Florida’s Dysfunctional Property Insurance System

By Matt Kelly

Many readers will remember the hurricane season of 2004 as a chaotic time to be a Florida resident. The Sunshine State received four torrential storms that year, causing $45 billion in losses. School was cancelled, streets were covered with debris, and 37 lives were lost. Since 2005, Florida has experienced a nine-year reprieve from major hurricanes, but the state’s largest property insurance company has only recently recovered from the financial losses incurred in 2004 and 2005. A new report by senior fellow of the R Street Institute R.J. Lehmann, from the James Madison Institute makes clear that the next big storm could also devastate public coffers unless reforms are made. Florida and Louisiana are the only two U.S. states that have government established property insurance companies. Florida’s Citizens Property Insurance Company was established in 2002 to “offer coverage to Floridians who legitimately could not obtain it from the private market,” serving as an insurer of last resort. Lehmann’s report notes, “In 2007, Citizens’ role was greatly expanded to offer insurance policies to any homeowner who receives a quote for coverage from a private insurer more than 15 percent greater than Citizens’ rates.” Since then, Citizens has ballooned. As of June 30, 2014, it covered as much as 22% of Florida’s property insurance market, with 912,731 policies in force and over $295 billion in exposure. Citizens has reached these proportions through its advantage as a public entity, creating a dysfunctional insurance system along the way. Unlike private insurance companies, Citizens has the authority to impose charges, called “emergency assessments,” on almost all other insurance policyholders in the state. These assessments would increase premiums for policyholders statewide in order to cover Citizens’ deficits arising from a severe storm or storms. These assessments can extend to nearly every form of insurance and last for multiple years. This advantage allows Citizens to charge artificially low premiums to its policyholders, many of whom can already afford the market rate. The company’s coverage remains significantly below market price and has only recently returned to an actuarially sound level. Though with 22% of the property insurance policies in Florida currently, Citizens was much larger just a few years ago. In 2012 it had a 42% market share. Thanks in part to steps taken by lawmakers and Citizens’ management, the company’s exposure has been significantly reduced, from a peak of $510 billion to $295 billion today. Governor Scott made an important step forward in moving Citizens to a more actuarially sound footing when he advocated for, and secured, the lifting of a 10% cap on premium increases for sinkhole coverage. In 2014, 185,405 of its policies were transferred to the private market, and Citizens has now accumulated a surplus of $7.9 billion. Yet this surplus is mostly due to the extremely rare nine-year stretch without a major hurricane. A one-in-one-hundred year storm would far outstrip Citizens’ modest savings. The Office of Economic and Demographic Research estimates that such a storm could cause between $183.22 billion and $198.99 billion in damages, with $90.86 billion in insured residential and commercial property losses. Not only would Citizens’ current surplus not cover such damages, but nearly everyone with a private insurance policy would be effectively taxed in order to pay for Citizens’ deficits. There’s no avoiding the next catastrophic storm, but Lehmann’s report suggests several reforms that could minimize the impact on Florida’s taxpayers. Future blogs will discuss potential solutions to Florida’s dysfunctional insurance system. With $2.9 trillion in coastal property values, such reforms are vital to Florida’s future and the fiscal solvency of the state.