Florida Chief McCarty: Facts, Not Fear, Should Guide Insurance Debate

Florida Insurance Commissioner Kevin McCarty sent a letter to the state’s media outlets on April 9 regarding the current property insurance system and what should be done to improve it. In it, he says the exodus of national carriers from the market is not a Florida-only phenomenon; insurers have cut back in other states, too. He urges the public not to be swayed by ‘alarmists’ who stress a need to raise premiums because of the 1% likelihood of a once-in-a-millennium catastrophe. Instead, he urges policymakers to focus on controlling the cost-drivers in the system, raising capital requirements and making insurers’ transactions with their affiliates more transparent. The text of his letter follows.

The 2010 Legislative Sessions has featured numerous bills purporting to “fix” the insurance marketplace. To adequately evaluate the merits of this legislation, it is important for all of us to understand the historical context of the current market structure. The underlying problem is simple: Since Hurricane Andrew in 1992, large insurers have reduced their hurricane risk exposure on America’s coastlines.

The exodus from the coast is not a Florida phenomenon. Commissioner Jim Donelon of Louisiana remarked, “Louisiana is confronting a serious insurance availability problem, as demonstrated by several national companies reducing their coastal exposure.” Commissioner Mike Chaney of Mississippi noted, “There are fewer companies writing insurance policies along the coast.” Even Commissioner Susan Cogswell of Connecticut reported, “The department believes there is an availability problem for homeowners insurance … located within 1,000 feet of the coast.” This scenario is being replicated from Maine to Texas.

It is also not a new problem, but a reality Florida has confronted for two decades. After Hurricane Andrew, our state experienced 11 insolvencies and large insurers threatened to leave our state. The situation was so dire the Florida Legislature resorted to a draconian measure – a “moratorium” against insurers leaving. In the interim, our state encouraged homegrown insurers, and developed government assisted programs including the Citizens Property Insurance Corporation and the Florida Hurricane Catastrophe Fund (Cat Fund).

The system worked. The market stabilized and despite eight named storms in 2004-2005, our state limited its insolvencies, and all claims were paid. It should be noted that prior to this hurricane season, the majority of the market was Florida start-up companies that came into existence following Hurricane Andrew. However, these storms continued to accelerate the movement of national insurers out of our state. As national insurers reduced exposure, the Governor and Legislature had to confront some unpleasant alternatives.

One solution was to abandon the concept of a private marketplace, and rely primarily on state government (through Citizens) for homeowners’ insurance. Conversely, another alternative was to once again resort to draconian measures, including a new insurer moratorium. Both of these proposals were rejected. A total reliance on the government removes market competition, while a moratorium would dampen future private investment.

The Governor and Legislature developed an alternative approach: to expand homegrown Florida insurers, and to fight to keep a private insurance marketplace. This was a three-tiered strategy that included reinsurance cost relief (by expanding the CAT Fund), storm-proofing homes, and the Insurance Capital Build-Up Incentive Program, which led to new investment, new companies, and increased competition.

Several commentators have worried about the “mega-catastrophe” – or a 1-in-100 year storm. In practical terms, the odds of this occurring are remote (literally 1%). According to the Florida Hurricane Catastrophe Fund Rate-Making Report, a 1-in-100 year storm would cost $55 billion.

In contrast, Hurricane Andrew cost roughly $15.5 billion ($22 billion in today’s dollars). While our state should do everything possible to prepare for a mega-catastrophe triple the size of Hurricane Andrew, we cannot become overwhelmed by a “Chicken Little” mentality.

Here is the blunt truth: if the proverbial “sky does fall” and Florida experiences a once-in-a-millennium catastrophe – we will need federal government assistance similar to Louisiana following Hurricane Katrina. This is precisely why we need a National Catastrophe Plan. A once in a millennium storm scenario would overwhelm any private market structure as well. It is also unrealistic to believe that Citizens and the Cat Fund should have accumulated tens of billions of dollars since their inception to pay for a storm. These entities are operating as they were designed –as post-event funding mechanisms (through assessments) if there is a shortfall.

Some pro-industry proponents have presented deregulation (or more accurately raising premiums) as a panacea. Giving Floridians premium increases of 30% or 40% would cause public outrage, and is a fundamentally flawed strategy: current proposed legislation provides no guarantees that insurance companies will keep the money to pay claims. Insurance companies could easily dividend these newfound profits to their shareholders, and the money would be gone. As evidence for this, the industry has opposed the Office’s attempts to change Florida Statutes to allow transparency and oversight of financial transactions among companies, their Managing General Agents (MGAs) and affiliates. Another important fact: not one large national insurer has made commitments to expand their writings if deregulation is achieved.

I understand the public is puzzled as to why some insurers are losing money despite relatively few storms. One of the reasons is the economy. Whether it is shopping mall closures, or lay-offs in the auto industry, every sector of the economy has suffered, and the insurance industry is no exception. In fact, from 2009 to present there have been 20 bank failures in Florida, even though banking is the most tightly regulated sector of the financial industry. Insurance companies, like other financial institutions, sometimes fail. The government cannot and should not guarantee a company’s profitability.

The Office proposes a more measured approach that directly addresses our state’s challenges.

We should focus on other underlying problems, including the cost-drivers. This includes holding public adjusters accountable, reducing unjustified claims, reducing fraud, and strengthening our solvency requirements to ensure companies have the money on-hand to pay for storm events. We also need greater transparency and oversight of insurer transactions with affiliated (nonregulated) companies to keep money in our state.

Let me be clear – the Florida property insurance market faces substantial challenges. Yet the public policy debate is being adversely affected by alarmists who mischaracterize the issues, shock the public, and propose vague and untenable solutions. All of us – the regulators, industry, and media must focus on fairly representing the facts to assist the Florida Legislature in making responsible reforms.