How Florida CFO hopefuls hope to solve insurance crisis

The theme of career business person versus career politician pervades the race for Chief Financial Officer in Florida, considered by some to be the second most powerful position in state government.

Democratic candidate Alex Sink said she is committed to using her 25 years of banking industry and financial experience to benefit Florida taxpayers and consumers.

Republican candidate Tom Lee, Senate president, operates from deep within the state’s political machine and believes that this experience is what’s needed for the next CFO to succeed.

The two are vying to replace CFO Tom Gallagher, who ran and lost in the primary for Governor.

Insurance issues have been prominent in the campaign partly because the Office of Insurance Regulation falls under the CFO, although the state cabinet appoints the OIR director. Both candidates have spoken out on how they would go about solving the current crisis in property insurance pricing and availability.

Sink argues that efforts by the current crop of politicians in Tallahassee have been inadequate and emphasizes bringing other states into a solution to spread the costs and risk.

Lee wants to decrease the state’s own financial exposure while finding ways to encourage more private insurance. Both vow to keep premiums as slow as possible for buyers.

Sink vows to pursue a regional program for alleviating the burden of catastrophes on certain areas, as a step towards an eventual national solution. Her plan is to involve not only the states on the Gulf of Mexico, but every state along the eastern seaboard, to diffuse the cost of damage caused by catastrophic natural events. She referred to Long Island and Brooklyn, N.Y., and Cape Cod, Mass., as locations that are vulnerable to major storms.

Not waiting for Congress
“The problem of violent weather is a national problem, and we need a national catastrophic fund to spread the risk. But Congress can’t get its act together even after a major disaster like Hurricane Katrina,” she maintained. “I am not going to wait for Congress any longer. As CFO, I will call all of my counterparts in coastal states from Texas to Maine and work with them toward the creation a regional catastrophic fund that helps spread the risk of tropical weather.”

Sink noted that the cost of reinsurance is one of the factors pushing up the cost of insurance for homeowners and businesses. To help address this, she said she would expand and strengthen the Florida Hurricane Catastrophe Fund. “A stronger Cat fund will establish a more predictable property insurance market and attract more private competition for our insurance business,” she said.

She thinks the Legislature needs to be more proactive. “The current Legislature waited until the last minute of the legislative session to put a band-aid on a problem that needs major surgery,” Sink said. “This is a problem that threatens to bring our entire economy down.”

As a “band-aid” Sink was referring to the recent reactivation of the Property and Casualty Joint Underwriting Association (PCJUA) that is serving as a last resort provider of insurance for businesses valued under $1 million. When asked if she thought the JUA was a good idea, Sink said it was the only idea policymakers could come up with — and at the eleventh hour.

In a relatively mild hurricane season to date, Sink cautions Florida’s governing body to resist complacency.

“We have been lucky so far to avoid the devastating hurricanes of the past two years, but we can’t count on luck to solve our state’s property insurance crisis,” Sink said. “Consumers continue to see their homeowners policies non-renewed or canceled as insurance companies flee our state. Those fortunate enough to find insurance have faced spiraling rate increases that are crippling households and our economy. In fact, Tallahassee’s efforts were so inadequate that the governor had to appoint yet another commission — the third on this issue — to ‘study’ the insurance crisis.”

Bureaucratic barriers
As for her approach to regulation, Sink says, “I support regulation that protects consumers. I don’t support regulation that puts up unnatural bureaucratic barriers that discourage companies from doing business in Florida.”

Statewide building code uniformity is also a priority for Sink. She wants to see residents and businesses “from Pensacola to Fernandina Beach to Key Largo ready for storms before they arrive.”

“When it comes to financial preparation for violent weather, an ounce of prevention really is worth a pound of cure,” she said. “As Chief Financial Officer, I’ll fight to unify building codes around the state and increase other mitigation efforts.”

Sink thinks the primary responsibility of the CFO is to be Florida’s financial watchdog and that as part of that job the CFO must scrutinize private vendors working for the state.

“Over the last eight years, Florida has privatized millions of dollars in state government services,” Sink maintained. “The promise of privatization was that it would lower costs while improving services. Sadly, privatization has often resulted in the reverse –higher costs to taxpayers with lower quality services.”

Serious threat
Republican CFO candidate Tom Lee agrees that the insurance crisis is a threat to the economy.

“Florida is facing one of the most serious threats to our economy — the lack of a strong, stable, and affordable property and casualty insurance market,” Lee said.

“Make no mistake: this crisis has been brought on because of nearly $40 billion in losses that have been sustained during the 2004-2005 hurricane seasons. These catastrophic losses have turned the insurance market upside down.”

He thinks some of the steps taken in the last 10 years by the Legislature have helped ease insurance difficulties. He cited establishment of a statewide building code, the creation of an insurer of last resort (Citizens Property) and the state’s catastrophic fund as examples.

However, he also argues that some of these steps have caused the state itself to become more of an insurer than it should and they should be re-examined. If elected as the next CFO, Lee said he would propose “expanding the role of the state as a reinsurer in exchange for phasing out the state’s role as a direct insurer.”

The state is a direct writer of property insurance through Citizens Property Insurance Corp. and it also currently provides hurricane reinsurance through the Florida Hurricane Catastrophe Fund. “Each role exposes the state and policyholders to catastrophic risk of loss, but the state acting primarily in the role of a reinsurer has distinct advantages,” Lee noted.

Cat Fund coverage
Lee hopes his objective would be accomplished by offering the private market increased Cat Fund coverage specifically for policies removed from Citizens, or by increasing an insurer’s overall Cat Fund coverage based on the number of policies assumed from Citizens.

Lee said that increasing Cat Fund coverage to the private market is a way to prevent new policies from entering Citizens in the first place.

“We are likely to continue to need a residual market insurer of last resort,” Lee said. “But the goal should be to minimize the role of the state as a direct writer, to stimulate the private sector to undertake the appropriate role of issuing and administering insurance polices and to lower premiums through transferring an acceptable level of risk to the state as reinsurer.”

Windstorm for businesses
Lee would consider increasing underwriting flexibility for windstorm coverage, particularly in the commercial lines market. “Currently, business owners must go to the surplus lines market for such coverage options,” he said. “If such options were available from authorized insurers, greater protection would be afforded to policyholders, such as rate regulation and guaranty fund protection.”

However, he cautioned that in order to protect the financial security of the state, officials must make sure that Cat Fund coverage is not expanded “unless there is a responsible and actuarially sound plan for covering projected losses.”

Lee also backs a mitigation program for Florida homes and businesses, and the promotion of stronger building codes and development policies.

Lee said he would work to attract more private capital back into the marketplace and provide homeowners with the lowest possible insurance premiums.