Florida Governor’s Insurance ‘Plan’ Is Dangerous and Expensive

The Florida property insurance market today reminds me of the old cartoon with the insurance pitch: “Here’s a nice little policy with a real low premium if you promise never to have any claims.” When the insurer is unable to make good on its promise to pay, its executives are demonized (as they should be), accused of being corrupt.

But what if the executives of that company are elected officials who use their pulpit and power at the expense of the public? Is that more ethical?

Amid all the rhetoric, the math on Governor Charlie Crist’s insurance reform “plan” seems to be unraveling and leading to higher costs than if no reforms been made in 2007 and beyond.

Newspapers attributed the following statement to Jack Nicholson, senior advisor to the Florida Hurricane Catastrophe Fund:

“The state was potentially on the hook for $28 billion last hurricane season, but had access to only about $13 billion to reimburse insurers. The shortfall could be even bigger this year, as much as $18 billion.”

On Feb. 5, Crist took aim at a Wall Street Journal article that was severely critical of his unraveling plan:

“Since beginning Florida’s insurance reform in 2007, the number of Citizens policyholders has dropped 18%, from more than 1.3 million to just over one million. This decline has been possible because 40 new companies have come to Florida, bringing more than $4 billion in new capital. This indicates reform is having the desired effect.”

However, careful examination of slides of Insurance Commissioner Kevin McCarty’s presentation to the Florida Cabinet on Jan. 13, 2009 reveals the following:

Slide 6 shows there were 10 new property insurers started in Florida in 2006 with total capital of $218.3 million.

Slide 7 shows that in 2007 there were 9 new carriers with $218 million in new capital. Slide 8 shows that in 2008 there were 6 new carriers bringing in a total of $110 million in capital. McCarty further notes that the total for years 2006-2008 was $546.3 million and that there were 62 new companies licensed between 1992 and 2008.

However slide 9 shows that the new capital wasn’t all new after all. In fact $65.5 million of it was paid in by the state through the Capital Build-Up Incentive Program. According to McCarty, 13 insurers (7 of which were formed prior to 2006) took advantage of the program and contributed an additional $353.5 million in new capital. But again, $182 million of that was state money.

The numbers still fail to add up to the Crist’s $4 billion. McCarty’s numbers indicate that the net new capital since 2006 is about $652.3 million.

Wow! That’s quite a difference. The Governor said that Florida had created $4 billion in new capital since his reforms. Let’s hope this was a mistake and not an intended misrepresentation.

Meanwhile the Governor and McCarty speak as though they’ve introduced Florida to an oasis of available property insurance. Where are the 62 newly licensed companies? How many are writing new business? Ever try to get the companies to actually answer the phone or sell you a policy?

Consider State Farm’s departure. State Farm’s Probable Maximum Loss (PML) on a 100-year return period is roughly $7 billion. State Farm Florida’s recovery from the Cat Fund, in a worst case hurricane, is roughly $3 billion. Most of the rest of its hurricane exposure is reinsured through the parent company, State Farm Mutual. That’s $4 billion of reinsurance for about $500 million in premium, according to Crist’s assault on State Farm. Yet, the Governor and the Cat Fund paid Warren Buffet $224 million for a $4 billion line of credit that didn’t kick in until after all other sources. That was money Crist and the Cat Fund would collect from property owners to repay Buffet if needed. Can you say “double standard”?

When State Farm leaves it takes with it the difference between its PML of $7 billion and what it would get from the Florida Hurricane Cat Fund — just under $3 billion. That means a net decrease in claims paying ability of $4 billion – not the plus $4 billion Crist brags about. The ultimate math is $652.3 million minus $4 billion.

Where does Crist think he’s going to find the other $3.4 billion just before the hurricane season? Maybe he’s hoping that Mother Nature will give Florida one more year of light winds. Buffet isn’t gambling another year on the Governor’s plan. If you’re betting on the Governor bringing cash to a disaster, good luck. You may very well need a lot of it!!!

Topics Florida Catastrophe Hurricane