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Citizens Insurance: a looming Category 5 disaster
Matt Walsh
Editor and Publisher
Another hurricane season is upon us. Let's pray hard: Please, no big hurricanes in Florida this season. The Florida residential insurance industry cannot withstand one; it's really and truly on the brink.
Thanks to the unintended consequences of the post-Hurricane Andrew legislation championed by then Insurance Commissioner and now GOP gubernatorial hopeful Tom Gallagher, Florida's property insurance industry cannot handle another catastrophe to compound the existing residential insurance catastrophe, also known as Citizens Property Insurance Corp., Florida's state-controlled insurer of last resort.
The supply of residential insurance is so short and the price of it so under-priced that Florida's insurer of last resort has become the state's second-largest residential property insurer with about 850,000 policyholders. And the number is rising.
While that in itself should be an obvious indicator of a government-controlled market that is not working (at all), we have Citizens' own financial performance the past two years to emphasize the point. It is expected to record by the end of fiscal 2005-06 a deficit of $1.6 billion. And that would be on top of the $516 million deficit recorded in fiscal 2004-05. In each of the past two years, Citizens has underwriting losses of $1.8 billion, $3.2 billion altogether. That means the damage claims that Citizens had to pay these past two years exceeded its premiums by that amount.
That shouldn't have happened.
But it did because of mismanagement in Tallahassee - legislative mismanagement that started with the creation of Florida's post-Hurricane Andrew legislation in 1993 on through today.
Lawmakers know that Citizens Property Insurance Corp., already a Category 4 disaster, is a looming Category 5. Put in those same categories Florida's overall residential property insurance market. If we have anything close to the 2004 hurricane season, you will see Florida's governor declare a state of emergency not only in the residential areas torn by storms but throughout the state's insurance industry.
Unfortunately, lawmakers failed to face and fix this disaster in the last session. Instead, they crafted an election-year Band-aid that makes them appear as if they're magicians who can make children's boo-boos go away without feeling much pain.
You know the magic trick by now: It started when lawmakers learned this spring that Florida's tax revenues would produce more than a $4 billion surplus, thanks to tax collections from Florida's booming economy and hurricane reconstruction. While that great news befell them, legislators also were confronting a politically unpopular decision: They needed a method to close Citizens Property Insurance's $1 billion deficit. And the likeliest one would have been an assessment on all residential property policyholders throughout the state, as mandated by the 1993 post-Hurricane Andrew laws.
Florida law says in the event of hurricane catastrophes that reach certain levels of monetary destruction, all insurance companies in the state must assess their policyholders to help cover the uncovered claims of the state's insurer of last resort and/or the claims of those insurers who don't have the financial wherewithal to meet their obligations.
This meant, because of Citizens' losses, lawmakers would have to agree to passing along to all Floridians, including those covered by private insurers, premium increases on top of the shocking, double-digit increases that were already being assessed.
But then the brilliant, magical idea occurred: Take $750 million of that $4 billion surplus and give a gift to Citizens to help close its deficit. Sell the idea to taxpayers as "rate relief." Indeed, Florida Chief Financial Officer Tom Gallagher was shameless in his pandering. Trumpeted Gallagher on April 17: "Returning surplus revenue to Florida's families is sound fiscal policy and common-sense tax relief and I commend our state legislators for taking this first step."
Then on May 6, when lawmakers sealed the deal, Gallagher added: "We have collected millions in sales taxes during hurricane recovery, and the fair thing to do was to give it back to Florida's families to deal with insurance costs. This is not a bailout of Citizens; this is unprecedented rate relief for Floridians."
It was a bailout.
Yes, it helped avoid another assessment on policyholders. But in a larger context, this gift was bestowed on Citizens to cover up multiple legislative and regulatory sins and errors that go back to 1993 and are becoming increasingly compounded . Consider:
• Error 1: Allowing Citizens to operate in denial. With underwriting losses in fiscal 2004-05 of $1.8 billion, it should have been obvious to lawmakers, regulators and Citizens executives that Citizens' rates were hugely inadequate and needed to become realistic (i.e. much higher).
• Error 2: Letting Citizens become Florida's second-largest residential property insurer. Duh. If the state-run insurer of last resort is quickly becoming the state's insurer of first resort, what bell needs to toll for lawmakers to realize we have a big problem - that the private insurance market is completely dysfunctional?
• Error 3: Through regulatory rate-rigging - preventing insurers from charging prices that make economic rather political sense - state lawmakers and regulators for more than 10 years have created a shortage of insurance and an Alice in Wonderland world in which Floridians are buying insurance at prices less than what it really costs. Lawmakers should ask themselves this: How long will a business last that loses $1.8 billion a year on its operations?
Error 4: Creating the $750 million bailout and neglecting to act earnestly and quickly to head off the coming disaster.
Lawmakers know the state's residential property insurance system doesn't work. Unfortunately, they don't have the political will to throw out the current system.
Florida CFO Tom Gallagher wants the federal government to help solve our problem by letting insurers create tax-deferred catastrophe reserves and letting consumers have tax-free catastrophe savings accounts.
These steps would help. But the biggest help of all would be for our lawmakers to do, once and for all, what they don't have the courage to do: Shut down the Florida Insurance Department and let buyers and sellers decide what the real price of insurance should be.
At first, such a cold-turkey move would create widespread discomfort, disruption and protest. But after that initial jolt, rational pricing would emerge. Of this much we're sure: The effects of a real buyer-seller insurance market will be far less catastrophic than the effects that are sure to come if lawmakers leave the system the way it is.
NOTES FROM THE FIELD
+ Car dealer dilemma
Auto dealers' stomachs are growing bigger knots. As interest rates rise, traffic in the showrooms is likely to continue to taper off. But here's what's worse:
Huge numbers of SUV owners are upside down. Middle-class and upper-middle-class car buyers, already up to their credit limits, borrowed to buy all those SUVs that the car makers have been pushing like drugs the past five years. Turns out, with inflation, $3-a-gallon gasoline, rising interest rates, many of these SUV owners are gasping. They can't afford these guzzlers.
They'd like to scale down to smaller, more efficient vehicles, but they owe more than their SUVs are worth. They can't get out of their loans - and there are fewer and fewer SUV buyers in the market.
Watch for big summer and fall incentives from the car makers. But from a broader perspective, if the auto dealers' sales retract, so will those of other retailers. It's going to be a long, hot summer.
+ It's everywhere
We've all heard and read about the residential real estate slowdown. Well, we also know misery loves company.
Over in Palm Coast in Flagler County, Florida's fastest-growing county, a year ago this month the number of licensed Realtors there reached a record 1,500. At the same time, there were 750 residential units listed for resale, a two-month supply. Today, we're told, 500 of those 1,500 Realtors did not renew their membership in the county's Realtor association, and the number of re-sales on the market now total more than 4,500, a 12-month supply.
Meanwhile, Realtors take heart. An Interstate 75 billboard in Atlanta flashed this eye-popping statistic: 90,109 homes are listed for sale.
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