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

We Say
With apologies to the fine folks who work at Citizens, their large piece of the pie may one day hit us all in the face with a plate full of assessments. Citizens' premiums are inadequate to cover losses from a major storm, which makes nearly everyone with a property and casualty insurance policy vulnerable to “hurricane taxes” that last for years. Other states may have recognized the dangers of that earlier because no other state has anything like the behemoth Citizens. Leaders from neighboring coastal states call it Florida's folly to grow what is, essentially, socialized property insurance.

At a recent meeting, insurance commissioners from several other Southern states participated in a panel discussion on their state initiatives. The consensus was that no state needs to be in the insurance business. Florida, however, is into it deeply — up to its eyeballs with both Citizens and the Florida Hurricane Catastrophe Fund — and absent measures to curb the growth of what was intended to be the “insurer of last resort” and a less-costly reinsurance facility, we may wind up submerged.

Some may say we shouldn't care that insurance regulators in other states use Florida as an example of what not to do. Yes, Florida is different, with a coastline that is unmatched by any other state. Creative minds have originated some innovative ideas that other states have unabashedly copied, and that is certainly worth noting. However, creativity sometimes makes things mutate into forms that are counter to rational practices, which is the best way I can think of to explain how we find ourselves with a great 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-half times more exposure to loss than the combined residual markets in seven other hurricane-prone states. It is a combination of political pressure and geography. Of Florida's 67 counties, 61 are considered coastal, according to the National Oceanic and Atmospheric Administration (NOAA). These are defined as counties with at least 15 percent of total land area located within a coastal watershed or a portion of the county that is at least 15 percent of NOAA's coastal cataloging unit. In other words, these are the most desirable places to build and live, which residual markets make it easier to do. Maybe too easy.

Residual market plans include beach/windstorm plans, Fair Access to Insurance Requirements (FAIR) plans, and hybrids of the two, such as what we have with Citizens. They exist to insure against the windstorm peril for people unable to buy coverage in the voluntary market. Granted, residual markets are rarely self-sufficient, which is why states make every effort to shrink them. Yet residual markets nationally have surged from a total exposure 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 went from 931,550 in 1990, to almost 2.5 million in 2009. These figures are down slightly from 2008, as states strive to reduce their potential losses by encouraging the private sector to take on more coastal polices. However, this reversal is not occurring in Florida. 

A way to appreciate the differences between Florida and other Southern states is to compare exposure of residual market plans as a percentage of a state's total exposure. In Florida, Citizens' exposure represents 15.5 percent of the total state exposure to risk. That puts us in first place. Second place goes to Louisiana, with less than 7 percent of the state's total exposure 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 insurance commissioner. It offers homeowners' policies only for owner-occupied primary residences. If the property is a second home, coverage is less comprehensive. The state also capped insurers' financial liability for residual market claims at $1 billion, providing private insurers will some degree of certainty about what their financial obligation would be if a major storm hit. Insurers pay the $1 billion in addition to their own claims, of course, and a surcharge kicks in after that to handle any wind pool deficit.

South Carolina created a “catastrophe savings account” for homeowners to set aside money, free from state income tax, to pay storm-related expenses such as insurance deductibles or other uninsured risk. The state also requires wind pool policyholders to purchase flood insurance as a way to solve dilemmas over wind versus water damage. Without flood coverage, policyholders may receive coverage at actual cash value rather than full replacement cost. In Mississippi, the wind pool offers discounts of up to 25 percent to policyholders who make their homes more hurricane resistant. This is one way the state encourages coastal development while 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 hope that all the lessons do not have to be learned the hard way.