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Newspaper Article

    Can the Insurance Market Weather Crist's Reforms?

    BY Dr. Wayne Brough
    08/29/2008

    As Florida mops up after Tropical Storm Fay, homeowners and businesses are beginning to make repairs and calculate the damage. Even though Fay never attained hurricane status after landfall, the record rains still caused considerable destruction.

    Given Florida's exposure to such storms, the threat of massive property damage is real and significant. More than three months remain in the 2008 hurricane season; should a major hurricane make landfall, many predict that Floridians could be facing as much as $100 billion in storm damage.

    This gives Florida a heightened interest in hurricane preparedness -- something that must include a well-functioning insurance market. Unfortunately, politics has trumped economics in the insurance debate, and legislative efforts to rewrite the laws of economics have left the insurance market unsustainable in its current form.

    A major storm could put Florida's taxpayers on the hook for billions of dollars, thanks to insurance "reforms" passed in 2007. Gov. Charlie Crist remains adamant that insurers must reduce their rates, causing many insurers to opt out of the market. While this may generate populist sentiments that are politically valuable, mandated low rates cannot eliminate the substantial costs of a major hurricane. Today, state-run Citizens Property Insurance Corp. is the largest insurer in the state, with levels of loss exposure greater than private insurers.

    In addition, the state's hurricane-catastrophe fund is having a hard time finding buyers for bonds to support its $29 billion reinsurance exposure. Today's low rates with Citizens ultimately will require assessments on future insurance policies for all Floridians in the wake of a catastrophic storm. Everyone will be facing higher rates, shifting some of the burden from those who chose to build along the coast to those who live in safer inland areas such as Orlando. And because the risk is spread away from those on the coast, incentives to curb development in high-risk areas remain weak.

    The current market is forced to under-price the risks of a major catastrophe, even though the possibility of a significant hurricane is always looming. The unavoidable fact remains that Florida has one of the largest hurricane risks in the nation, with almost $2 trillion in risky coastal exposure -- and growing. Not only is this unsustainable, but it also threatens the economic growth of Florida.

    Nobody likes paying expensive insurance premiums, but price caps do not lower the costs of a hurricane. Rebuilding requires resources, and if they do not come from insurance policies, they will come from the taxpayer.

    Instead of putting the state's financial future at the mercy of the weather, efforts should be taken to encourage more underwriting in Florida rather than driving insurers out of the state. If businesses cannot manage their risks, they are not far behind the insurers in looking for a more reasonable place to set up shop.

    Let's hope the skies are calm for the next three months -- and let's hope Florida gets serious about real insurance reform.

    Wayne Brough is the chief economist at FreedomWorks Foundation, a public-policy organization promoting lower taxes, less government and more freedom.

    by Dr. Wayne Brough on 8/29/08.