“Luck be a lady tonight” is a line from a great Frank Sinatra song about a gambler calling for luck as he throws the dice in a craps game. Luck is a lady when the gambler wins.
Florida’s former governor, Charlie Crist, didn’t sing the song, but his policies on hurricane insurance were tantamount to rolling the dice on the weather while humming the tune in his head. For five years luck has been a lady for Floridians. This continued last week when Hurricane Irene made a right turn, headed up the U.S. coast avoiding Florida while wreaking havoc on eight other states. Damage is estimated at $7 billion but will undoubtedly grow with more detailed assessment. With two months remaining in the hurricane season what happens if Florida’s luck runs out?
Crist’s insurance reform bill forced companies to lower rates and simultaneously expanded Florida’s role through Citizens Property Insurance Corp. (CPI) as “the insurer of last resort.” As private insurers dropped clients because capped premiums didn’t cover the risk, CPI morphed into the largest insurer of Florida homes, covering some 1.3 million residences and businesses, about 26 percent of the total. CPI has a total exposure of more than $400 billion making it one of the top 10 home insurers in the U.S.
The amount CPI has accumulated for hurricane damage claims is about $16 billion including the recent $900 million proceeds of a municipal bond offering. There’s additional money in the Florida Hurricane Catastrophe Fund, a state reinsurance entity. But its liabilities are more than double its liquid assets. According to insurance experts, a category 5 hurricane directly hitting Miami would cause damages of some $25 billion, roughly the same (adjusted for inflation) as that caused by Hurricane Andrew in 1992. In 2004 four hurricanes hit the state.
In short, a $16 billion cushion may not be nearly enough to cover liabilities. If the $16 billion runs out, CPI could impose additional assessments on its policy holders to make up the difference. Moreover, other insurance companies may also have to foot the bill because CPI has the right to hit them up simply because the companies do business in the state. Potentially every Florida resident could also have to chip in (higher taxes) to cover the losses.
This is what happens when governments get involved in the insurance business. The basic concept of insurance, premiums need to cover risk, is negated; the focus becomes cost. Insurance premiums get capped by vote seeking politicians. Insurance companies ultimately stop writing new policies and some cease to do business altogether. The risk gets aggregated into one public entity thereby increasing the risk for everyone.
Additionally, if the damage is large enough and the state exhausts all financial resources, it could call on the federal government for help. This is not conjecture. With Irene hitting multiple states, there is probably some politician in Washington thinking about a national hurricane/flood insurance option for all homeowners.
Property insurance in Florida is a ticking financial time bomb. Luck be a lady every night till hurricane season ends.
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