Albert Einstein once said “a new type of thinking is essential if mankind is to survive and move toward higher levels.” Or, as it often paraphrased, we cannot solve our problems with the same thinking we used when we created them. Proponents of shrinking Citizens Property Insurance Corp. by paying private insurers to take out policies should heed that bit of wisdom.
Everyone agrees Citizens is too large and underfunded. This happened because, back in 2007, the Legislature eased eligibility requirements and forced the government-owned company to lower its rates and keep them low. They did this with the full knowledge that Citizens would collect insufficient premium to cover losses after a bad hurricane season. This put every Floridian at risk of massive post-hurricane taxes to make up any deficits Citizen may incur—taxes that would be levied on every policy including automobile, homeowners, renters, business and even boaters insurance.
Private companies, on the other hand, do not enjoy the ability to levy taxes if they don’t have enough money in reserve or reinsurance coverage to pay claims. Instead, they are legally required to charge enough to cover their risk. This obviously means private insurers charge more than Citizens in most cases, which is why the state-run insurer has grown to more than 1.5 million policies.
Most agree that many of these policies need to go back into the private market. However, recent proposals that call for paying insurance companies out of Citizens’ surplus to take over policies will only leave Citizens with less money to pay claims. And even if these private companies agree to use whatever money Citizens gives them appropriately (and not for, say, executive salary raises), if the terms of any such take-out agreement require these companies to honor the cap on Citizens’ rates or otherwise prevent them from charging enough for coverage, they, too, risk bankruptcy followed by a taxpayer bailout. Eventually, those policies would wind up right back in Citizens, which is what has happened each time this sort of depopulation has been attempted in the past.
Ultimately, if a $10 billion storm strikes, there needs to be $10 billion somewhere to pay the claims—whether it be out of companies’ surplus, reinsurance coverage and/or taxpayers’ pockets.
The best way to ensure that it’s not the latter and to successfully depopulate Citizens is by organically harnessing the power of the free market. To do that, Citizens must gradually and methodically be given the ability to charge rates that reflect its risk so that, sooner rather than later, it is charging actuarially sound rates—that is, collecting enough premium to cover potential losses. This will not only minimize the risk to taxpayers, but will also make its prices more proportional with the private market’s. Consumers will then be able to compare prices and decide what coverage options better suit their needs.
However, as long as extreme, government-imposed price disparity exists between Citizens and private companies, there will never be a truly balanced, competitive insurance marketplace in Florida.