By ASHLEY AMASON
(Part one in a Herald-Breeze series on residential property insurance in Florida.)
Many Floridians receive their annual/bi-annual residential property insurance statement, noticing the additional assessments at the bottom labeled CPIC, FHCF, and sometimes FIGA —five dollars here, three dollars there, altogether not that much money. However, do Florida homeowners actually know what those assessments are and for how long they’ll have to pay them?
CPIC is Citizens Property Insurance Corporation. Citizens is Florida’s state insurance program, sometimes called the insurance of last resort. It began in the aftermath of Hurricane Andrew in 1992. The economic impact of Andrew led Florida Legislators to create an entity as an insurer of last resort in the event that no private insurance company would insure high-risk homes (mainly million-dollar coastal properties).
Florida Legislators also created another entity, the Florida Hurricane Catastrophe Fund (FHCF), simply known as the CAT fund. The CAT fund serves as reinsurance. Reinsurance is needed because an insurance company can only insure so many homes before the capacity of its reserve runs out.
It works like this: a homeowner shifts the risk of losing an asset (his home) to an insurance company. The homeowner pays the premium and the insurance company assumes the risk. When an insurance company, such as Citizens, assumes the risk of losing assets and determines the probable maximum loss, PML, (which in Florida totals billions of dollars) is greater than their capacity – they buy reinsurance.
So why does a Florida resident who lives 35 miles or more from the coast, and has State Farm insurance on a $100,000 house, receiving assessments from CPIC and FHCF, which was originally meant for uninsurable high-risk coastal properties? Because Citizens and the CAT fund are government entities, and they have the ability to tax every Floridian’s insurance to balance their deficit.
From where is this deficit coming?
In January 2007, the Florida Legislature changed the law about whom Citizens could insure. Before 2007, Citizens was meant to insure only those who could not find insurance through a private company. However, in January 2007, legislators passed a policy allowing Floridians to choose Citizens to insure their home if the most affordable insurance they could find in the free market was 25 percent more expensive than Citizens.
Herein lies the problem: the cheapest rate Citizens offers is factually documented as an inadequate rate. According to Mike Thomas’ article, “Insurance rates linked to votes? This can’t go on.” in the Oct. 16, 2008 issue of the Orlando Sentinel, “Citizens customers pay 73 cents on the dollar for their policies. The subsidy is far greater for residents of southeast Florida who live east of Interstate 95. People with the greatest risk proportionately pay the lowest premiums. And that means everybody else assumes the risk for them.”
Former Florida Representative and Committee on Insurance Chairman Don Brown said, regarding Citizens and the CAT fund, “We are passing policy that panders to the dark side of human nature.” He goes on to quote Frederic Bastiat, saying “Self-preservation and self-development are common aspirations among all people…But there is also another tendency that is common among people. When they can, they wish to live and prosper at the expense of others.”
According to a 2007 article written by Brown, Citizens “is relying on more than $2 billion in subsidies—taxpayer dollars and assessments on property owners—to cover the deficits it accrued during the 2004 and 2005 hurricane seasons.” Its reserves to cover its claims are inadequate (in the event of a storm), and because the CAT fund began with no capital and has reinsured properties with inadequate premiums, it too has inadequate funds. So this is what happens: Citizens has losses, Citizens pays to 100 percent of its capacity, under certain circumstances Citizens is reimbursed a portion of its losses from the CAT fund to its capacity. If neither have enough money to cover losses, they assess every Florida policyholder.
This is where homeowners come in. When Citizens and the CAT fund have to borrow money to cover their losses, they begin to assess a tax/fee. However, creating a revenue stream from assessments takes time, so they borrow money by selling bonds and pledge assessments as collateral to repay the bonds. Citizens and the CAT fund are allowed to assess every Floridian’s insurance (residential property and automobile). The assessments will be charged until the deficit is fully repaid, which could be an indefinite amount of time depending on the amount of losses, coupled with recurring storms.
Citizens and the CAT fund can tax Floridian’s for multiple events. Let’s say a major storm struck Florida this year and caused $20 billion in losses for Citizens’ insured homes. Because Citizens charges inadequate premiums and has assumed more risk, it can only afford to pay $10 billion in claims. Therefore Citizens goes to the CAT fund, but it can only pay $5 billion, leaving $5 billion in losses that will have to be borrowed to cover claims. Citizens and the CAT fund borrow the money, pledging assessments on Floridians as collateral, and you begin to see taxes from CIPC and FHCF on your statement until the $5 billion deficit is repaid.
Suppose another storm strikes Florida in 2009, a smaller storm causing $10 billion in losses for Citizens. Again, it cannot afford to cover all of its claims, with only $3 billion in reserve. Additionally, the CAT fund can only pay $3 billion, leaving $4 billion to be borrowed and charged to Floridians.
This vicious cycle could seemingly continue indefinitely, since both entities are underfunded and using Floridians to pay for their poor-planning and artificially-low rates. Furthermore, the Florida Legislature is not scheduled to address the policy until 2009. Regarding the unstable circumstances of Citizens and the CAT fund, state Chief Financial Officer Alex Sink said, “Let’s hope we don’t have a storm.” Apart from that, she said, hope for a multi-billion-dollar federal bailout.
Brown concluded by saying, “The desire of some to live in dangerous places is fine, but the rest of us should not be expected to pay for their risky behavior.”