By ASHLEY AMASON
(Part three in a Herald-Breeze series on residential property insurance in Florida.)
As of 2004, nearly 80 percent of Florida’s total insured exposure was coastal, totaling nearly $2 trillion in insured coastal exposure, $942 billion of that in insured residential coastal exposure.
“To put this in perspective,” former Florida Representative and Committee on Insurance Chairman Don Brown wrote, “insurance companies take in about $5.5 billion a year in homeowner’s insurance premiums, and ‘Citizens’ [Citizens Property Insurance Corporation] takes in another $1.5 billion a year. These premiums must cover not only hurricanes, but also fire, theft, liability, operating expenses and agents’ commissions.”
Because exposure so heavily outweighs insurance companies’ capacity to pay, the Florida government authorized thinly-capitalized, start-up insurance companies to “take out” policies from the state-run insurer [Citizens] to reduce its exposure which, as of October 2008, stood at $437 billion, and return it to its original purpose as an insurer of last resort for Floridians.
Due in part to many Citizens policyholders opting out of transferring to the takeout companies, a state appointed group of 11 members is discussing a draft report to eliminate consumer choice. Other recommendations in the Citizens’ draft report include “repealing language in state law that Citizens Property Insurance must provide affordable property insurance, replacing it with the goal of becoming actuarially sound, denying policyholders the option to refuse an offer from a private ‘takeout’ company, as well as denying agents the option to block policies from being removed, and repealing a state law which allows property owners to qualify for Citizens if the offered rates from a private company are more than 15 percent higher than Citizens rates for similar coverage.” The report won’t be voted on until January.
Also working to return Citizens to its role as an insurer of last resort is the Citizens Property Insurance Mission Review Task Force. The task force is considering allowing Citizens to raise its rates, up to 20 percent per year, to better reflect its risk. Increasing its rates would be a drastic step in leveling the playing field for private insurance companies, since Citizens has often had the cheapest rates, on top of a rate freeze from 2007 until 2009.
While returning Citizens to its original purpose is a well-intentioned goal, this problem does not have a one-step answer. Brown wrote, “there are at least four ways to reduce the risk” in an essay titled “Hurricane Crisis Reform Concepts.”
The first tool to combat the hurricane and insurance crisis in Florida, according to Brown, is growth management—limiting our coastal development due to vulnerability and development’s impact on catastrophe exposure. If developers do continue to build and re-build on the coast at such a rapid pace, payment for potential hurricane damages should be paid on the front end through premiums, not on the back end in assessments.
Second is improved building codes to better fortify homes against hurricanes. A long-term commitment to the free wind inspection and matching grant mitigation program is next. In doing so, the two million homes built to an inferior wind-code can be inspected and updated. Fourth is educating the public with mandatory risk disclosure in all residential real estate transactions.
In addition to these four methods, restricting Citizens coverage for homesteads, rather than investment or vacation properties, would reduce its exposure. “This principle,” stated Brown, “is based upon the premise that if an obligation is owed to anyone, it is owed to helping Floridians insure the homes that provide shelter and the dwellings where they live with their families, rather than for properties that provide leisure or represent investment opportunities.”
WORKING TO RETURN Citizens Insurance to its role as an insurer of last resort is former Florida Representative and Committee on Insurance Chairman Don Brown, who recommended restricting Citizens’ coverage for homesteads, rather than investment or vacation properties. This would reduce its exposure. “This principle,” stated Brown, “is based upon the premise that if an obligation is owed to anyone, it is owed to helping Floridians insure the homes that provide shelter and the dwellings where they live with their families, rather than for properties that provide leisure or represent investment opportunities.”