever

Florida comes in near the very bottom of our ratings, almostentirely because of its unusually intrusive homeowners' insurancesystem. Since Massachusetts announced it would stop dictating therates that insurance companies charge beginning this year, Floridahas emerged as the only state that directly dictates insurancerates through state action. To a large extent, Florida's regulatoryover-stretch remains limited to its homeowners' insurancemarket.

Although Florida possesses a highly competitive automobileinsurance market, a series of government efforts over the past 15years has crippled the ability of the state's private insurers toprovide effective homeowners insurance. Already burdened with aheavily concentrated homeowners' insurance market and some of thenation's highest homeowners' insurance rates, Florida consumers sawthe state assume massive new liabilities. The situation resulted inlarge-scale retreat of private insurers and a declining state bondrating, with the very real prospect of higher taxes for allFloridians. For most Floridians, premiums continued to rise.

Hurricane Andrew

The path that leads to Florida's current insurance system beginswith the aftermath of Hurricane Andrew in 1992. In the wake of thestorm and several brushes with insurer insolvency, the Floridalegislature convened three separate special sessions in 1992 and1993. Those sessions resulted in the creation of the JointUnderwriting Association and the Hurricane Catastrophe Fund and anexpansion of the Florida Windstorm Underwriting Association.

The Joint Underwriting Association theoretically served as ashort-term market "safety valve," while the Windstorm UnderwritingAssociation provided ongoing coverage to Floridians who couldn'tget coverage elsewhere. The so-called "Cat Fund" made it easier forprivate companies to offer reasonable insurance rates by sellingthem discounted re-insurance. These three mechanisms — the firsttwo now merged into the Florida Citizens Property InsuranceCorporation — still comprise the essentials of governmentintervention in Florida's system for providing propertyinsurance.

Homeowners Demand Rises

As hurricanes continued to batter the state in early 2000, thelegislature, in 2002, combined the two to create the CitizensProperty Insurance Corporation. Although it continued to write somewind-only coverage, Citizens was, by design, a full-line homeownersinsurer that replaced all homeowners coverage in certain cases andcontracted out little business. Still, homeowners insurance ratescontinued to rise throughout the state.

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

As homeowners faced continual battering from hurricanes andrising premiums, Bush requested more reforms to the system and, in2005, he got them. Senate Bill 1486 shrunk the Cat Fund, created ahurricane loss mitigation program, required insurers to offerhigher deductibles to consumers who wanted them, mandated discountsfor mitigation, and, perhaps most importantly, allowed Citizens tocompete freely with the private market in Monroe County.

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

Sweeping Reforms in 2007

Those quickly rising rates, coupled with record insurancecompany 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 sessionof the legislature to consider them.

The Insurance Industry Accountability and Consumer ProtectionAct, (Bill 1A), significantly changed the system by whichFloridians purchase insurance. Provisions include:

?A rollback of January 2007 rate increases for Citizens PropertyInsurance Corporation and a prohibition on rate increases byCitizens until 2009.

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

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

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

?Taxes on "excess profits."

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

?A massive expansion of the Hurricane Catastrophe Fund.

Bill 2498, An Act Relating to Insurance, which passed later in2007, continued in the same vein, with a number of tweaks to thefundamental system. Among other things, it contained provisionsto:

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

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

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

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

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

Citizens Property Insurance Corporation

Since 2002, Citizens has existed, in theory, to write insurancefor Floridians living "in high-risk areas and for others thatcannot find coverage in the open, private insurance market."Although it maintains a private-sector fa?ade, Citizens is, infact, an unusually powerful government agency.

Citizens has been given the authority to impose taxes on everyinsurance policy issued anywhere in the state of Florida. State lawplaces no limits on these taxes and applies them to everybody inthe state, including people who have never done business withCitizens.

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

Because Citizens specializes in writing policies in high-windareas, the quiet hurricane seasons of 2006 and early 2007 allowedit to build up a surplus of nearly $2 billion as of early August2007. Although barred by statute from operating for the benefit of"any private person," Citizens faces few hard-and-fast restrictionson how it spends or invests this surplus.

The Catastrophe Fund

Like Citizens, the Cat Fund is a government agency. It serves asthe largest re-insurer in Florida. Until the 2007 special session,the Cat Fund remained a reasonably minor entity that re-insuredsmaller companies and the then-small Citizens. Today, the fund hasbecome the largest and most important re-insurer in Florida. Sinceit underwrites the great bulk of Citizens' risk, its existenceprovides a prop for Citizens. By providing re-insurance atbelow-market rates, the Cat Fund theoretically allows insurancecompanies, including Citizens, to write insurance policies at lowerrates.

In fact, it appears the Cat Fund may actually increase costs.Current Florida law requires that all insurers doing business inthe state purchase reinsurance through the fund. This reinsurancecosts less than similar coverage in the private market and, intheory, would allow insurers to cut rates. Unlike traditionalreinsurers, however, the Cat Fund does not carry out a seriousinvestment strategy or attempt to grow its business. Instead, likeCitizens, it has the authority to impose new taxes — in the form ofassessments — to pay off whatever bonds it might issue. Earlierthis year, the fund issued more than $5 billion in debt to build upits cash reserves, the state's largest-ever single debt issue.

Rate Regulation

Although 49 states regulate insurance rates in some way, the2007 insurance reforms made Florida's rate regulations particularlyburdensome. Florida not only requires that state bureaucrats signoff on all rates — something about half of all states require — butit also mandates that the insurance commissioner and insurancecompanies attend public hearings on just about every major requestfor a modification in rates.

Not only do insurance companies have to go through the burden ofhearings, but the state has eliminated appeals panels that quicklydecided cases when a dispute existed. Today, insurance companieswho dislike the state's decisions have little choice but to launchexpensive court proceedings.

The Future

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

If Florida remains storm-free, then the state could eitherreform the system painlessly, by selling Citizens to a privatecompany and removing its power to tax, or build up a large-enoughreserve 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; itcontinues to build significant numbers of structures along itscoast; and it will almost certainly continue to experiencehurricanes. Florida's taxpayers remain on the hook for enormousliabilities.

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

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

Eli Lehrer is a senior fellow of the Competitive EnterpriseInstitute and Heartland Institute. CEI is a non-profit publicpolicy organization dedicated to advancing the principles of freeenterprise and limited government. Heartland Institute is anational non-profit research and education organization whosemission is to promote free-market solutions to social and economicproblems. He may be reached at 202-331-2283 or via e-mail [email protected].