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Whirl of trouble for Florida's insurance
Florida Governor Charlie Crist is surrounded by lawmakers as he signs an insurance bill during a ceremony on the front porch of a private home in North Palm Beach, Fla.
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Kai Ryssdal: We have our first hurricane of the 2009 season. Hurricane Andres is expected to reach Mexico's west coast later today. In prime U.S. hurricane territory, that is, mostly, the state of Florida, there are still fresh memories of the devastating storms they have had there the past several years.
Strangely though, insurance rates haven't kept pace with public worries. Florida froze insurance premiums two years ago. That let builders keep building in the face of a saturated real-estate market. And it could mean everybody gets soaked if the weather gets really bad. From Miami, Marketplace's Dan Grech reports.
DAN GRECH: Florida keeps insurance rates low by doing something no other state has tried: it subsidizes the cost of reinsurance. Reinsurance is basically insurance for insurance companies. An insurer agrees to cover, say, the first $10 billion in damage after a storm.
Reinsurance kicks in to cover the rest.
Private firms charge around 25 cents for each dollar of reinsurance protection. The state-run Hurricane Catastrophe Fund, or Cat Fund, charges two cents for each dollar of protection. So homeowners pay lower premiums.
There's one big problem: the Cat Fund can't cover its commitments.
JIM MASSIE: Our current strategy in Florida is prayer.
That's Jim Massie with the Reinsurance Association of America.
MASSIE: We're praying that we don't have a hurricane. And prayer is good, but I don't know that we can count on it to pay insurance claims.
The Florida Cat Fund relies on its ability to borrow money to pay claims. But last fall, the credit markets seized. The Cat Fund was suddenly short $17 billion. Massie says Florida's experiment in state-subsidized reinsurance could end in disaster.
MASSIE: The Cat Fund violates one of the cardinal principles of insurance, which is spreading the risk. The Cat Fund concentrates the risk within the state of Florida. Private reinsurers sell that risk around the world. To Bermuda, Japan, London.
Florida created its Cat Fund after Hurricane Andrew in 1992. The fund has since grown to sell $27 billion in storm protection, making it the state's dominant reinsurer. By keeping premiums low, the Cat Fund made property in Florida more affordable. That helped pave the way for Florida's building boom.
Robert Hartwig is president of the Insurance Information Institute. He says cut-rate insurance allowed Florida developers to overbuild and Florida homeowners to overbuy.
ROBERT HARTWIG: There's no question that the state's policy of providing subsidized insurance has led and contributed to the state's real-estate disaster.
Hartwig says the only way for the Cat Fund to have enough money to cover its obligations would be for it to hike the premiums it charges. That would reflect the true cost of re-insurance.
Ron Klein is a Democratic Congressman from South Florida. He says Florida needs to rely more heavily on private reinsurance. But the government must take a role in keeping those companies in check.
RON KLEIN: Unfortunately there's sort of a failure of the market. It's a handful of companies charging whatever they can charge. A lot of people would say that's whatever the market will bear. But people can't afford it. You're pricing them out of their home. That's not a good thing.
Klein wants to create a national pool for catastrophic risk that could sell bonds to the private market. Others suggest the federal government should float mega-catastrophe bonds after a major disaster. But those solutions are far off.
Despite new state legislation, the Florida Cat Fund is still short billions of dollars this hurricane season. In the event of a big one, the state may not have the money to pay claims.
In Miami, I'm Dan Grech for Marketplace.
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Insurance companies were making HUGE profits for years, then there's a weather event -- imagine that in Florida? -- and all of a sudden there's no money to pay the claims. Give me a break. Everyone acts like Florida is the only state with homeowner claims. How about the CA fires, the floods and tornadoes in the midwest?
Where's Washington when we need them the most. Obama is handing out money left and right, why not give Florida some. We gave him the presidency, he should give us some help. Reassure Floridians that in the time of need we will not be ignored like the residents of New Orleans were by Bush. Bail us out Obama. Give us some funding so we know we can continue on with our lives if we have to go through a disaster. Florida's economy cannot fail. If we don;t get some assistance it could very well do so. Crist's agenda matches Obama's, regulate, regulate, regulate. They'll be pals for sure if Crist becomes a Senator.
Hurricane Hugo was quite the storm when it moved through SC. We were able to rebuild, but government began to get in the way. Fortunately I don't think we're as bad off as Florida. They seem to be in the lurch as far as insurance goes. I hope they don't get another Andrew or a Hugo sized storm. What a disaster that would be. Hopefullt Florida's leaders can step up and figure out a solution. It seems like its only a matter of time before the big one comes through Florida or South Carolina. Hopefully we'll all be prepared. I learned my lessin last time. :)
Jim Massie's comment about praying scares the heck out of me. Why are we praying not to get hit again? Besides the obvious that no one wants to be hit a hurricane, if we are hit by one of any size we're all going to go broke. That's a shame. The politicians put us in this mess. The private market is not helping, but how can they with the mighty Christ and his sidekick Lil McCarty stepping in to save the day???
We need real rates in Florida.
Government run insurance is the WORST possible idea to curbing disaster risks in Florida. Citizen's is becoming so bloated with high-risk policies it's trying to transfer them to private insurers. Frozen rates and poor business practices are prompting State Farm of Florida (the largest private policy holder in the state) to pull everything but auto coverage out. Overbuilding in high risk areas and artificial premiums have made Florida extremely vulnerable and unless they work to reduce risk, we're going to see their economy wash out to sea and the rest of the nation will be paying for it.
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