A common-sense solution to windstorm insurance

Nov 10, 2005

Dan Gelber

The Miami Herald

Even before Wilma, Florida's hurricane insurance market was well on the road to disaster. Affordable windstorm coverage was virtually nonexistent. Now, after being hit by eight hurricanes in less than 15 months, many people will be lucky to find any coverage at all.

Here in South Florida, we will bear the worst of it. The Keys took a horrible beating, and Wilma's unforgiving winds left a wide swath of costly damage throughout Florida's most densely populated areas.

A big part of the insurance problem is that Tallahassee's answer to the crisis—The Citizens Property Insurance Corporation—has been a failure. Citizens is currently the state-run insurer of last resort. It was created on the premise that if "free market" principles were applied wholesale to Florida's insurance market, Citizens would merely fill in any temporary voids until private insurers could be lured back when the market stabilized. It's where homeowners were supposed to turn for short-term coverage when there was nowhere else to go. By law, it charges only the highest rates available.

But our insurance market never stabilized. And even though insurance companies have received repeated approvals from Tallahassee to charge consumers higher rates, they are still fleeing the state. Now nearly a million Floridians are captive to Citizen's skyrocketing rates. After this hurricane season, that number is sure to grow.

It is time for Tallahassee to open its eyes to the utter dysfunction of Florida's windstorm market and provide real reform that will stabilize insurance rates and allow our residents to affordably insure their most valued possession: their home. We need a plan that will provide real relief to homeowners and bring stability to the insurance market. Here is just such an idea.

Florida should revamp its Hurricane Catastrophe Fund (CAT), to enable it to provide insurance directly to homeowners. Currently, the CAT fund can only be tapped by insurers to help mitigate losses. Under our plan, the CAT fund would become Florida's Hurricane Insurance Fund, and actually provide hurricane wind-damage coverage to all Florida homeowners who need it.

This plan would allow the CAT Fund to work just like conventional insurers: by stockpiling reserves and investing them so there is an adequate cushion to pay hurricane claims in bad years. It could even buy reinsurance from other insurers, so it wouldn't have to absorb a claim's entire loss. And it could borrow money if it needed to pay claims.

Initially, the fun would cover hurricane losses only up to $500,000, with varying deductibles. Homeowners who need more windstorm coverage would easily obtain it from the private market because the major risk of hurricane loss was being covered by the state fund. In years when claims are higher than expected, this fund could assess other insurers, or issue bonds, to make up the shortfall. Or the state could find equitable ways to build up the fund. For instance, last year hurricane-recovery construction generated nearly a $2 billion increase in collected sales taxes, a good share of which could have been recycled back to support the windstorm rates of the people facing increased insurance premiums.

Most important for consumers, the fund's windstorm-insurance rates would be lower, because it would not be profit driven, nor pay taxes. Further, since the fund would be controlled by the state, not the insurance industry, its ratemaking process will be totally open and transparent.

Finally, although the state would be insuring the windstorm risk, the policies would be written through existing private insurance agents and companies. Consumers will benefit from faster claims payments and easier coverage purchases because they'll only have to deal with a single agent and a single claims adjuster.

The idea of retooling the CAT fund is not novel, as this proposal resembles the current federal flood-insurance model. Unfortunately, when Democrats presented this idea earlier this year, Republicans reflexively dismissed it as "socialism."

My colleagues cannot continue to ignore that our windstorm-insurance market is in a death spiral. They should not allow rigid thinking to continue to get in the way of a common sense, nonpartisan approach to the growing homeowners-insurance crisis.

We need to stat fresh, with a plan that takes into account the harsh, permanent realities of Florida's windstorm market. And we need to act now before our insurance market totally disintegrates, leaving Floridians even more defenseless before the harsh winds that will undoubtedly visit again.

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