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Property insurance reform

The Washington-based Competitive Enterprise Institute, a think tank devoted to promoting free enterprise and limited government, is setting up operation in Tallahassee with an office specifically devoted to insurance issues throughout the Southeast.

Florida is a natural for an office focusing on insurance issues. We’ve suffered severe disruptions from sharply rising property insurance rates because of damaging hurricanes in the state in 2004 and 2005 and promises of continued above-average storm conditions for years to come.

Policy analyst Michelle Minton will oversee the new office as part of CEI’s Center for Risk, Regulation and Markets. Christian Camara of Miami, a veteran of committee staff work for the Florida Legislature, will direct the office.

Camara said CEI will seek to form coalitions in Florida, including with commercial real estate organizations, in order to “promote meaningful property insurance reform in Florida.” Camara said reform would focus on “efforts to encourage sensible mitigation strategies, reduce the financial risks that the Hurricane Catastrophe Fund poses on the state, cut the size of the Florida Citizens Property Insurance Corp., and protect the environment.”

Pretty lofty goals for a state mired in recession where the state legislature has all its members can do to come up with enough budget cuts and/or sources of revenue to keep the government running.

“It’s not hurricanes that a re-causing high insurance rates, but bad government policy,” Minton said to me in a December interview.

OK, maybe that statement was meant to be provocative, or just the way things are phrased at a free-enterprise think tank. Surely several pit-bull hurricanes in ’04 and ’05 caused dramatically increased property insurance rates both for homes and commercial real estate, rates that were one factor leading to the real estate funk we find ourselves in now. But it’s not hard to argue that government policy has made the situation worse, or at least riskier.

So why bring the subject up when property insurance rates for commercial real estate have gone down, somewhere in the neighborhood of 30% to 40%, according to First Vice President Steve Ekovich of the Tampa office of Marcus & Millichap, and insurance is more available? NAIOP of Florida government affairs director, Jeff Rogo, goes so far as to say “it’s (property insurance rates) not one of our hot issues any longer.”

The reason to focus on property insurance, or at least to be aware that the property insurance issue hasn’t been settled once and for all, is that the way property insurance rates and availability were brought somewhat into line - creation of Citizens Property Insurance Corp. and the hurricane CAT fund - has created a major financial risk to every insurance policy holder in Florida.

“Citizens is the major cause for high insurance rates,” Minton said. “It’s supposed to be the insurer of last resort with the highest rates. It artificially caps rates. It makes it impossible for private insurers to make a profit in Florida. That’s why a lot of them have bailed out. The more private insurers leave the state, the more people have to rely on Citizens. And Florida’s risk exposure becomes even greater. They should be charging higher rates than they are.”

Florida has enjoyed some recent success in moving policy holders out of Citizens to private insurers, with 248,000 policies leaving Citizens in 2007 and more than 400,000 leaving Citizens this year. But still more than a third of Florida’s homeowners are insured by Citizens. Very bad medicine for the state - i.e. all of us who live here - if a major storm strikes.

Minton suggests there is little that needs to be done to end the property insurance problem in Florida other than getting government out of the way. And she’s no fan of the various national CAT fund proposals that have been talked about but gotten very little traction in Washington.

“What Florida did has made things worse,” Minton said. “And a national backstop is one of the worst things we could do. We need to let private insurance companies charge, and give credit for things that protect property. Private industry does it better.”

Well, private industry usually does indeed do things better. And Minton will get little disagreement that the current state hurricane CAT fund exposes Florida policy holders to huge surcharges if a large hurricane strikes a major metropolitan area and does tens of billions of dollars of damage to insured properties. But hurricanes are very difficult to predict and cause very high levels of claims when they strike. They are almost impossible for insurance company actuaries to deal with and set rates for.

“A major storm would have devastating effects on the real estate industry in Florida,” Ekovich said. “A CAT-4 storm would probably crater the commercial real estate market in Florida for two or three years.”

The problem is the Florida CAT fund, from which Florida property insurers are obliged to purchase reinsurance, does not have the money to pay the claims a major storm would produce. Estimates vary on how much the fund could pay out, but most say anything north of about $15 billion in storm damage - and a direct hit on a major Florida city by a major storm could easily cause this much damage or more - would overwhelm the system. This could lead to surcharges on insurance policies in amounts that would make today’s elevated premiums look like the good ole’ days.

The CAT fund is backed up by authority to issue bonds to pay claims. The problem is that under current economic conditions hardly anyone is buying bonds.

“Bonding capacity is a real issue,” said Tallahassee lobbyist Gene Adams, who represents NAIOP of Florida and FAR. “Who would buy these bonds, and what effect would it have on the bond rating of the state? It could affect our ability to sell bonds for other things like building roads.”

CEI’s Camara is even more glum in his predictions. He said paying for a major storm could put Florida at risk of bankruptcy.

“Florida is pretty much set up for the perfect storm,” Camara said. “The only thing missing is the storm.”

And at some point, we just don’t know when, Mother Nature will supply the storm. Floridians can take scant comfort in the fact that Florida has not been hit by a major storm since 2005. The last three years have seen little storm damage in Florida, but 2008 was an active storm year. Texas and Louisiana were hit hard by storms this summer. And the active storm cycle is far from over.

“This active period began in 1995,” said Dr. Gerry Bell, who heads the Climate Prediction Center for the National Oceanic and Atmospheric Administration. “Historically active periods have lasted for 25 to 40 years. The last active period was from the mid-’30s to 1970. And 1971 to 1994 was an inactive period. So, historically, we’re right in the middle of an active period. It could last another decade or more.”

Not reassuring. And good reason why Florida needs to modify the short-term fix it enacted in reaction, some would say over-reaction, to the sharp increases in property tax premiums that followed the 2003 and 2004 storm seasons.

There are plans out there to deal with the risk we all face. The Florida Chamber has a series of proposals and former Pinellas County legislator Don Crane has a comprehensive plan called the Florida Reinsurance Corp. which would establish a pool to pay wind damages and get the state out of this risky business.

But it will be difficult to get Florida legislators to pay attention to much more than the budget crisis that will be on their plates during the 2009 regular session of the Florida Legislature. It’s hard to find time to deal with real risks out there in the future (the future in this case being potentially as near as the next storm season) when there are large and acute problems to deal with right now.

“We’re in bad shape,” Adams said. “The legislature is overwhelmed by the budget issue. We’ve gotten by without any storms for the last few years, so some people think we don’t need to do anything. I don’t see a lot of excitement for it (dealing with the CAT fund and Citizens issue).”

It will be up to those who don’t wish for Floridians to continue with a meteorological Sword of Damocles over their heads to create some excitement. It will be too late to abandon our short-term fixes when the $30 billion storm is bearing down on us. The Florida Chamber’s Dave Daniels, who heads up that organization’s insurance effort, is more optimistic that something can happen on this issue this year.

“Perhaps I’m a bit Pollyannaish, but I’m optimistic we can move toward putting a more financially prudent model in place,” Daniel said. “My members expect legislators to make the tough decisions. I know politicians are under a lot of pressure (to keep rates low). But they will be under even more political pressure if a hurricane comes through and Floridians begin to realize how much they are on the hook for.”

Larry Thornberry is a Florida Real Estate Journal contributing editor.

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