Editors note: In light of the special session on insurance, which is expected to consider the Governor's Property and Casualty Insurance Reform Committee, a group of newly elected House Democrats have come forward with their own plan that focuses on policyholders' rates.
The Homeowners' Protection Act requires that the state take a business-minded approach to begin repairing Florida's broken insurance market and deliver meaningful rate reduction. First, to identify solutions to the insurance crisis, we must think like a business owner. Under the current circumstances, the product (windstorm insurance coverage) offered through the private sector is so costly that consumers are not willing or able to afford the product. Consensus has been reached that the underlying factor driving the high price of the product is the soaring cost of reinsurance purchased from the private market.
Overhauling the current system requires that a complex, but critical question be answered: How much risk can the people of Florida responsibly assume while maximizing premium savings? The current system in place has the state already assuming unprecedented risk through Citizens Property Insurance Corporation, the Property & Casualty Joint Underwriter Association, the Florida Hurricane Catastrophe Fund, and the Florida Insurance Guaranty Fund. Unfortunately, the people of Florida have assumed the most irresponsible risk with no cost savings and without spreading the risk.
Knowing that homeowners need to have adequate coverage to protect their most valuable asset, their home, the state must seek ways to deliver the same product through other avenues. We should assume that the 18 million residents and business owners in Florida would prefer to collectively invest in the use of "public capital" if it is less expensive than the cost for private capital. The end result is using a less costly vehicle that pools together public capital through self insurance. This would provide responsible risk to Floridians and a stable market.
To evaluate and assess current market conditions, an authority will be created to deliver a reasonably priced insurance product and assume responsible risk as necessary to produce lower premiums. The Rate Reduction Authority will work with the insurance commissioner to deliver reduced premiums by setting the form of insurance product sold within the parameters set in statute. The Authority will work to replace the most expensive reinsurance sold in the private market and set prices for insurance products based on actuarial risk.
For example, the Authority could lower the Cat Fund retention levels to produce lower rates for consumers. Another option would be establishing a self-insurance fund. The Hurricane Self-Insurance Fund (HSIF) would be a quasi-public entity established through state law. The self-insurance fund would be administered by staff and would set annual premiums based on actuarially sound rates. The self-insurance fund would be given statutory authority to the Rate Reduction Authority to raise public capital through premiums and various mechanisms that would include issuing bonds and assessments capabilities. The process to raise public capital is no different than the one that is in practice today through the Cat Fund.
The return for use of public capital is lower rates for the 18 million residents and businesses of Florida. The Authority will implement changes to the current system that make good business sense for the people of Florida by replacing the high cost of private capital in the current "dysfunctional" market.
Recommendations
The Rate Reduction Authority's statutory authority would allow it to lower the Cat Fund's retention level to $1 billion and sell reinsurance now sold by the private market at unreasonable rates. Create the HSIF and institute the following changes:
Reform the Cat Fund so that Florida residents and businesses would pool a portion of their existing insurance premiums to drastically reduce the cost of insurance. Instead of paying the total premium to insurance companies, who in turn buy very expensive backup insurance from big reinsurance companies, this part of the premium would go to the HSIF.
The HSIF would sell affordable backup hurricane insurance through insurance companies at a dramatically reduced cost, saving residents and businesses millions of dollars. The HSIF would set actuarially sound rates that would be collected and invested by the State Board of Administration on behalf of the HSIF.
The HSIF would be run by the governor and Cabinet and would cover 80 percent of the set coverage level of hurricane loss to residential and business property. The governor and Cabinet would be authorized to adjust the coverage limit between $50,000 and $500,000 for residential property and between $50,000 and $2 million for businesses. These adjustments would be made to allow for changing conditions in the insurance market and the amount of cash built up in the HSIF.
Repeal the use of arbitration. It is important to change the way insurance companies challenge rate-setting decisions. In an effort to maintain consistency in state government, we should require insurance companies to follow the same procedure as everyone else when a disagreement arises with a state agency. As prescribed by law for state agencies, there should be an administrative hearing with findings of fact, written reasons for the decision, and a chance to appeal. Currently, the only recourse the state has when an insurance company disagrees with the decision not to allow them to raise rates is binding arbitration. This means that arbitrators are the one and only shot there is to keep an insurance company from disregarding a decision that a rate request is not reasonable. There is no opportunity to take the matter through the courts and there is no appeal process.
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