Hurricanes and the free market


Florida makes an amazingly bad financial decision
Wow.

This one redefines government irresponsibility.

Last month, state legislators voted in an emergency session to lower insurance rates, primarily in South Florida, by pledging tens of billions in public money to affected homeowners if a major hurricane or two strikes again.

Since neither the state's catastrophe fund nor the state-chartered insurance company has anywhere near enough money on hand to pay the claims they may now be required to pay after a major hurricane, the measure is considered a gamble, even by proponents.

"We all need to pray to the hurricane gods," said state Sen. Steven Geller, who represents this beachfront condo city and negotiated a portion of the bill. "Yes, we're taking a risk. But what were our options?"

As Tom Zucco points out in this piece, the situation was brought about by lawmakers meddling in the free market.

First, let's look at what happened. Lawmakers changed the insurance landscape in two major ways:

They allowed companies to buy more inexpensive reinsurance from the state-backed Florida Hurricane Catastrophe Fund (CAT Fund), with the provision that the savings be passed on to policyholders. Estimates run from 10 percent to 35 percent.

Good news, except that it will be at least April, after insurance companies make their rate filings, before we know what savings will be.

In what may turn out to be the most profound change of all, lawmakers also froze rates for policyholders of state-run Citizens Property Insurance at 2006 levels, and allowed Citizens to compete with the private market. Citizens no longer has to charge the highest rates, and it can sell other lines of coverage, such as fire and theft.

State regulators estimate that allowing the insurer of last resort to be competitive could add as many as 700,000 more policies to the 1.4 million the company already has. That would give Citizens close to half of the entire property insurance market at year's end. By then, Florida will not only be in the insurance business. It will be the insurance business.

Industry challenges

Fearing that insurance companies might try to sneak a rate increase or policy cancellations in before the law took effect, Gov. Charlie Crist and the Florida Cabinet stepped in a week after the session ended with an emergency order that placed a 90-day moratorium on premium increases and cancellations for those whose policies expire after Jan. 30.

None of this went over well with the insurance industry, which filed legal challenges last week, saying it was improper to bar them from dropping policyholders. The industry is also unhappy that Citizens is now allowed to compete.

Here's the killer bit. Emphasis added.

The Florida Insurance Council, the state's insurance trade group, argues that for the next three years, taxpayers would assume up to twice as much liability as they do now if the state is hit by major hurricanes, and that homeowners in inland parts of the state are unfairly subsidizing those who live on the coasts.

But the private market also got some concessions. National insurers can still have Florida-only subsidiaries, and rate requests won't take into account the massive profits of a company's parents.

Get that? The money doesn't exist. If disaster strikes, Florida will have to raise taxes. Or as Radley Balko points out, depend on a Federal bailout.

Meanwhile, insurance companies are not allowed to drop bad risk policies. Which means that people are being rewarded for making bad choices, despite market forces. One more bad hurricane season and there won't BE any insurance in Florida except the state provided insurance.

Doesn't that make you feel all warm inside?

— NeoWayland

Posted: Thu - February 22, 2007 at 04:54 PM  Tag


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